Wēijī

The hottest places in hell are reserved for those who in a period of crisis maintain their neutrality

What defines a crisis?

Are there universally acceptable objective criteria against which we can measure an event?

Just as every political scandal post the presidency of Richard Nixon has affixed to it “(insert name of political scandal) – gate” so does it seem that every current macro / micro economic event has attached to it the word “crisis”.

In researching this entry, Honestly Lay Bare came across a wonderful description of what isnt a crisis by Victor Mair, the Professor of Chinese Language and Literature in the Department of East Asian Languages and Civilizations at the University of Pennsylvania.

I will let Professor Mair tell the story:

There is a widespread public misperception, particularly among the New Age sector, that the Chinese word for "crisis" is composed of elements that signify "danger" and "opportunity."

I first encountered this curious specimen of oriental wisdom about ten years ago at an altitude of 35,000 feet sitting next to an American executive.

He was intently studying a bound volume that had adopted this notorious formulation as the basic premise of its method for making increased profits even when the market is falling.

At that moment, I didn't have the heart to disappoint my gullible neighbour who was blissfully imbibing what he assumed were the gems of Far Eastern sagacity enshrined within the pages of his workbook. Now, however, the damage from this kind of pseudo-profundity has reached such gross proportions that I feel obliged, as a responsible Sinologist, to take counteraction.

A whole industry of pundits and therapists has grown up around this one grossly inaccurate formulation.

A casual search of the Web turns up more than a million references to this spurious proverb.

It appears, often complete with Chinese characters, on the covers of books, on advertisements for seminars, on expensive courses for "thinking outside of the box," and practically everywhere one turns in the world of quick-buck business, pop psychology, and orientalist hocus-pocus. This catchy expression (Crisis = Danger + Opportunity) has rapidly become nearly as ubiquitous as The Tao of Pooh and Sun Zi's Art of War for the Board / Bed / Bath / Whichever Room.

The explication of the Chinese word for crisis as made up of two components signifying danger and opportunity is due partly to wishful thinking, but mainly to a fundamental misunderstanding about how terms are formed in Mandarin and other Sinitic languages.

For example, one of the most popular websites centered on this mistaken notion about the Chinese word for crisis explains: "The top part of the Chinese Ideogram for 'Crisis' is the symbol for 'Danger': The bottom symbol represents 'Opportunity'."

Among the most egregious of the radical errors in this statement is the use of the exotic term "Ideogram" to refer to Chinese characters. Linguists and writing theorists avoid "ideogram" as a descriptive referent for hanzi (Mandarin) / kanji (Japanese) / hanja (Korean) because only an exceedingly small proportion of them actually convey ideas directly through their shapes. (For similar reasons, the same caveat holds for another frequently encountered label, pictogram.)

It is far better to refer to the hanzi / kanji / hanja as logographs, sinographs, hanograms, tetragraphs (from their square shapes [i.e., as fangkuaizi]), morphosyllabographs, etc., or -- since most of those renditions may strike the average reader as unduly arcane or clunky -- simply as characters.

The second misconception in this formulation is that the author seems to take the Chinese word for crisis as a single graph, referring to it as "the Chinese Ideogram for 'crisis'."

Like most Mandarin words, that for "crisis" (wēijī) consists of two syllables that are written with two separate characters, wēi and jī.

The third, and fatal, misapprehension is the author's definition of jī as "opportunity." While it is true that wēijī does indeed mean "crisis" and that the wēi syllable of wēijī does convey the notion of "danger," the jī syllable of wēijī most definitely does not signify "opportunity."

Webster's Ninth New Collegiate Dictionary defines "opportunity" as a favorable juncture of circumstances; a good chance for advancement or progress.

While that may be what our Pollyanaish advocates of "crisis" as "danger" plus "opportunity" desire jī to signify, it means something altogether different.

The jī of wēijī, in fact, means something like "incipient moment; crucial point (when something begins or changes)."

Thus, a wēijī is indeed a genuine crisis, a dangerous moment, a time when things start to go awry. A wēijī indicates a perilous situation when one should be especially wary.

It is not a juncture when one goes looking for advantages and benefits. In a crisis, one wants above all to save one's skin and neck! Any would-be guru who advocates opportunism in the face of crisis should be run out of town on a rail, for his / her advice will only compound the danger of the crisis.

For those who have staked their hopes and careers on the CRISIS = DANGER + OPPORTUNITY formula and are loath to abandon their fervent belief in jī as signifying "opportunity," it is essential to list some of the primary meanings of the graph in question.

Aside from the notion of "incipient moment" or "crucial point" discussed above, the graph for jī by itself indicates "quick-witted(ness); resourceful(ness)" and "machine; device."

