How will the Pigeon King Scheme End?
Dave Thornton, of CrimeBustersNow, has written some amusing "retrospective" pieces on Arlan Galbraith's Pigeon King scheme. But how in general does a Ponzi scheme end? What causes there to be a run on the bank?
Recall what we have learned in the first three days investigating what was behind the Iowa Attorney General's concern that Arlan's PKI is a Ponzi scheme.
First, even sophisticated business people can be deceived by an attractive Ponzi scheme, because at first, the returns look like the real thing. Second, your gut instinct about the scheme being a fraud will be trumped by "reason", which after the fact will look like bad and magical thinking. Finally, the use of testimonials in the form of cheering, emotional testimonial revivals will often overwhelm an individual's gut feeling of wrongness.
But like all viral madnesses, eventually the Ponzi scheme shudders to an end.
The poorly constructed schemes limp along until someone finally complains to the regulators, who then drain the last bit of resources from the scheme by installing a receiver. But the clever schemes always have a way out.
Many people erroneously think that a Ponzi scheme comes to an end when there are no more recruits. Some commentators go to mathematical extremes to show how a particular scheme must run out of recruits.
These calculations are simply errors: the clever Ponzi scheme always entices a large portion of the investors to "re-invest" their "winnings". In principle, with a high enough re-investment rate, a Ponzi scheme could continue with minimal recruitment.
Arlan says that he has 700 investors, which he claims is a fraction of the possible interest in his scheme. He also claims his company to be debt free - despite being indebted to some 700 individual unsecured creditors. I trust that the falsity of the first statement is transparent.
How did the delightful Ponzi scheme end in Boston? Did the regulators step in, after listening to and evaluating complaints from investors? No, in part because Ponzi had "lent" money to various state, police, and bank officials so they could "invest" in his securities.
Did Ponzi run out of recruits? No, despite imitators and fake securities being redeemed, Ponzi was branching out from Boston into other areas before his scheme collapsed.
So what brought to an end to the collective madness?
Remember Ponzis was offering an incredible return - 50% in 60 or 90 days. He claimed to be using the money to redeem foreign postage stamps into US postage stamps - there was a theoretical arbitrage opportunity here. The opportunity was only theoretical and Ponzi never engaged in it on a commercial basis. Since he wasn't doing this, what was he doing with the money?
Banking it. Earning a normal return of 5% yearly. Think about this signal. Ponzi claims to have discovered a risk free money making arbitrage system, but doesn't invest his own money in it - he uses banks instead. Oh, oh not a good reputation signal is it?
What about Arlan? Recall, in the CBC interview Arlan was asked whether he has eaten squab, any of these birds that he is breeding as "Hinterland Squabs". No, he hadn't. Ah, crow doesn't taste so lovely?
There is another way the PKI scheme could end. Arlan's liabilities could disappear. From Lancaster Farming, we read more about the health conditions of Arlan's flock.
Two recent quarantines of a pair of pigeon facilities in northern Pennsylvania have been linked to a growing and increasingly scrutinized pigeon breeding company based in Canada.
On Nov. 7, the Pennsylvania Department of Agriculture (PDA) quarantined the farm of Robert Leister of Wellsboro, Pa. after some pigeons from his farm were found to be infected with tsittacosis, a bacteria that causes respiratory illnesses in birds and is transmittable to humans.
Chris Ryder, PDA spokesman, said the department made the discovery after Leister noticed some of his birds were sick and he requested PDA test them for infection.
Ryder said he was unsure how many birds tested positive for the illness. But the birds were later traced back to a large 10,000-pigeon "holding facility" in Turbotville, Pa., which is owned by Pigeon King International of Waterloo, Ontario, Canada. That facility was quarantined on Nov. 19 after Ryder said additional tests had to be taken to prove Leister's birds came from there.
Arlan couldn't be expected to buy back sick birds could he? Poof, and overnight his liabilities are quarantined and the breeding company shut down for health reasons. Arlan flies into the sunset with a trunk full of cash. Neat, eh?
Tomorrow, in the final post, we will discuss possible remedies.
Related Posts: What is New in Family Farming?, Why Being A Sucker Seems So Right, and Pigeon King and Testimonials.
