OWS buys and forgives distressed debt

Check out this very interesting project: http://wilwheaton.tumblr.com/post/35309150177/the-peoples-bailout

Occupy Wall Street is buying up distressed debt for pennies on the dollar and then, rather than hounding the person to pay simply forgiving the debt! What an interesting project - they are calling it "the people's bailout".

My CEO just sent me that! It appears that links to the parent org (Rolling Jubilee) have been making the rounds in startup-land.

Is determining the debtor makeup of a CDO possible? NPR chaperoned several financial safaris back during the dark days of the recession; they left me with the impression that these securities were opaque collections of debt gumbo.

Love this idea so much.

I'm not an expert, but most investors buy the debt in the hopes of collecting it, so they'd have to know what the individual notes say and who the debtor is.

Yeah, I'm pretty sure you can figure out who the debtors are. How would they work otherwise?

My brother sent this to me this morning. Great idea. I hope it takes off. Being a nation of debt fucking blows.

I'd wait to jump into something like this. These products are complicated and tearing them up can be expensive and difficult.

Doesn't debt forgiven = income in the eyes of the IRS?

Even if you could, which is doubtful,* CDOs are hideously complicated structures, and I believe that, in order to actually forgive the debt underlying any one of them, you'd have to buy the entire thing: the way CDOs work, a special-purpose vehicle acquires all of the debt, then issues notes secured by that debt to noteholders. You can buy notes from the noteholders, but there are severe restrictions on when, if ever, the underlying debt can be sold out of the structure. Even if you owned all the notes, there might not be a mechanism in the deal for simply dissolving the structure and directly acquiring the notes (although you could probably work something out).

Bottom line: this sort of thing is a lot easier to do if you're just buying debt that hasn't been securitized.

* My understanding, which I admit is limited, is that the debt underlying most CDOs is not generally publicly disclosed.

Friggin' Obama.

In some cases, yes. Primarily you can get a break if the cancelled debt is the mortgage on your primary residence (that you've lived in for at least two years). Forgiving credit card debt is generally treated as taxable income, because it's effectively no different than if somebody paid you $X and then you immediate used that money to pay the balance off with your creditor. You used the credit card in lieu of spending money earned as normal, taxable income, so all you've really done is defer payment of the taxes from the "income" you've borrowed against the future.

The mortgage exemption, as you might have guessed, has only been around these past five years and really is the government trying to give a tax break to people losing their main home to foreclosure.

But yeah, that'd be another thing to be careful of.

Even so, owing taxes on the debt would be a substantial improvement on owing the debt itself, for most people. You can set up a payment plan with the IRS that, IIRC, does not charge interest.

The reddit thread linked has some answers. In summary, they have done their homework and can make this thing work.

Their response on the ycomb link:

Only kind of debt that goes for pennies on the dollar is distressed debt getting offloaded to collection agencies. Borrower is delinquent and bank says fuck it, gives credit hit and looks to monetize it. So I kinda doubt that the borrower in question will benefit all that much from this action.

At that point the better solution is to let the collection agency buy it and negotiate with them to call the debt paid for a nominal fee. There are plenty of firms (non and for profit) that already handle that sort of negotiation. Donating to them, or creating a fund borrowers dealing with a collection agency can draw on, are both better solutions than buying arbitrary debt on the market and writing it off without examining the borrower for either need or ability to pay. You could also support bankruptcy lawyers interested in doing pro bono work for needy families as that'd clear way more obligations than wiping the distressed debt.

I doubt they're going to do this with securitized debt because there's no realistic way for legitimate buyers to shut that shit down.

Final thing is major debts (education, mortgage) that enter deliquency almost always eventually exit it without modification. Bank inaction on clearing out these debts is self serving as it guarantees eventual income + even more interest. Essentially a loan with value equal to interest on principal that would have been paid over the period. Which, of course, points to it being an income problem with an obvious and well known solution (get thee to the econ thread) rather than a debt problem per se.