In combination with other graphs, however, jī can acquire hundreds of secondary meanings. It is absolutely crucial to observe that jī possesses these secondary meanings only in the multisyllabic terms into which it enters. To be specific in the matter under investigation, jī added to huì ("occasion") creates the Mandarin word for "opportunity" (jīhuì), but by itself jī does not mean "opportunity."

A wēijī in Chinese is every bit as fearsome as a crisis in English.

A jīhuì in Chinese is just as welcome as an opportunity to most folks in America. To confuse a wēijī with a jīhuì is as foolish as to insist that a crisis is the best time to go looking for benefits.

For those who are still mystified by the morphological (i.e., word-building) procedures of Sinitic languages, it might be helpful to provide a parallel case from English.

An airplane is a machine that has the capability of flying through the air, but that does not imply that "air" by itself means airplane or that "plane" alone originally signified airplane. (The word "plane" has only come to mean "airplane" when it functions as a shortened form of the latter word.)

The first element of the word airplane, like the first element of wēijī, presents no real problems: it is the stuff that makes up our earth's atmosphere.

The second element, however, like the second element of wēijī, is much trickier. There are at least half a dozen different monosyllabic words in English spelled "plane."

While most of these words are derived from a Latin root meaning "flat" or "level," they each convey quite different meanings. The "plane" of "airplane" is actually cognate with the word "planet," which derives from a Greek word that means "wandering." A planet is a heavenly body that wanders through space, and an airplane is a machine that wanders through the air.

Neither "air" nor "plane" means "airplane"; only "airplane" means "airplane" - except when "plane" is being used as an abbreviation for "airplane"!

Likewise, neither wēi nor jī means wēijī; only wēijī means wēijī.

If one wants to find a word containing the element jī that means "opportunity" (i.e., a favorable juncture of circumstances, or a good chance for advancement), one needs to look elsewhere than wēijī, which means precisely "crisis" (viz., a dangerous, critical moment).

One might choose, for instance, zhuǎnjī ("turn" + "incipient moment" = "favorable turn; turn for the better"), liángjī ("excellent" + "incipient moment" = "opportunity" [!!]), or hǎo shíjī ("good" + "time" + "incipient moment" = "favorable opportunity").

Those who purvey the doctrine that the Chinese word for "crisis" is composed of elements meaning "danger" and "opportunity" are engaging in a type of muddled thinking that is a danger to society, for it lulls people into welcoming crises as unstable situations from which they can benefit.

Adopting a feel-good attitude toward adversity may not be the most rational, realistic approach to its solution.

Freedom of Access

Better be despised for too anxious apprehensions, than ruined by too confident security

For many years as a child, Honestly Lay Bare sat in front of the black and white television watching “On the Buses”.

Although it seemed to last a lot longer in our household, “On the Buses” was a British situational comedy that ran for four years about … no surprise … a bus driver.

The bus driver – Stan I think his name was – was played by the actor Reg Varney.

We hereby declare Reg Varney as one of the most important people in the history of information system security.

**

Stay with us on this one.

At the height of his popularity, Varney was instantly recognisable and despite his character on “On the Buses” being anti establishment, someone who the British population trusted.

As so, on 27 June, 1967 in the London borough of Enfield, Varney walked up to an automatic teller machine and became the first ever customer.

**

John Shepherd-Barron lives these days in a remote farmhouse in northern Scotland.

He is the inventor of the cash machine.

Inspiration had struck Mr Shepherd-Barron, now 82, while he was in the bath.

In a recent interview with the BBC he noted "It struck me there must be a way I could get my own money, anywhere in the world or the UK. I hit upon the idea of a chocolate bar dispenser, but replacing chocolate with cash."

Barclays was convinced immediately. Over a pink gin, the then chief executive signed a hurried contract with Mr Shepherd-Barron, who at the time worked for the printing firm De La Rue.

Plastic cards had not been invented, so Mr Shepherd-Barron's machine used cheques that were impregnated with carbon 14, a mildly radioactive substance.

The machine detected it, then matched the cheque against a Pin number.

The machine paid out a maximum of £10 a time.

To start with, not everything went smoothly. The first machines were vandalised, and one that was installed in Zurich in Switzerland began to malfunction mysteriously.

It was later discovered that the wires from two intersecting tramlines nearby were sparking and interfering with the mechanism.

One by-product of inventing the first cash machine was the concept of the Pin number.

Mr Shepherd-Barron came up with the idea when he realised that he could remember his six-figure army number. But he decided to check that with his wife, Caroline.

"Over the kitchen table, she said she could only remember four figures, so because of her, four figures became the world standard," he said.

**

And so it comes to Reg Varney who – by chance – was living in Enfield at the time.

