Bad Paper: Chasing Debt from Wall Street to the Underworld
  • Bad Paper: Chasing Debt from Wall Street to the Underworld
  • Bad Paper: Chasing Debt from Wall Street to the Underworld

Bad Paper: Chasing Debt from Wall Street to the Underworld

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by Jake Halpern

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The Federal Trade Commission receives more complaints about rogue debt collecting than about any activity besides identity theft. Dramatically and entertainingly, Bad Paper reveals why. It tells the story of Aaron Siegel, a former banking executive, and Brandon Wilson, a former armed robber, who become partners and go in quest of "paper"—the uncollected

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The Federal Trade Commission receives more complaints about rogue debt collecting than about any activity besides identity theft. Dramatically and entertainingly, Bad Paper reveals why. It tells the story of Aaron Siegel, a former banking executive, and Brandon Wilson, a former armed robber, who become partners and go in quest of "paper"—the uncollected debts that are sold off by banks for pennies on the dollar. As Aaron and Brandon learn, the world of consumer debt collection is an unregulated shadowland where operators often make unwarranted threats and even collect debts that are not theirs.

Introducing an unforgettable cast of strivers and rogues, Jake Halpern chronicles their lives as they manage high-pressure call centers, hunt for paper in Las Vegas casinos, and meet in parked cars to sell the social security numbers and account information of unsuspecting consumers. He also tracks a "package" of debt that is stolen by unscrupulous collectors, leading to a dramatic showdown with guns in a Buffalo corner store. Along the way, he reveals the human cost of a system that compounds the troubles of hardworking Americans and permits banks to ignore their former customers. The result is a vital exposé that is also a bravura feat of storytelling.

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Editorial Reviews

Whenever thoughts of A Christmas Carol come to mind, here's a Dickensian note that comes with its own wintry chill: "As of 2010, more than a third of all states permit the jailing of consumers for failing to pay a debt." And you thought such barbarity had gone out of fashion, like painting your face with woad. No, the feckless use of plastic entitles you to an all- expenses-paid stay at what doubles for London's long-defunct Clink and Marshalsea prisons, right here in twenty-first-century America.

Thirty million of us have debts old enough — over 180 days in arrears — to attract the debt collector. As Jake Halpern makes achingly clear in Bad Paper, this is not going to be fun, this new relationship, but it will throw into sharp relief a system that compounds the troubles of mostly hardworking, or hard- looking-for-work, Americans while permitting banks to loose the junkyard canines. When big banks can't pay their obligations, they are given capital infusions (a few, mostly smaller fry, will be publicly executed as examples of bad seed). If you, Joe and Jane Doe, can't pony up for a modest debt — sometimes even a two- figure debt — then you can expect the phone to start ringing in the middle of the night, and keep right on ringing.

Now, let's not let the American consumer off the hook. We know what camp Halpern is in — he's in the right and decent camp — but he also wants to put in perspective the lay of the debt-insanity landscape, and all the nefarious opportunities it presents to those who game the system in one way or another. "There is a vast market for unpaid consumer debt — not just credit card debts but auto loans, medical loans, gym fees, payday loans, overdue cell phone labs, old utility bills, delinquent book club accounts." Don't forget library fines. "American consumers owe a grand total of $11.28 trillion, of which roughly $831 billion is delinquent or unpaid." Read it and weep, you 30 million debtors. Collection agencies are good at making you weep. Someone get the phone.

Aaron Siegel and Brandon Wilson are Halpern's prime protagonists in what will prove to be a cautionary tale for aspiring debt-collection independistas. Siegel was a Wall Street banking executive who took a gamble on returning to his hometown of Buffalo — where debt collections go to heave their last, putrid breath — and setting up shop as a debt collector. The numbers just looked so good: "If he could buy debts with 'face values' of $1,500 for $15 (banks routinely sell paper for these obscene discounts; something is better than nothing) — and if his agencies could collect just 10 percent of what was owed — he could make a fortune." Wilson was an old-school debt collector and dealer in paper — the notes or instruments of the original loan, with all the critical information: name, address, Social Security number, amount owed, family history, nicely laid out in Excel and tucked into a thumb drive — good paper, not double and triple sold, stolen, or beaten to death by previous agencies. He may have spent a decade in prison for armed robbery, but people trusted his paper.

It had meat on its bones.

Halpern is a bloodhound — five years' worth of bloodhounding for this project — following the trails that debts can take once the creditor sells them off into the murky world of collection. Siegel's portfolio of paper turns out to be stolen — legitimate collectors purchase the names of people with bad debts ("paper") from banks and brokers, but anyone who gains access to that information can, illegally, try to collect on the debt; it is up to the collector to chase down the thieves — and he turns to Wilson: "The following pages tell the story of Aaron and Brandon's unlikely partnership and tracks the stolen portfolio of debt they set out to retrieve." Meanwhile, "it is also a collection of stories about Americans whose financial lives have unraveled." Stories make this book intimate and relatable, and Halpern is well on his way to honing his skill as a dashing tale teller.

