During the 1920s, millions of otherwise sensible Americans invested in stocks, bonds, unincorporated businesses and a host of get-rich-quick schemes. Quite of few of these investors became wealthy, at least on paper, for a short while. By the end of that decade, however, times had changed. The stock markets that had advanced, retreated. Ordinary working people, who had dreamed during the boom years of throwing off the shackles of their meaningless jobs, woke up to find that their employers were instead dumping them. The wheel of fortune had turned. While much that had been gained during the Roaring ’20s was lost during the Great Depression, at least one thing from the flapper era is still very much with us. It is a word. It was a name. Ponzi. During the 1920s, a fellow from Boston, one Charles Ponzi, noticed that quite a few people had become enamoured of owning land in Florida. Long a winter haven for the wealthy, the Sunshine State had begun to attract the interest of ordinary folk. The value of property from Miami to Boca to West Palm was climbing steadily. Developers were buying up large parcels of land and, by judiciously carving them up, creating lots that the masses could afford. As this process evolved, it became clear to observers, including Ponzi, that a number of Florida’s new landholders were not as interested in actually living on their property as they were in reselling it at a healthy profit. By 1925, speculation in Florida real estate had become rampant. Even land in the general vicinity of Jacksonville had begun to glitter, for it showed promise as a means by which a smart investor might get rich quickly and with no effort.
Bragadoccio One merely invested a modest amount today and found a buyer with a bit more money tomorrow. This process was made very easy through the good graces of Mr Ponzi. Having inveigled a first round of speculators into purchasing lots on his subdivision, Ponzi arranged for some profitable sales by his first customers to subsequent investors. As long as the amount of new money coming in exceeded the sums being paid out, Ponzi’s empire grew, and grew more profitable. Successful speculators sometimes sank their money right back into Ponzi’s scheme, and often boasted of their profits to others. This braggadocio – incidentally, another word drawn from a name, in this case a character invented by a sixteenth century English poet – helped encourage ever more feverish investment. The process continued apace, but not forever. Buyers who took the plunge in 1925 didn’t know it, but the very next year the market in Florida land would begin to soften. It was an act of Nature that brought the point home. On September 18, 1926, a hurricane killed an estimated four hundred people in Florida, blew the roofs of thousands of homes and washed yachts into the streets of Miami. Ponzi was finished, but his idea would live on. Today, a ponzi scheme loosely refers to any deal in which the initial investors are bailed out by the greater fools that follow them. Strictly speaking, in a ponzi scheme the underlying deal is worthless to begin with, as empty as Ponzi’s representations about the land he sold. Thus, if one were to call certain types of investment associated with computer leases ponzi schemes, one might be taken to task.
After all, the leases usually involve IBM’s excellent products, rented to the most creditworthy of IBM’s customers. Yet lease investors may remain as ignorant of IBM’s product strategy and its effects as New York cabbies are of manners. Every bit of computer technology, no matter how advanced, eventually becomes obsolete. Well before the machinery wears out it may lose all economic value. Like anything else in the realm of commerce, a computer component is worth exactly what someone will pay for it. No buyers, no value. The basic business challenge faced by an investor in equipment that will be leased is to determine just how long each piece of machinery can bring in rent, and how much. The owner of the equipment is in a race with the inevitable. And because of this, the lease
rate is very much like a life insurance premium. If events proceed as anticipated, the investor, like the insurer, will ultimnately have taken in more than it pays out, perhaps a great deal more. And, like insurance, leasing has its cycles. In both endeavours, when profits rise, more money chases deals and rates are bid down. At some point in the cycle, competition shaves the rates too thin and the lessors or insurers take a bath. Investors retreat, rates rise, and the cycle begins anew. The computer leasing business is now in the unpleasant part of its cycle. A few small lessors have gone bankrupt and others are strug.pl 71 gling. Even though the best run companies are prospering, we haven’t seen the last of the leasing industry’s problems. Nor will the trouble be confined to the lessors themselves. The backers of many deals involving IBM disk drives are also in great peril. Early this decade, as IBM began shipping its first 3380s, most lessors were cautious about the new storage devices. IBM had experienced problems building the things, and lease investors worried that the whole product line might prove troublesome in the field. In that case, they figured, the 3380 would have a short economic life. They were wrong. The 3380-AA4 and -B4 were spectacularly successful for lessors and their backers. Then, as it has in other times and places, the pheromone of lucre drew a crowd of investors. By the time IBM began shipping its improved second round of 3380s during 1985, the financial world had spawned a flock of deals through which the little guy could put a few bucks into promising disk leases.
Sale on shirts The small investor gets to play by buying into an income fund that acquires equipment from a leasing company. This lessor arranges the transaction and, in most cases, will remarket the equipment when it comes off lease. If the portfolio held by the income fund meets or exceeds the fund’s expectations, the investor profits; if it does not, the investor shares in the shortfall. The lessor may be the general partner in the income fund, and at risk, too. The income fund justifies today’s investment by showing potential clients the records of its financial history as well as its plans for the future. These plans are bound up with economic projections that attempt to predict the future yield of the leased equipment. Sellers of participations in the funds are aided and abetted by IBM, which keeps nominal list prices high while it sells billions of dollars of disks at hefty discounts. When the discounted gear is resold by lessors to income funds, the price breaks may or may not be passed on, but participants in income funds that concentrated on IBM’s original 3380s made out OK. Those with heavy commitments to the 3380-Ds will be lucky to come out whole. Lessees have already lost interest in the things. As for the most aggressive backers of 3380-K leases, they had best cock a keen eye for a sale on shirts. Having expected history to repeat itself, they will not be disappointed. Except that the story twice told will be the one about Ponzi’s last suckers. Copyright (C) 1988 Technology News of America Co, Inc
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