Had he not been the trustworthy personality that he apparently was at the time, it is conceivable that automatic teller machines would have been launched without fanfare and concepts such as Pin numbers wouldn’t have gained as much widespread acceptance as it subsequently did.

A bit farfetched?

Well think of it this way instead.

Varney in walking up to that cash machine in June 1967 became the first known customer to directly access the bank account maintenance information systems of a large commercial bank – legally.

That we today take it for granted such access should never override what was a major leap forward in the concept of information security.

Any system is capable of use by anyone provided that there is sufficient security to allow access or to deny access to areas that you don’t want the customer looking.

The Brothers Crim

Things gained through unjust means are never secure.

Honestly Lay Bare loves a great story about corporate misadventure.

They don’t get much better than this.

**

Today, the McKesson Corporation – headquartered out of San Francisco – is the largest health care company in the world with 2008 sales of $US101.7 billion.

In December 1938, then known as McKesson and Robbins, Inc. it was the centre of what was one of the largest corporate scandals of the 20th century.

The scandal led to major corporate governance and auditing reforms.

**

The mastermind of the McKesson & Robbins fraud was Philip Musica.

Although born to poor Italian immigrants and raised in poverty, Musica became a nationally recognized leader in business and politics.

At the height of his popularity, in 1937, a delegation of prominent Republicans urged Musica (who was then using the alias F. Donald Coster) to seek their party’s nomination to run for U.S. President.

Musica’s criminal career began early.

By his 30th birthday, he had been convicted of fraud twice.

The first conviction was for avoiding import tariffs by bribing customs officials to record incoming shipments at a fraction of their true weight.

The second conviction was for using forged invoices to obtain large bank loans.

In 1919, after adopting the name Frank D. Costa to conceal his criminal record, Musica founded the Adelphi Pharmaceutical Manufacturing Company. Adelphi manufactured high alcohol-content products such as hair tonic and cosmetics. Adelphi’s best customers were bootleggers who bought huge quantities of the company’s products and distilled out the alcohol to make booze.

In 1925, using the assumed name of F. Donald Coster, M.D., Ph.D., Musica used his bootlegging profits to buy McKesson & Robbins, a ninety-year-old company that sold milk of magnesia, cough syrup, and quinine.

During the next twelve years, Musica/Coster built a pharmaceutical distribution network that rivaled national chains such as Liggett, Rexall, and Walgreen.

To inflate McKesson & Robbins’ reported assets while skimming cash into his own pocket, Musica enlisted the help of his three younger brothers.

One brother, using the alias George Vernard, was placed in charge of a fictitious sales agency—W.W. Smith & Co.

The W.W. Smith office was actually a “letter-writing plant” containing seven typewriters, each with a distinct typeface and a unique supply of stationery.

Musica/Vernard’s role was to write purchase orders bearing the names of fictitious companies and mail them to McKesson & Robbins.

Another Musica brother, using the alias Robert Dietrich, was placed in charged of McKesson & Robbins’ shipping department. This brother would forge shipping documents to make it appear that inventory had been delivered by McKesson & Robbins to legitimate customers.

The fourth Musica brother, using the alias George Dietrich, was appointed McKesson & Robbins’ assistant treasurer. This brother would transfer money between numerous company bank accounts to create the appearance of cash payments for purchases and cash receipts from customers.

For each sale, McKesson & Robbins paid W.W. Smith & Co. a commission of .75 percent.

The four Musica brothers divided the Smith commissions among themselves with Philip, the oldest brother and mastermind, getting the largest share.

The McKesson & Robbins fraud was not discovered until late 1938 when the company’s treasurer, Julian Thompson, became suspicious of the large payments McKesson & Robbins was making to W.W. Smith & Co. Thompson obtained copies of the Dunn & Bradstreet (D&B) credit reports that had been used to satisfy McKesson’s auditors of W.W. Smith’s viability.

When he showed the credit reports to a D&B representative, he learned that D&B had never heard of W.W. Smith & Co. and that the credit reports in his possession were forgeries.

On December 6, 1938 the SEC opened an investigation into McKesson & Robbins’ accounting and the New York Stock Exchange suspended trading of the company’s shares.

One week later, federal agents arrested Coster, fingerprinted him, and released him on bond. The next day, investigators discovered from his fingerprints that respected businessman F. Donald Coster M.D., Ph.D. was really twice-convicted fraudster Philip Musica. They ordered Musica/Coster taken into custody, Musica put a gun to his head and took his own life.

The McKesson & Robbins fraud led to significant changes in procedures for appointing auditors and conducting audits. After four months of hearings, during which forty-six witnesses produced 3,000 pages of testimony, the SEC recommended that non-officer members of the client’s board nominate the auditors and that auditors be elected by and address their report to the shareholders.