The Federal Trade Commission (FTC) ranks debt collection as the second-highest source of consumer complaints — the harassment, the intimidation, the shame mongering, the completely illegal threats to bring you to court (unless you are a lawyer, then the playing field changes) — after identity theft. But neither the FTC or the Consumer Frauds and Protection Bureau or the Fair Debt Collection Act of 1977, Halpern explains, have the muscle to go after anyone but the big collectors, which leaves the remaining 29,999,975 debtors without protection. The government operates under the assumption — sadly, and despite all evidence — that the market will right itself. Indeed, the government introduced buying unpaid debt in the wake of the savings-and-loan crisis of the 1980s. A whole new shadow industry was born, and left unsupervised, to grow.

Halpern is good at burrowing into Wilson's talent for pricing debt accurately, especially grungy, beaten paper: says Brandon, "I am a bottom feeder. . . . I'm the King of Crap." Halpern is also good at climbing down the ladder of honor and propriety, from the hedge fund managers to the reputable debt brokers to the midsize agencies, from the mom-and-pop shops to the lowly legitimate collectors ("We are professional nags, not con men," notes one such), until "below all these players are the toughest collectors and the final stop for debt in America: the lawyers." The lawyers have the power of the court, but by the time they get it the paper is pretty tainted, with little by way of a paper trail, what the art world calls provenance. Most judges like a chain of title, a pedigree. Since this chain is unlikely to exist with such well-travelled paper, the lawyers work on debtors' fear: nine out of ten don't show up for their court date — court is scary — which is their biggest mistake. Then they are in trouble, maybe all-the-way-to-jail trouble. But three magic words can change everything for the debtor in court: "Prove your case." Most lawyers simply walk away. They haven't the chain (despite some banks operating in cahoots with lawyers to generate phony affidavits).

The Siegel-Wilson story is a good one, but when Halpern goes farther afield, devoting a couple chapters to low-end but well- intentioned collectors dealing in rotten paper, there isn't enough material to deliver something sustained and substantive. This gives the last third of the book the feeling of a shotgun house with a few ill-advised rooms tacked on the back. Some of what Halpern uncovers is ripe stuff — why debt is called the "white man's dope," the pleasures of scoring fresh paper on cosmetic-surgery debt — but there is a failure to integrate, and we miss some of our promised payout after staying with the trail to the end.

Even though the economy has tanked, credit is hard to get, paper is drying up, and modern technology is making it harder to track people, there are still 9,559 debt collectors ready to do business. Stay out of debt. Just as important, keep an eye on Halpern, who proves that following the money is as important for the reporter as it is for his subjects.

Peter Lewis is the director of the American Geographical Society in New York City. A selection of his work can be found at

Reviewer: Peter Lewis

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Farrar, Straus and Giroux
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In 2005, when he was thirty-one years old, Aaron Siegel decided to leave his job on Wall Street and move back to his hometown. He was drawn to Buffalo—the self-proclaimed “city of no illusions”—because of its modest scale, its historic neighborhoods, and its general lack of pretension. After so much time in Manhattan and London, something about Buffalo was refreshingly real. What’s more, the Siegel family name meant something there and it lent Aaron not just credibility or prestige, but a sense that he belonged—that he mattered. Aaron returned to Buffalo, along with his wife, who was also from upstate New York, and he took a job at a local division of Bank of America specializing in private wealth management. He resolved to stay there until he could figure something else out. The only problem was that he had almost no work to do. “I spent my days spinning around in a chair and throwing pencils at the ceiling,” Aaron said. “There was nothing to do. There’s very little private wealth to manage here.”

There weren’t a great many banking opportunities in Buffalo; in truth, there weren’t all that many professional opportunities at all. At least one industry, however, was booming: debt collection. Buffalo is a major hub for debt collection and is sometimes even called the industry’s capital. This is in large part because one of the biggest collection agencies in the nation, known as Great Lakes Collection Bureau, was once based there. GE Capital purchased Great Lakes in 1997, and soon afterward, many of the company’s managers were laid off and opted to strike out on their own. Their companies thrived and expanded. In the greater Buffalo area, more than five thousand people now earn a living as debt collectors. That’s more than the number of taxi drivers, bakers, butchers, steelworkers, roofers, crane operators, hotel clerks, and brick masons combined.

