Every great American boom and bust makes and breaks its share of crooks. The past decade -- call it the Ponzi Era -- has been no different, except for the gargantuan scale of white-collar crime. A vast wave of financial fraud swelled in the first years of the new century. Then, in 2008, with the subprime mortgage collapse, it crashed on the shore as a full-scale global economic meltdown.
As that wave receded, it left hundreds of Ponzi and pyramid schemes, as well as other get-rich-quick rackets that helped fuel our recent economic frenzy, flopping on the beach.
The high-water marks from that crime wave, those places where the corruption reached its zenith, are still visible today, like the 17th floor of 885 Third Avenue in midtown Manhattan, the nerve center of investment firm Bernard L. Madoff Investment Securities -- and, as it turned out, a $65 billion Ponzi scheme, the largest in history. Or Stanfordville, a sprawling compound on the Caribbean island of Antigua named for its wealthy owner, a garrulous Texan named Allen Stanford who built it with funds from his own $8 billion Ponzi scheme. Or the bizarrely fortified law office -- security cards, surveillance cameras, hidden microphones, a private elevator -- of Florida attorney Scott Rothstein, who duped friends and investors out of $1.2 billion.
The more typical marks of the Ponzi Era, though, aren't as easy to see. Williamston, Michigan, for instance, lacks towering skyscrapers, Italian sports cars, million-dollar mansions, and massive security systems. A quiet town 15 miles from Lansing, the state capital, Williamston is little more than a cross-hatching of a dozen or so streets. A "DOLLAR TIME$" store sits near Williamston's main intersection -- locals affectionally call it the "four corners" -- and its main drag is lined with worn brick buildings passed on from one business to the next like fading, hand-me-down jeans. It's here, far from New York or Antigua, that thanks to two brothers seized by a financial fever dream, the Ponzi Era made its truest, deepest American mark.
Jay and Eric Merkle, active church members and successful local businessmen, were well known among Williamston's residents. In 2004, the brothers discovered that an oil-and-gas venture, which they had invested in and which promised them quick, lucrative returns, was a scam. They'd been duped. Their next move should have been simple: turn in the crooks and get on with their lives, their pockets a few dollars lighter. Jay and Eric, however, grasped the spirit of their age and made another decision entirely -- they teamed up with the guys who had ripped them off, in the process switching from prey to predator.
That first venture actually floundered, but in 2005, court records show, they started their own Ponzi scheme, Platinum Business Industries (PBI). Based in Williamston, PBI claimed it was socking its investors' money into lucrative oil and gas exploration opportunities in Oklahoma and Texas, and it promised the investors absurdly high returns -- 6% a month, or 72% a year. Despite such promises, the brothers assured town locals handing over their hard-earned dollars that little risk was involved. Even if the energy exploration didn't pay off, the land acquired by PBI was valuable and could be sold to offset any losses.
Like Madoff in Palm Beach, the Merkles in Williamston exploited local ties -- church and family -- to reel in new investors; and like Madoff's investment fund, PBI, too, was a complete sham, and a classic Ponzi scheme -- that is, an investment scam in which existing investors' returns are paid for with money from new investors. In the case of PBI, there was no energy exploration in Oklahoma and Texas.
Some of the money they received from later investors the Merkles used to pay off earlier ones and give their scheme the look of success. But in their case, there was a rub. The Merkles were distinctly creatures of the Ponzi Era: they evidently couldn't help themselves. Even as they ran their own Ponzi racket, documents show, they were getting fleeced. What they weren't paying out in fake returns the Merkles bet on high-yield, get-rich-quick schemes in the U.S. and abroad that had nothing to do with oil and gas -- and other Ponzi schemers and con artists were robbing them blind.
Their financial crime spree collapsed in 2008. Dead-broke, with investigators closing in, they told investors that various foreign governments and banks had frozen their assets. The brothers then asked them to wire more than a million dollars to Nigeria, Ghana, and other countries as "fees" to release their money, even as they warned them against cooperating with an FBI investigation. Then, on a brisk autumn day in October 2008, the feds arrested to the two brothers; the game was up. In all, via PBI and other scams, they had duped more than 600 investors out of $50 million, robbing some of their life savings.
When compared to Madoff's or Stanford's heists, that sum was little more than pocket change. But the Merkle brothers caught the true, democratic spirit of a decade of an unrestrained magical thinking that infected rich and poor, successful and ne'er-do-well, the financially savvy and neophytes who couldn't tell a stock from a bond. Think of their story as a parable for the Ponzi Era: they were taken, decided to become takers, took others, then got taken again. In the rush for the pot of gold at rainbow's end, they bet everything Main Street had to offer, believing they could get away with it.
Thanks to an open credit spigot, a booming housing market, and visions of unimaginable wealth on Wall Street, practically everyone in the United States in the past decade seemed to aspire to get rich -- and quick. Perfectly ordinary people refinanced their homes, refinanced again, and used the money they got to stake themselves at the crooked casino table of American life. Some rolled the dice in stocks, bonds, and second homes. For millions more, the gamble took the form of "investment opportunities" that promised wealth in a hurry, opportunities now exposed as little more than financial con jobs. "People were shooting for that home run," says Peter Henning, a law professor at Wayne State University and white-collar crime expert. "They were saying, 'I'm just as smart as Warren Buffet.'"
Today, with easy credit and the buy-now-pay-tomorrow culture that it spawned in the dustbin of history, the Ponzis and pyramid schemes of the past decade can be seen for what they really were. Not a week seems to go by without the Securities and Exchange Commission (SEC) or the FBI or law enforcement officials busting another get-rich hustle. Yet the full scope of the criminality of the Ponzi Era remains elusive; no one yet knows just how widespread those Ponzi schemes were -- and how many may remain, hidden or in plain sight.