In the summer of 1939, the American Institute of Accountants appointed its first standing committee on auditing procedures.

The committee’s first standard, Statements on Auditing Procedure No. 1, “Extensions of Auditing Procedure,” made observing inventory and confirming accounts receivable—two procedures that would have helped detect the McKesson & Robbins fraud—standard audit procedures.

Summary of McKesson & Robbins fraud based on The Greatest Frauds of the (Last) Century – a Paper by Paul M. Clikeman, Robins School of Business, University of Richmond, May 2003

One with the Lot

For only when our arms are sufficient beyond doubt can we be certain beyond doubt that they will never be employed.

On this the 100th posting to Honestly Lay Bare ... thank you in advance for your congratulatory notes ... we look at a concept as old as time itself.

Honestly Lay Bare lives near - but does not frequent - a McDonald's restaurant.

A year or so ago there was some disturbances caused out the front of the McDonald's by some local teenagers that had nothing better with their time than to see who could yell the loudest at 2am.

A couple of months later, Mrs Honestly Lay Bare noticed that there was a sign in the car park out the front of the McDonald's that read "reserved for police vechicles".

In the many times since that we have driven past the McDonald's never once has there been a police vechicle in the designated spot.

Neither has there been any further trouble at this McDonald's.

(As an aside - we have never seen anyone dare park in the spot for fear that just at that time there WILL be a police car that will claim what has been allocated for them).

By simply putting up what one would imagine is a $100 sign and allocating a car spot, the McDonald's has saved itself a portfolio of complaints about unruly customers.

It has exploited the concept of a deterrence.

Deterrence is a theory from behavioral psychology about preventing or controlling actions or behavior through fear of punishment or retribution.

General deterrence manifests itself in policy whereby examples are made of deviants.

The individual person is not the focus of the attempt at behavioral change, but rather receives punishment in public view in order to deter other individuals from deviance in the future.

Specific deterrence focuses on the individual deviant and attempts to correct his or her behavior. Punishment is meant to discourage the individual from recidivating.

Both forms of deterrence assume rationality on the part of deviants and criminals, and that crime can ultimately be prevented through altering the cost benefit ratios of such behavior.

**

It is generally accepted wisdom in, say, fraud prevention that the logic in fraud deterrence is that employees who perceive that they will be caught are less likely to commit it.

Therefore internal controls can have a deterrent effect only when employees perceive that such controls exist for the purpose of uncovering fraud.

As rational and self explanatory as that sounds, Honestly Lay Bare looked far and wide and can find no detailed quantitative study that backs up this assertion.

And at this point Honestly Lay Bare tracks back to that parking spot outside McDonald's.

If it isnt the deterrence factor at work what then is happening?

Answer that question and you not only save yourself the trouble of authoring a detailed academic paper but you also likely unlock the key to a new world of thinking on how to construct a strong internal controls environment.

Mr Ponzi of Lugo, Italy

The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud.

Much has been said of recent times about the Madoff fraud – the world’s largest known Ponzi scheme.

If you were like Honestly Lay Bare until recently you nodded vigorously saying “yep … another Ponzi” yet thinking “Ponzi – is that any relation to Arthur Fonzarelli”.

Well today join Honestly Lay Bare as we meet Charles Ponzi who – for the avoidance of doubt – never lived at 565 North Clinton Drive, Milwaukee, Wisconsin (ie – with the Cunninghams!)

**

Charles Ponzi was born in Lugo Itlay on March 3, 1882 and died in Rio de Janeiro on January 18, 1949 aged 66

He was one of the greatest swindlers in American history.

His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo.

The term "Ponzi scheme" is a widely known description of any scam that pays early investors returns from the investments of later investors.

**

In the summer of 1920, Ponzi was front-page news virtually every day in the Boston papers.

But prior to 1920, few people outside Boston's Italian community had ever heard of Charles Ponzi.

He told the New York Times that he had come from a well-to-do family in Parma, Italy. He also claimed to have studied at the University of Rome, but said that he was not suited to the academic life. "In my college days, I was what you would call here a spendthrift. That is, I had arrived at the precarious period in a young man's life when spending money seemed the most attractive thing on earth."

When his money ran out, young Ponzi decided the wisest course of action was to head west.

On November 15, 1903, he stepped off the gangplank of the SS Vancouver in Boston Harbor with only a couple of dollars in his pocket—the result, he said, of being taken in by a cardsharp during the transatlantic crossing. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me," Ponzi later told the New York Times.