As a former banker, Aaron was intrigued that so many people in his midst were toiling to collect on debts that his employer—the bank—had given up on and sold to debt buyers at huge discounts. He sensed an opportunity and, in the fall of 2005, he started his own collection agency. He used $125,000 from his personal savings, bought some “paper,” and threw himself—rather blindly—into the world of collections. His plan was to continue working at Bank of America by day and run the collection agency after hours.

When it came to hiring collectors, Buffalo proved to be an auspicious locale, both because there were so many veteran collectors to hire and because so many of the city’s other residents were so eager to find paying work. Buffalo remains among the poorest cities in the nation. Almost one-third of the people within its limits live in poverty—double the national average. Growing up in a very affluent family, Aaron says that he rarely interacted with the city’s poorer residents. “I knew they existed,” he told me. “These were folks that you bumped into going to the store, but there wasn’t a whole lot of interaction because Buffalo is very stratified.” Yet when Aaron launched his own collection agency, these were precisely the sorts of people who applied for work—and their ranks included ex-cons, drug addicts, twenty-somethings without high school diplomas, and a variety of other hard-luck cases.

“Oh my God, they were like thugs,” recalled Aaron. “Everybody had their hustle and flow or whatever the hell it was—why they were the best, the greatest.” He quickly came to realize, however, that the more clean-cut types simply wouldn’t get the job done. As he put it: “You realize that you’re sitting on an investment and you’ve hired a bunch of boy scouts who can’t turn any money.” What he needed were telephone hustlers. The problem with the hustlers, explained Aaron, was that they hustled not just the debtors, but him as well. One of the first truly great collectors that Aaron hired—an overweight, womanizing, aspiring bodybuilder—robbed him of several thousand dollars by counterfeiting the firm’s checks.

Eventually, Aaron hired a floor manager—a young, handsome guy in his mid-twenties, who asked to be identified by his middle name, Rob. Rob understood collectors. He took it as a given, for example, that many of his collectors either used or sold drugs. In one of his stints as a manager, Rob bought his team “three cases of whippets”—steel cartridges filled with nitrous oxide—for hitting their goal. “You have to have a little hustle in you to collect,” he explained. “Certainly, if you are selling bags of pot to college kids, you have that natural ability.” One day, Rob had to help break up a fight that began when a collector overcharged his co-worker for a bag of cocaine. Their punishment, recalls Rob, was simply being sent home for the day. Above all, says Rob, the collectors needed “someone they could relate to”—someone who could be a “bridge” to Aaron. “I was that bridge.”

Rob’s biggest challenge was making sure that one of the agency’s best collectors made it to work each day. On many occasions, Rob confiscated his car keys and insisted that he spend the night with Rob at his house. “He was a very intelligent guy, but he was also your average stoner who didn’t think of the day ahead until that morning,” recalled Rob. “He was extremely lazy and smoked a massive amount of pot. At the time, he was twenty-three and he didn’t understand the whole concept of work responsibility.” When he did show up, however, he was masterful at the “talk-off”—the spiel given to debtors in order to encourage, shame, and intimidate them into paying. This particular collector was a “killer” and a “beast” on the phone, Rob said.

To this day, Rob recalls his talk-off with great admiration: “He would ask a question, which he knew the answer to, but when he got the debtor’s response, he flipped it on them. For example, maybe the debtor bought a dishwasher for a thousand dollars from Sears. The debtor would say, ‘I didn’t have a job at the time.’ Then he would say, ‘But I have paperwork right here saying that you worked at Rich Stadium at the time, and now I would like a statement from you because I am going to have to explain to the banks that you were lying.’ He’d get them into a trap. He’d get them to lie, then he’d call them on it, and then—in five minutes—they were writing a check.” According to Aaron, his star employee collected as much as $20,000 a month.

Aaron took it as a given that some of his collectors, the good and bad alike, might quit at a moment’s notice. The industry was famous for employing “hoppers,” who simply stopped coming to work one day and “hopped” to another agency where they thought they might do better for themselves. One of the most famous hoppers in Buffalo was a man of exceedingly short stature known as “Matt the Midget.” “He had these extended pedals on his car so his feet could reach,” Aaron said. When he showed up for an interview at Aaron’s agency, Matt the Midget delighted Aaron’s employees by leaping into the air and tapping his forehead with his own feet. Aaron’s agency offered him a job, but unfortunately, Matt the Midget never showed up for work. Not even once.

