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How Our Entire Economy Became a Ponzi Scheme

We're only just discovering how widespread the rip-off schemes riddling our economy are.
 
 
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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.

 
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