The road to riches was a long one for the ever-optimistic Ponzi, who waited and bused tables in New York City, painted signs in Florida and worked small jobs up and down the East Coast. In 1917, he headed back to Boston in response to a newspaper ad placed by merchandise broker J. R. Poole, who needed a clerk.

He soon met young Rose Gnecco on a streetcar and wooed her energetically. A small, pretty woman from a modest background, Rose was swept off her feet by her older, seemingly sophisticated suitor. Rose's youthful innocence shines through even in newspaper photographs, as does her unswerving devotion to her husband. The couple married in February 1918. Ponzi took over his father-in-law's grocery business and proceeded to make a mess of it. (He had already left Poole, who apparently failed to recognize his new clerk's latent financial genius.)

It was not long before Ponzi struck out on his own, and finally hit upon the scheme that—for a short time—was to make him rich beyond his wildest dreams. He had come up with the idea for an international trade journal, which he believed could make a tidy advertising profit. But the bank where he sought a $2,000 loan, Hanover Trust Company, did not agree. Following a brusque rejection by the bank president, Ponzi sat alone in his little School Street office and pondered his next move.

It came to him while opening his mail one day in August 1919. As Ponzi relates in his shamelessly exuberant autobiography, The Rise of Mr. Ponzi, a business correspondent from Spain, interested in learning more about Ponzi's aborted journal, had enclosed a small paper square that put the well-oiled wheels of Ponzi's imagination into overdrive.

The little scrap of paper was an international postal reply coupon, and the Spanish correspondent had enclosed it in prepayment of reply postage. Purchased in a Spanish post office for 30 centavos, it could be exchanged for a U.S. postage stamp worth 5 cents, a redemption rate that was fixed by international treaty.

But the Spanish peseta, Ponzi knew, had fallen recently in relation to the dollar. Theoretically, someone who bought a postal reply coupon in Spain could redeem it in the United States for about a 10 percent profit. Purchasing coupons in countries with weaker economies could increase that margin substantially, he reasoned.

It should be possible, then, to make a financial killing by buying huge quantities of these coupons in certain overseas countries and redeeming them in countries with stronger currencies. Ponzi called his new business the Securities Exchange Company, and set out to promote his idea.

It was a big idea—one that Ponzi managed to sell to thousands of people.

He claimed to have elaborate networks of agents throughout Europe who were making bulk purchases of postal reply coupons on his behalf. In the United States, Ponzi asserted, he worked his financial wizardry to turn those piles of paper coupons into larger piles of greenbacks. Pressed for details on how this transformation was achieved, he politely explained that he had to keep such information secret for competitive reasons.

Of course, there was no network of agents. Nor, for that matter, did Ponzi expend any effort to corner the market on postal reply coupons. A final audit of his company's assets after the whole business was over turned up $61 worth of the coupons

Ponzi knew that his concept—the path to easy riches—was so alluring that the worst thing he could do was try to sell it too aggressively.

Borrowing a page or two from Tom Sawyer, he cultivated an image among friends and acquaintances as a man on the verge of wealth who preferred not to discuss his good fortune in detail—unless, of course, he was pressed. In his role as the busy but cheerful investment expert, Ponzi showed up at boccie games and neighborhood cafés, plied his pals with good cigars and bonhomie, then rushed off to meet with one of his many important "clients”.
.
Only after his victims were well primed was Ponzi ready to dangle his bait: the grand plan in which his investors received 50 percent interest in 90 days. (Later he sweetened the pot, promising 50 percent interest in 45 days.) By December, the money had begun to roll in.

Most of the actual investment pitches were done by sales agents who were trained by Ponzi and received 10 percent commissions for investments that they brought in to him. In turn, many of those sales agents recruited "subagents" who received 5 percent commissions for new investors. Once Ponzi paid off his first round of investors, word of the financial "wizard" on School Street spread quickly.

Ultimately, some 40,000 people joined the feeding frenzy. Many people simply reinvested their profits with Ponzi, thereby relieving him of actually having to make good on his promise. At the height of his success, Ponzi had offices from Maine to New Jersey, and was fending off shady offers from prospective "partners" in New York.

The newspapers caught wind of Ponzi after a man named Joseph Daniels filed a $1 million suit against him in July 1920.

Daniels, a furniture salesman, laid claim to a share of Ponzi's fortune on the basis of an old debt. His lawsuit for what was at the time an enormous amount of money started a buzz about Ponzi outside the circle of investors he had cultivated.

By then, Ponzi had built the lifestyle he had pursued for so many years: a 12-room mansion in upscale Lexington; servants; a couple of automobiles, including a custom-built limousine; and fine clothes and gold-handled Malacca canes for himself, and diamonds and other baubles for Rose. He purchased commercial and rental properties all over Boston and acquired stock in several banks. He even bought out his former employer, Poole. "The more I bought, the more I wanted to buy," Ponzi wrote. "It was a mania."