What made it all worth it for Aaron was that he was making money. When he purchased an especially good portfolio of debt, the profits were astronomical. For example, he obtained one portfolio for $28,526, collected more than $90,000 on it in just six weeks, and then sold the remaining, uncollected accounts for $31,000. On that portfolio, he made a whopping net return of 199 percent. Aaron bought another portfolio of debt for $33,387, collected more than $147,000 on it in four months, and then sold the remaining accounts for $33,123. On this portfolio, his net return was 264 percent. Of course, not all of his deals proved to be this wildly profitable; but, on the whole, he was doing well with almost all of the paper that he purchased. This was in no small part because in 2006 he had begun buying paper from a debt broker named Brandon Wilson. Initially, at least, Aaron knew very little about Brandon. A business associate had recommended him, and right away, Brandon began to prove his worth—supplying good paper, with “plenty of meat on the bone” as they say in the business. “The paper that I bought from him performed wonderfully,” recalled Aaron.

During the day, while he toiled away at Bank of America, Aaron began spending more time with one of his co-workers: a beautiful young brunette named Andrea. Andrea grew up in an Italian-American family in the nearby town of Batavia, worked for a few years as a teacher, and then took a job with Bank of America at its corporate headquarters in Charlotte, North Carolina. She returned home to western New York and arrived at the Bank of America offices in Buffalo with a sense of deflation that mirrored Aaron’s. “There were like nine people in our office and they were all like six days from dying,” she told me.

Then she saw Aaron.

“I was standing at the receptionist desk, and he walks by, and I remember in my mind remarking, ‘He’s got a nice suit on. Okay, maybe this isn’t so bad.’” On one of their next encounters, Andrea was stranded in the parking lot with a flat tire, and Aaron came to her rescue. The only problem was that he didn’t know how to change a tire properly and he ended up damaging her car. Somehow he managed to make light of the debacle, and his own ineptitude, which Andrea found strangely endearing. They were soon spending more time together and, eventually, started having an affair. “I don’t think I was emotionally ready to be married in the first place, but—up until then—I was doing a very good job of faking it,” Aaron told me. “Really, it was just terrible judgment.”

To this day, Andrea isn’t sure what Aaron was thinking at the time. “I don’t really know what the draw was—not wanting to be with his wonderful blond wife that everyone loved in order to date a crazy Italian. Who does that? Nobody.” Aaron ultimately decided to leave his wife and, on top of that, his job at Bank of America as well. “He basically put his life in a jar and shook the shit out of it,” said Andrea. Looking back, Aaron’s father, Herb, says that Andrea—whom he calls a “femme fatale”—was a very bad influence on his son. “She’s very attractive and very seductive,” he warned me.

Aaron’s younger sister, Shana, puzzled over her brother’s transformation from Wall Street banker to owner and operator of a small collection agency in Buffalo. She would stop by his agency and wonder what her brother had gotten himself into. “I’d be in his office, seeing the people that were coming in, and I was like: What the hell? What do you got going on here? It felt shady.” She viewed all of it as being a far cry from the high hopes that her family had for Aaron. Shana recalls that Aaron had nice artwork on the walls of his personal office but that elsewhere in the agency the carpet was ratty, the railings were rickety, and the employees seemed sketchy. “It was like he was trying to put gold rims on a dilapidated car,” she said. “It was like he was trying to make my father’s office out of something that was not as nice.”

Aaron’s father, Herb Siegel, was a legend in Buffalo. He was a successful divorce lawyer and the founder of Siegel, Kelleher & Kahn—a hugely profitable law firm that handled divorces and personal-injury cases. In the early 1990s, The Buffalo News ran a lengthy profile on Herb, describing his “Gatsby-esque parties” and his lavish lifestyle. The article depicted Herb at work in his “two spectacularly renovated Victorian mansions” under the soft glow of chandeliers. “He enjoys the perks that come from sitting atop his law firm: The respectful associates whose offices were once the sitting rooms and servants’ bedrooms of the 19th century mansion … Clients can’t help noticing the glamour, the elegance … [especially] the women who come to him at the most difficult time of their lives and tearfully whisper revealing details about their most personal encounters in their marriages. He is someone who can solve their problems. He has the power to make it better. They adore him.”

Herb’s own marriages were tumultuous. He married and divorced three times, though not all of his separations were bitter. His second wife, for example, subsequently took a job as his bookkeeper. His third wife, Aaron’s mother—Joyce Siegel—actually started off as a client. When she first met Herb, she was in the midst of a divorce, and Herb’s office was representing her. Initially, Joyce was working with another lawyer at the firm, but when she broke down in tears, the lawyer summoned Herb for help. This was Herb’s specialty—he knew how to handle even the most distraught of clients. He walked in, told her to stop crying, and took over her case. “Herb usurped the client in more ways than one,” Joyce recalled.

