Excerpt from Bad Paper by Jake Halpern, plus links to reviews, author biography & more

Before long, he was buying up bad debt on a massive scale. He began bundling this debt, selling it to investors as bonds, and then using their money to buy even more debt. Bartmann's firm, Commercial Financial Services (CFS), quickly became one of the largest debt-collection companies in the nation. Bartmann played the role of newly crowned debt czar to the hilt. It was widely reported in the press that he hired former Secret Service agents to protect him, arranged to wrestle Hulk Hogan in Las Vegas, and flew thousands of employees to retreats in the Caribbean. Bartmann once boasted to a journalist that he had so much money, "If I set it all on fire, I'd be dead before it went out." But it didn't turn out that way. According to The New York Times, Bartmann's troubles started when someone sent an anonymous letter to credit-rating agencies, stating that CFS was giving investors a false picture of the company's financial health. The letter alleged that CFS was discreetly selling some of its debt to a "shell company"—with ties to a major shareholder at CFS—and was then using the proceeds from these sales to inflate its apparent success in collecting. Bartmann subsequently stepped down as CEO, investors began to sue, money from lenders disappeared, and CFS filed for bankruptcy.

Some might view Bartmann's story as a cautionary tale, but plenty of others saw it as an example of the fortunes that could be earned in this previously obscure niche of the financial world. After all, Bartmann's missteps didn't necessarily mean that the industry itself was toxic. If anything, by the early 2000s, as Americans in a mostly stagnant-wage economy began taking out more and more debt on their credit cards, it seemed as if the opportunities might even be greater.

Starting in the fall of 2007, Aaron Siegel began looking for investors. At this point, the economy was still booming; in October, the stock market reached its all-time high when the Dow Jones Industrial Average peaked at 14,164. Throughout the fall, Aaron called every rich person he knew in the hopes of raising millions of dollars and launching a private equity fund, which he dubbed Vintage Two. This was to be a onetime deal with a limited lifespan. Investors would make an initial investment and then, over the course of the next four years, receive returns until all of the money the fund earned was dispersed. According to the terms of the deal, for every dollar that he spent to purchase paper for the fund, Aaron would receive a 2-percent commission to help pay for his operating expenses. His real benefit, however, would come only after the fund broke even, at which point he was entitled to 15 percent of all profits.

When courting his investors, Aaron tried to caution them about the volatile and even unsavory nature of the investment that they were about to make: "When I pitched to investors, I told them, 'Just so you know, this is a dark sector of the finance world. This is something that people don't like to talk about.'" There was potential for great profits, Aaron assured his would-be investors, but it could be risky. "This is not where you want to be with your life savings. But if you have some speculative capital, this is a good thing to roll the dice on." To entice his investors, he showed them a spreadsheet detailing the profits that he had made from ten portfolios of debt that he'd purchased in the past—roughly half of which he'd acquired from the man who'd become his closest associate, Brandon Wilson, though he made no mention of this. The returns on these portfolios were impressive. Four of them showed net gains of more than 100 percent in seven months or less; another four portfolios showed gains of more than 20 percent in a similar time period. Even in the best of times, these numbers were remarkable.

One of Aaron's challenges was to convince his investors that he had a unique and superior approach to debt buying. Aaron noted that the industry behemoths, publicly traded companies such as Encore Capital Group and Asta Funding, tended to buy "fresh" paper directly from the banks. This paper is highly valued. In all likelihood, just a few of the banks' own collectors or subcontractors had ever tried to collect on it; and these collectors likely embraced a softer, customer-service approach to collecting. A debt buyer such as Asta Funding might buy a portfolio of "fresh" paper, collect on much of it successfully, and then sell those accounts that didn't pay. In other words, the debt buyers at the top of the food chain pay more money for better paper, but generally have an easier time collecting and making money off it. Meanwhile, the debt buyers at the bottom of the food chain pay less money for older, grungier paper that is, for the most part, harder to collect on. Those debt buyers—not surprisingly—are more likely to use hard-hitting, coercive, and even illegal tactics to get debtors to pay.

Excerpted from Bad Paper by Jake Halpern. Copyright © 2014 by Jake Halpern. Excerpted by permission of Farrar, Straus & Giroux. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.