But what he really wanted was control of a bank. He arranged a takeover of Hanover Trust, the same bank that had turned down his loan application the previous year. A few months later, when Ponzi fell, so did Hanover Trust. (The Commonwealth of Massachusetts, it turned out, had $125,000 on deposit with Hanover Trust—a revelation that figured in the September 1920 resignation of State Treasurer Fred Burrell.)

On July 24, 1920, the Boston Post ran a front-page feature on Ponzi with the headline: "DOUBLES THE MONEY WITHIN THREE MONTHS; 50 Per Cent Interest Paid in 45 Days by Ponzi—Has Thousands of Investors." The article described his rags-to-riches ascent, including details of his postal reply coupon scheme. It pegged Ponzi's worth at $8.5 million.

Monday, the 26th, started out as a banner day for Ponzi. The scene that awaited him as he approached his office that morning in his chauffeur-driven Locomobile "was one that no man could forget," he later wrote.

"A huge line of investors, four abreast, stretched from the City Hall Annex, through City Hall Avenue and School Street, to the entrance of the Niles Building, up stairways, along the corridors...all the way to my office!...

"Hope and greed could be read in everybody's countenance. Guessed from the wads of money nervously clutched and waved by thousands of outstretched fists! Madness, money madness, the worst kind of madness, was reflected in everybody's eyes!...

"To the crowd there assembled, I was the realization of their dreams....The ‘wizard' who could turn a pauper into a millionaire overnight!"

Interestingly, the U.S. Post Office Department announced new conversion rates for international postal reply coupons less than a week later—the first change in the rates since prewar days, the New York Times reported. Officials insisted that the new rates had nothing to do with Ponzi's scheme. However, they also insisted it was impossible for anyone to do what Ponzi claimed to be doing. (Postal authorities today say the same thing: although international postal reply coupons are available at post offices where there is a demand for them, regulations make speculation in them impossible.)

The tide turned quickly against Ponzi.

He had come under investigation by postal and legal authorities as early as February, but they appeared to be making little progress in their efforts. Meanwhile, the editors at the Boston Post, possibly chagrined at having published the article that injected so much momentum into Ponzi's enterprise, launched an investigation into his business. The bad press enraged Ponzi.

At the advice of his publicity agent, a former newspaperman named William McMasters, Ponzi offered to cooperate with the U.S. District Attorney's office by opening his books to a government auditor and declining to accept new investments, as of noon that day, July 26, until the audit was complete.

Word that Ponzi was closing his doors prompted a huge run, as thousands stormed School Street to redeem their investment vouchers.

Ponzi directed his clerks to refund the money of everyone who presented a voucher. On one day, the Post reported, Ponzi paid out more than $1 million. Frightened investors who cashed in their chips early got back only their principal, which, Ponzi noted, saved him considerable interest.

Ponzi maintained a cool head.

He played games with the authorities—on the one hand appearing to cooperate with them, and on the other snubbing them to talk to reporters, who provided daily coverage of the unfolding drama. "‘POSTAGE STAMP' KING DEFIES FEDERAL GOVERNMENT TO LEARN HOW HE PROFITS," the Washington Post reported on July 30.

In the article, Ponzi shrugged off the notion that he was under any obligation to reveal details of his business dealings to officials. "My secret is how to cash the coupons. I do not tell it to anyone," he asserted. "Let the United States find it out, if it can."

As the run continued, Ponzi ordered up sandwiches and coffee to be distributed to the mobs of people waiting outside his office. He directed that women be moved to the front of the line, after hearing that several had fainted in the sweltering summer heat.

Uncertain whether he was a crook or a hero, the crowds simultaneously booed and cheered him. Many people changed their minds while waiting to turn in their vouchers, convinced that their investments would pay off in the end. The Boston Post reported how one man proclaimed Ponzi "the greatest Italian of them all."

With false modesty, Ponzi pointed out that Columbus had discovered America and that Marconi had discovered the wireless. "But Charlie," the fan replied, "you discovered where the money is!" Meanwhile, speculators in Ponzi's hire bought up notes at a discount from the worried

The investigation slogged on.

"OFFICIALS BALKED BY PONZI PUZZLE," the Boston Post observed. Then, on August 2, the Post dropped a bombshell after enlisting the cooperation of McMasters, Ponzi's erstwhile publicity agent, who wrote a copyrighted, first-person report in which he proclaimed Ponzi "hopelessly insolvent." "He is over $2,000,000 in debt even if he tried to meet his notes without paying any interest," McMasters declared. "If the interest is included on his outstanding notes, then he is at least $4,500,000 in debt."