Joyce says that she was initially drawn to Herb because he had the aura of a “man about town.” “You know how women are. They like power and money, and, in the situation I was in, I didn’t have any of that.” They eventually married, but Joyce says it was rocky from the start because Herb would stay out late, leaving her at home, worrying—and then simmering. “I reached a point where I wouldn’t even leave the porch light on for him. I was really hoping, secretly, that he’d fall and break his neck or crash on the way home. Then he would come home, he’d [usually] been drinking—I’m sure he’d been with women—and he would go into the bedroom to wake up Aaron.” At the time, Aaron was an infant and Joyce says she would plead with her husband, unsuccessfully, to let Aaron sleep. “I’d hear Ari”—her nickname for Aaron—“in there, tossing and turning, trying to get back to sleep. He was such a good little boy. He wasn’t a crier.”

As his law firm continued to prosper, Herb began looking for a new, grander home for his family within the city’s historic district around the Albright-Knox Art Gallery. One day, he and Joyce went to see a gorgeous old mansion on Soldiers Place, one of the city’s most prestigious addresses. The house, situated kitty-corner from a mansion designed by Frank Lloyd Wright, was a stately edifice built in 1905. It boasted seven bedrooms, five bathrooms, and more than five thousand square feet of floor space. During their initial tour of the house, Joyce was unconvinced: “I remember being up in the room on the third floor, in what was like a pool room, and I was thinking, ‘God, I don’t know, this is so big.’” Then, without consulting his wife, Herb said to the agent, “We’ll take it.”

Aaron speculates that his father purchased the mansion with the intention of flipping it whenever the opportunity arose. “I think he probably put it on the market as soon as he bought it,” says Aaron. “No sentimental attachments there—that’s how he is.” When Herb finally did sell the house, more than two decades later, the buyer was the Canadian government, which wanted a suitable home for the head of its consulate. Herb sold the house for an enormous profit. When he inked the deal with the Canadians, Herb was amused to see that the contract bore the seal of the British Crown. “He ripped off the Queen of England,” said Aaron. “That doesn’t happen every day.”

As the years passed, Joyce became increasingly unhappy with her marriage and the family dynamics at Soldiers Place. She eventually ended the marriage and moved out of Soldiers Place, leaving Aaron and Shana—who wanted to stay in their childhood home—behind. The house was never the same after that. What ensued was the much-idealized scenario that many an American teenager has dreamed of: a mansion stocked with food and liquor, a permissive father, and an open-door policy for friends and classmates. Shana recalls this time in her life with great nostalgia: “I would say to my dad, ‘I’m having thirty couples here before the date dance, and I expect you not to come home for the whole night.’ And he’d be like, ‘Okay.’” It was a dream come true for Shana: “We’re fifteen years old and we’re all sitting around drinking champagne in this grand house.”

As permissive as Herb could be, he was—in other, important ways—quite overbearing. According to Shana, Herb “had grandiose ideas of what my brother would be” and this weighed on Aaron “terribly.” Aaron understood his father’s expectations implicitly. In Herb’s view, says Aaron, people were either “losers” or “very successful”—and it was always based on how much money they made. Herb’s hopes may have weighed heavily on his son, but Herb shrugged this off as inevitable. As Herb told me, “Look, when you come from a family like ours, you’re always going to be striving. You’re going to want to do something better than your father. I think that goes with the territory.”

For Aaron, the collections industry offered both financial reward and voyeuristic access to the city’s seedier side. According to Rob, Aaron’s floor manager at the agency, his boss was both fascinated and repulsed by the business: “Where Aaron came from, with a private high school and prestigious family, that was a different world. He liked this scene, in a way. You know how opposites attract? You know, you have the good girl dating the bad biker dude—she is intrigued. Maybe he was like that.” Even so, Rob added, “when he had a chance not to get his hands dirty anymore, he took that route.”

Aaron’s chance, it turns out, came with the realization that he didn’t have to operate a collection agency himself. Instead, he could buy portfolios of debt and then place them at other agencies, which would collect on the debt for him. These agencies would operate on a “contingency basis,” keeping a percentage of whatever they collected. From Rob’s perspective, Aaron’s decision made sense. “When he saw the potential in debt buying—where he could avoid lawsuits, avoid dealing with collectors and the bullshit that comes with that—he thought, I can make just as much buying and selling. It has to do with his personality. Instead of cleaning his house, he would rather hire a maid.”

Aaron’s plan appeared to be a smart one. His connections and experience as a banker in Manhattan—combined with his real-life experiences in the trenches of Buffalo—would make him uniquely qualified for this new venture. In the language of the collections industry, Aaron would operate as a “privately financed debt buyer.” A 2010 report by the Legal Aid Society and several other nonprofits speculates that there are roughly five hundred such buyers in the United States and concludes that little is known about how they operate. This often works out well for the buyers. After all, it is much easier to operate with minimal public scrutiny. An investment banker at one of the big Wall Street houses told me that he could never invest in “distressed consumer debt” because ever since his firm’s government bailout, its unofficial motto has been, “We cannot fuck the American taxpayer.” He had to run all of his deals by the PR department; thus, even if he could make a killing on an investment involving consumer debt, the PR people would likely say no.