Still, McMasters found it difficult to condemn the little financier: "No wonder Ponzi is confident: He sees an apparently unlimited pile of cash...the public dippy about him...and Wall Street ‘experts' who never did anything like it themselves offering ‘sure-thing' explanation of his ‘operations'—is it any wonder the thing has gone to his head?"

Note holders besieged the School Street office the day the McMasters article ran. Ponzi hotly denied the charges of insolvency, and threatened to sue both McMasters and the Post.

The public circus escalated.

On August 10, Ponzi gave a luncheon address at Boston's Hotel Bellevue for the Kiwanis Club, which had invited him for a "battle royal" with a mind reader named Joseph Dunninger. The idea was that Dunninger would "throw the X-ray of clairvoyance on the subtle brain of the little Italian and reveal what he found to the audience," the Boston Globe reported. But the spectators were so enthralled by Ponzi that the contest apparently never came off; at 2:45, Ponzi was still fielding questions from the audience.

Ponzi audaciously implied that he dealt directly with foreign governments in order to purchase the vast quantities of coupons needed to support his enterprise. Because the governments from whom he bought coupons profited themselves, they "naturally would not care to reveal" the exact nature of their business, he explained. "PONZI TELLS KIWANIS CLUB HOW HE GOT HIS MILLIONS," the Globe shouted from its front page.

Editors at the Chicago Tribune, which also reported on the Kiwanis Club affair, were more skeptical: "PONZI REVEALS PHILOSOPHER'S STONE: 0+0=$," the headline ran.

On August 11, the Boston Post made the sensational revelation that the financial wizard was a former jailbird, having served time (1908-10) in Canada for forging checks. The article, the result of the Post's own investigation, ran complete with mugshots of Ponzi from Montreal police. Later, it was learned that Ponzi had served another term in a federal prison in Atlanta for smuggling five Italians from Canada into the United States.

The next day, Edwin Pride, the government auditor, concluded his examination of Ponzi's books. He found Ponzi to be $3 million in the red (he later revised it to $7 million). Ponzi was placed under arrest. "PONZI WEARING HIS SMILE EVEN IN EAST CAMBRIDGE JAIL," the Boston Evening Globe reported. "The man's nerve is iron," his jailer marveled.

Half-a-dozen banks crashed in the aftermath of Ponzi's fall. His note holders received less than 30 cents on the dollar; many investors held on to their notes, clinging desperately to the belief that their hero would somehow come through

For its relentless reporting, the Boston Post won a Pulitzer Prize.

Ponzi was convicted on federal charges of using the mail to defraud. He served 31/2 years and was paroled. In 1925, he was convicted on state fraud charges.

Out on bail while the verdict was under appeal, he headed for Florida to raise money by selling swampland under the name "Charpon." He was quickly arrested and convicted of fraud. He jumped bail when he learned that the Supreme Judicial Court of Massachusetts had upheld his conviction in that state.

With authorities in two states in pursuit, Ponzi fled to Texas. He signed aboard as a seaman on an Italian freighter, but was captured in New Orleans. Ponzi was returned to Massachusetts to begin his sentence at the state prison in Charlestown.

When Ponzi emerged from jail in 1934, balding and 40 pounds heavier, immigration authorities were on hand with a deportation warrant. He had never become an American citizen and was considered an undesirable alien. On October 7, after his appeals to remain in the United States were rejected, he was deported to Italy.

Rose stayed on in Boston with plans to join him once he found employment, but after two years she tired of waiting and finally divorced him.

Accounts of Ponzi's life after his eviction from the United States vary. According to one version, he talked his way into a high-ranking financial ministry job in Mussolini's government. When officials realized that he was not the financial genius he purported to be, he fled carrying two suitcases stuffed with cash and caught a steamer to Brazil.

The more convincing story is that Ponzi got help from his second cousin, Col. Attilio Biseo of the Italian Air Force, who was commander of the Green Mice Squadron and a friend of Mussolini's. Biseo landed Ponzi a job with a fledgling airline doing business between Italy and Brazil. This new career kept Ponzi in high style between 1939 and December 1941, when the United States entered World War II and the Brazilian government cut off supplies to Ponzi's airline, having learned that it was ferrying strategic supplies to Italy.

Out of a job, Ponzi scraped by, teaching English and French and later working as an interpreter for an Italian importing firm.

But his eyesight was failing and a stroke in early 1948 left him partially paralyzed.

Ponzi died in a charity hospital in Rio de Janeiro on January 18, 1949, leaving $75 to pay for his burial.

Post based on In Ponzi We Trust - By Mary Darby Smithsonian magazine, December 1998

Hard Lessons

The United States government was not adequately prepared to carry out the reconstruction mission it took on in mid-2003

Imagine that you were in charge of a $US117 billion dollar project.