There have been privately financed debt buyers operating in the United States since well before the Civil War. At that time, there was no uniform paper currency and if you wanted to buy a piece of property, say—and didn’t have the money—you could simply write a promissory note. In fact, this is precisely what Abraham Lincoln did in 1833 when he acquired a general store from a man named Reuben Radford. In financing this purchase, he signed a promissory note to Radford for $379.82. The business fared poorly and when Lincoln proved unable to repay what he had borrowed, Radford sold his promissory note—which was merely a piece of “paper”—to the debt buyer Peter Van Bergen. Van Bergen then successfully sued Lincoln, ultimately prompting a sheriff to seize and auction off Lincoln’s surveying tools, saddle, and bridle. Years later, Lincoln effectively switched sides and spent much of his legal career suing debtors on behalf of clients large and small. He also worked on the side for the equivalent of a credit bureau, providing information on the financial soundness of merchants and others in the community. As James Cornelius, the curator of the Lincoln Presidential Library and Museum, put it: “He ratted out his friends.”

The marketplace for consumer debt, as we know it today, traces its origins to the late 1980s and early 1990s. One of the early pioneers of the debt-buying industry was a flamboyant self-made billionaire named Bill Bartmann, whose ability to promote his businesses—and himself—rivals that of Donald Trump and Don King. He grew up in Dubuque, Iowa, but dropped out of high school and left his home at the age of fourteen—at which point he claims to have taken up residence in the hayloft of a barn and joined a gang of ruffians known as the “Manor Boys.” “The farmer who owned the barn found out I was living up there and then burned the few clothes that I had left,” Bartmann told me. Bartmann eventually went into business, and grew rich by launching a successful oil equipment company. When oil prices crashed, in the mid-1980s, his company failed and Bartmann ended up $1 million in debt. Debt collectors started calling him around the clock.

Then, one day, his fortune changed when he saw an interesting advertisement in the newspaper. The federal government was auctioning off unpaid debts that belonged to two failed banks in Tulsa, Oklahoma. The government had bailed out the banks and taken their assets—including the unpaid debts—and was now trying to recoup its losses. This practice became more common in the early 1990s when the federal government’s Resolution Trust Corporation bailed out a number of the failed financial institutions known as savings and loan associations, or S&Ls. Many of the S&Ls had made very risky loans, which ultimately caused them to fail. The government seized their assets and auctioned off nearly $500 billion of their unpaid loans. These auctions helped establish how vast quantities of unpaid debts could be priced at a discount and then sold to enterprising buyers.

At the auction in Tulsa, Bartmann ended up bidding on and winning a portfolio of unpaid debts for $13,000. To pay for it, he borrowed the $13,000 from the very same bank that was still trying to collect $1 million from him. The portfolio was a mix of various consumer loans, including auto loans, recreational vehicle loans, and home improvement loans. He promptly collected $64,000 on this portfolio. Bartmann continued buying paper from the federal government at a discount and then collecting on it with great success; within two years, he had paid off the $1 million that he owed the bank. In the early 1990s, Bartmann bought credit-card debt for the first time and entirely by accident. The credit-card accounts were simply mixed in with the other consumer loans in a portfolio he bought from the government. “Our first reaction was, Oh crap!” says Bartmann. “We didn’t want them.” The conventional wisdom at the time, says Bartmann, was that consumers were unlikely to repay old credit-card debts because they felt no sense of personal connection to the creditor. It wasn’t like an auto loan where, presumably, the consumer made a single purchase and could likely remember the car, the dealer, and the dealership. This conventional wisdom proved false. These loans were very profitable to collect on—twice as profitable as his other paper—and Bartmann was soon in search of more of them.

In 1994, Bartmann recalls going directly to NationsBank, soon to be Bank of America, and offering to buy their old, unpaid credit-card accounts. When a debtor stops paying his or her credit-card bill, the banks count the balance as an asset for 180 days, during which time the bank’s collectors try their very best to collect on what is owed. After that time, the Generally Accepted Accounting Principles (GAAP)—which banks must follow by law—require that these accounts no longer be counted as assets, because the money might not be collectible. Banks then “charge off” the accounts, taking a loss. Bartmann was, in effect, offering banks cash for what—on paper at least—appeared worthless or close to worthless. As he recalled: “They sold us their ugliest of the ugly for two cents on the dollar—these were four-year-old charged-off credit-card loans that had been sitting smoldering in the basement for God knows how many years—and we took them home and had an extremely good result with them.” In order to maximize his returns, he also began classifying his collectors into distinct demographic groups and paired them with debtors of the same ilk: “We didn’t want anyone from the NAACP calling anyone from the KKK, because that would be a nonstarter on day one.”

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.

There is, however, another way to make money off older paper—namely buying paper that has been bought and sold repeatedly, but has not been collected on efficiently and thus wrung dry. This is what Aaron wanted to do. He told his investors that his goal, in significant part, was to buy “grungy” paper that had been around the block but retained its value. In short, he wanted to buy paper that was not as “beaten up” as it looked. After all, Aaron reasoned, a smart buyer could capitalize on just how difficult it was to price debt accurately. A dizzying array of variables affect a portfolio of debt’s true potential—including the age of the debt, how many agencies have worked it, the size of the balances, the types of credit card involved, the regions where its debtors live, the current economic climate, and many other factors. There is no single market or venue—like the NASDAQ or the New York Stock Exchange—where this kind of debt is sold. This creates a marketplace that is inherently inefficient, which makes it hugely enticing to many investors. Warren Buffett once famously said, “I’d be a bum on the street with a tin cup if the markets were efficient.”

One of Aaron’s investors told me that he was won over by the possibility that Aaron had found a wonderfully inefficient little market. He liked the idea that most deals were made through intermediaries—and that there was no easy way to know what the debt was really worth. You couldn’t simply check on the Internet or the business section of the newspaper. “There is the potential to buy bad paper, but there is also the potential—if you are smart or savvy enough—that you should be able to exploit this shortage of information,” the investor told me.

With $14 million from his investors all lined up, Aaron was poised for success. Overnight, he had gone from being the owner of a small call center, in which he had to deal with the likes of Matt the Midget, to once again being a player in the high-powered world of finance. And this time, in contrast with his stints working at big banks, he was in control of his own destiny. Aaron’s next order of business was to find a few good collection agencies to work his debt.

Aaron wanted to avoid hiring the enormous mega-agencies, with their endless rows of cubicles, stretching on forever and fading off into the dreary, monochromatic horizon. In Aaron’s view, these agencies had more paper than they knew what to do with. Such places often scored each and every debtor—by running a series of credit checks—and then worked only the top-scoring accounts, leaving the rest untouched. Aaron wanted smaller, hungrier shops, where he was the sole provider of paper. “This way,” explained Aaron, “they have to do well for me or they don’t make payroll.” Such an agency might eventually go out of business, he reasoned, because it would spend too much time on each account; but while it was up and running, it would make him money. He also wanted a shop that collected aggressively—not one that was “threatening to break legs” but a place where collectors were willing to test the limits of what was allowed under the Fair Debt Collection Practices Act of 1977. This law forbids debt collectors from engaging in abusive, deceptive, or unfair practices and it places certain restrictions on how and when they can call a debtor.

Aaron knew precisely what he was looking for, and in early 2009, he found a man who promised to provide it. Shafeeq, who asked only to be identified by his middle name, was the co-owner of a small, five-man shop. Shafeeq was an ambitious young black Muslim from the impoverished East Side of Buffalo—an imposing figure of a man, roughly six and a half feet tall, and weighing more than 300 pounds. Shafeeq looked the part of a bodyguard and, in addition to running his debt-collection agency, he ran his own security business on the side. Shafeeq’s intimidating appearance, however, belied a more thoughtful and soft-spoken aspect. As a child, Shafeeq was such an avid reader that he churned through each page of the Encyclopedia Britannica at his parents’ house, in wild anticipation of the mysteries that awaited him in the volume labeled “X.”

Shafeeq spent his early teenage years at a boarding school for Muslims, run by Arabs, in the suburbs of Buffalo. He eventually earned his GED, got married at the age of twenty-four, and took a job working as a debt collector, which was a complicated choice of profession for a devout Muslim. He told me that, whenever possible, he tried to honor Islam’s ban on usury by collecting only the principal that debtors owed. His faith and profession intersected in other interesting ways as well. According to Shafeeq, his branch of Islam allowed polygamy, which enabled him to take a second wife—a woman who was the administrative assistant at his small collection agency. It was a tempestuous relationship. They divorced and then remarried on multiple occasions. (Getting a divorce, he told me, was simply a matter of writing out a statement and having two witnesses sign it.) The divorces took their toll on him. “Polygamy in itself is a powerful, tough thing,” he told me. “You know what I mean? And it’s an emotional thing. Because women can act very jealous. You know what I’m saying?”