Imagine now that you got yourself in such a bind that you put out inflated measures of progress to cover up failures; had your efforts crippled by planners within your own organisation that were hostile to the project’s aims; and you were beset by bureaucratic turf wars and an ignorance about basic elements of what you were doing.

Welcome to the American-led reconstruction of Iraq.

Late last year the New York Times reported on an unpublished 513 page federal history of the American-led reconstruction of Iraq.

Titled “Hard Lessons: The Iraq Reconstruction Experience,” the new history was compiled by the Office of the Special Inspector General for Iraq Reconstruction, led by Stuart W. Bowen Jr., a Republican lawyer who regularly travels to Iraq and has a staff of engineers and auditors based in Iraq.

The manuscript is based on approximately 500 new interviews, as well as more than 600 audits, inspections and investigations on which Mr. Bowen’s office has reported over the nearly six years since the invasion.

Laid out for the first time in a connected history, it concludes, “the government as a whole has never developed a legislatively sanctioned doctrine or framework for planning, preparing and executing contingency operations in which diplomacy, development and military action all figure.”

It is a fascinating and disturbing read ... but what struck Honestly Lay Bare the most was that it was an auditor doing exactly what they are employed to do.

Without fear or favour, the report honestly lay bares to the proprietor - in this instance the United States taxpayer - the true condition of the undertaking.

**

In an illustration of the hasty and haphazard planning, a civilian official at the United States Agency for International Development was at one point given four hours to determine how many miles of Iraqi roads would need to be reopened and repaired.

The official searched through the agency’s reference library, and his estimate went directly into a master plan. Whatever the quality of the agency’s plan, it eventually began running what amounted to a parallel reconstruction effort in the provinces that had little relation with the rest of the American effort.

Money for many of the local construction projects still under way is divided up by a spoils system controlled by neighborhood politicians and tribal chiefs.

“Our district council chairman has become the Tony Soprano of Rasheed, in terms of controlling resources,” said an American Embassy official working in a dangerous Baghdad neighborhood. “‘You will use my contractor or the work will not get done.’ ”

The history gives a searing critique of what it calls the “blinkered and disjointed prewar planning for Iraq’s reconstruction” and the botched expansion of the program from a modest initiative to improve Iraqi services to a multibillion-dollar enterprise.

The report also criticises the endless revisions and reversals of the program, which at various times gyrated from a focus on giant construction projects led by large Western contractors to modest community-based initiatives carried out by local Iraqis.

The history cites some projects as successes.

The review praises community outreach efforts by the Agency for International Development, the Treasury Department’s plan to stabilize the Iraqi dinar after the invasion and a joint effort by the Departments of State and Defense to create local rebuilding teams.

But the portrait that emerges over all is one of a program’s officials operating by the seat of their pants in the middle of a critical enterprise abroad, where the reconstruction was supposed to convince the Iraqi citizenry of American good will and support the new democracy with lights that turned on and taps that flowed with clean water.

Mostly, it is a portrait of a program that seemed to grow exponentially as even those involved from the inception of the effort watched in surprise.

On the eve of the invasion, as it began to dawn on a few officials that the price for rebuilding Iraq would be vastly greater than they had been told, the degree of miscalculation was illustrated in an encounter between Donald H. Rumsfeld, then the defense secretary, and Jay Garner, a retired lieutenant general who had hastily been named the chief of what would be a short-lived civilian authority called the Office of Reconstruction and Humanitarian Assistance.

The history records how Mr. Garner presented Mr. Rumsfeld with several rebuilding plans, including one that would include projects across Iraq.

“What do you think that’ll cost?” Mr. Rumsfeld asked of the more expansive plan.

“I think it’s going to cost billions of dollars,” Mr. Garner said.

“My friend,” Mr. Rumsfeld replied, “if you think we’re going to spend a billion dollars of our money over there, you are sadly mistaken.”

The secondary effects of the invasion and its aftermath were among the most important factors that radically changed the outlook.

Tables in the history show that measures of things like the national production of electricity and oil, public access to potable water, mobile and landline telephone service and the presence of Iraqi security forces all plummeted by at least 70 percent, and in some cases all the way to zero, in the weeks after the invasion.

Subsequent tables in the history give a fast-forward view of what happened as the avalanche of money tumbled into Iraq over the next five years.

By the time a sovereign Iraqi government took over from the Americans in June 2004, none of those services — with a single exception, mobile phones — had returned to prewar levels.

Post based on Official History Spotlights Iraq Rebuilding Blunders by James Glanz and Christian Miller – New York Times – December 14, 2008