Shafeeq’s stress managing his two wives was compounded by his business woes. By the standards of the industry, he was working very low-quality paper. At one point, it had gotten so bad that Shafeeq was collecting on Radio Shack credit-card debt, some of which dated back to 1983. Just before meeting Aaron, he had purchased two portfolios of bad paper—one for $10,000 and another for $14,000—which proved so beaten-up that they were virtually uncollectible. Whenever he prayed—unrolling his prayer mat, kneeling down, and making dua, a Muslim prayer in which the supplicant beseeches God for help—he asked for divine intervention with his business. As if in answer to Shafeeq’s prayers, Aaron called, introduced himself, and offered to buy a one-third share in his company for $25,000. Shafeeq’s shop was too small to handle a large volume of paper, but Aaron could fix that.

According to the terms of the deal, Aaron would provide all of the paper, process the credit-card payments, and do the accounting. Shafeeq’s collection agency would take a 50 percent commission, a third of which would go to Aaron. In short, Aaron would be in control, while Shafeeq and his co-owner—another young black Muslim—would have the headache of running the place. Looking back, Shafeeq says: “I would probably have agreed to anything at that point.”

Shafeeq filed for incorporation in April 2009 and began hiring employees rapidly until soon he had an office of thirty people. Most of these employees were white and some bristled at the prospect of working for a black man—and a Muslim at that. Shafeeq heard that a few of them occasionally referred to him as a “nigger” behind his back. And so Shafeeq eventually decided that operations would run most smoothly if he told his employees that Aaron was, essentially, the sole proprietor of the business and he was merely the supervisor. “The world is crazy and screwed up,” he said. “People think in screwed-up ways and people are racist. They don’t even know they’re racist. People hate. They’re angry. And instead of trying to change it, you know, it’s better to just learn how to maneuver inside of it the best way you can.”

What made it all worth it was the quality of the paper that Aaron began to deliver. In the past, Shafeeq never had the resources or the connections to buy high-quality paper, which is typically sold in bulk—either directly by creditors or by the big debt buyers. He was simply too far down the food chain. Aaron transformed that. He was soon providing credit-card debt with fairly recent charge-off dates; and, according to Shafeeq, the money started pouring in. Shafeeq began taking home $10,000 a month, which was far more than he had ever earned in the past. “It was a whole new world,” he said.

Now that he was flush with cash, Shafeeq eventually decided that he wanted a third wife. He consulted his first wife and she suggested that he marry a woman whom she knew—a single mother with four children. Shafeeq agreed and, in so doing, felt he was doing something charitable: “Paying somebody’s bills is really a big deal in the ’hood when you’re dealing with African-American women.” The truth was, he said, there just weren’t enough responsible African-American fathers and husbands to go around. “If you can get one man who’s going to help the children—be there, teach them, give them guidance, leadership, show them how to do it, invest in them—and he does that same thing with another family, some other children, you’re duplicating that. You know what I mean? You’re Xeroxing righteousness.” Shafeeq felt so optimistic about the situation, in fact, that he began “interviewing” women in the hopes of finding a fourth wife.

All of this meant that Shafeeq had a lot riding on his new business venture. He needed his business to succeed because, say what you will about polygamy, it is not cheap. Aaron didn’t know all the details of Shafeeq’s situation but he understood what mattered: Shafeeq was desperate to make the whole thing work. Over the course of his investment, Aaron found and used a number of other collection agencies as well, but Shafeeq’s agency embodied what he wanted: it was small, scrappy, and a little desperate.

Under the terms of his newly launched fund, Aaron would have to spend the entire investment—all $14 million of it—immediately in order to put his investors’ money to work right away. This meant that he needed paper hunters and, inevitably, he turned to the man who had already supplied him with a number of very profitable portfolios: Brandon Wilson. In truth, Brandon was more than just a paper hunter. He also ran his own collection agency in Bangor, Maine; and he maintained a network of buyers, interested in old paper, who would buy Aaron’s inventory when he was done with it. Brandon had a checkered past, but whatever he lacked in refinement, he more than compensated for with his knowledge of the industry. Of course, Aaron wouldn’t rely on Brandon entirely, but he could make good use of him. Aaron’s gut feeling about Brandon was that he was honest and that he knew what he was doing; but it did give him a moment’s pause that he was entrusting his fate to a man who may have robbed the very banks for which Aaron, himself, had once worked.

Copyright © 2014 by Jake Halpern

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Bad Paper: Chasing Debt from Wall Street to the Underworld 5 out of 5 based on 0 ratings. 1 reviews.
Jedibarrister More than 1 year ago
A fascinating and riveting tale of the debt buyer industry and all the victims of the lawless state it lives in. A true educational thriller.