Last thing, people with college loans and mortgage payments aren't exactly the ones I think of when I think desperately poor individuals. Donations could be put to better use helping the actual bottom rung of society: the myriad homeless living in cars or on the streets, many of whom hold a job that pays too little to get a place to live. There's also the perennial problem of the young black high school educated male with one or more (usually drug related) felonies to his name. That group's unemployment and poverty rates are staggering. I doubt you could get better value for your poverty fighting dollar than giving them cash conditional on their attendance of a program at a trade school or college (IOW Bolsa Familia). That and eliminating the modern fetish for background and piss checks at every fucking employer and you'd go a long way toward undoing the ghettoisation of black Americans.

When the debt is forgiven, how does that affect their credit report? Depending on how unscrupulous the collection agency would have been it might have bought these people some peace as well as relieving the psychological impact of having debt (and potential of wage garnishment) hanging over their head.

You are right there might be better uses of the money. That money could probably be even better used outside of the United States if you really want to look at the big picture, but as it is, as long as they work through the best ways to offer this debt relief, I think it's likely still a public good. I don't think it's any worse than donating to your personal pet causes.

Edit: Just another note..

That fee is often around half the debt. If someone can't make the monthly payments on the debt, it's unlikely they are going to have that kind of money to just call it paid.

The new york fed releases a graph heavy (yay) quarterly report on household debt and credit. Two points:

1. Mortgages make up the vast majority of consumer debt.
2. It looks like Student Loans are increasing as a percentage of the total consumer debt load ( due in part to the reduction in total mortgage debt), in raw dollar amounts, and in their contributions to new delinquency.

Combined with your statement re their lack of modification, it seems like it would be difficult to provide meaningful relief to the seriously indebted [when using OWS's pennies on the dollar approach].

If you mean by seriously indebted to just mean those with the highest absolute debt. What amounts to serious often depends on that person's income (at least to them). I take Aeon's point though and I'll let it drop after this post.

But as a ratio of dollars spent to the amount of debt wiped out, this seems like a good way to eliminate debt compared to when some collection agency buys the debt then wants roughly half to call it paid (all at once). According to their website 250 dollars buys 5k worth of debt. That seems like a better deal.

I guess we will watch with interests for AARs on their activities. I hope something useful comes of it - but as you say, Aeon, assisting felons and homeless would be an immediate relief to many (the individuals and any dependents/family).

How do they pick the people who have their debt cancelled?

Here's a point: Why doesn't the bank in question automatically sell the debt back to the consumer?

Aeon, I think you're looking at this from the wrong perspective. This isn't a micro-economics action; it's not to help specific individuals. They admit they are helping people "at random." because this is necessarily a wider spread action (due to the nature of the debt they are buying). So, from a macro perspective, what is going to happen as a result of this action (where the amount of distressed debt is lowered and...)?

If they're mostly targeting insolvent folks, they probably couldn't afford to buy the debt back even at pennies to the dollar.

Because they can get more for it from somebody else.

This is going to be a drop in the bucket.

I think you guys are forgetting the emotional aspect stuff like this can have. Crushing debt is ... crushing. Sure, there's the stupid kind that people made for themselves by overspending with their credit cards, but then there are people who don't have health insurance, and had to go to the ER, and got stuck with a $1500 dollar bill. Having that sort of thing hanging over your head can be very depressing, and having it suddenly disappear could be just that thing to get a person back on their feet.

Yep. I speak from experience. Going to the ER, my wife having to have emergency life saving surgery and then her insurance turning around and refusing to pay large chunks of it. It's seriously demotivating to know that pretty much all my spare money for the next couple years is gone before I earn it.

Nothing. Let's assume they raise ten million dollars and manage to retire a billion dollars in debt. That's 1/150th of the way toward clearing out the seriously delinquent loans. They won't get that much, and it won't have even that much effect.

When you consider that all of the money involved goes towards the loan originating agencies rather than the people themselves and that credit ratings are still destroyed, it's even more hilariously stupid.

But hey, let's evaluate this another way. Let's say tomorrow the Fed chooses to buy all seriously delinquent debt and retire it. They could do so easily, but the macro effect would still be nil. And that's the Fed. Three hundred billion in stimulus but still almost no effect!

Weird, right? You'd think a giant stimulus would have an impact! If you want to see this in an easily comprehended format just watch what happens to prices in EVE when patch notes are released early. Even though nothing has changed yet in the game, prices still move to reflect the expected future changes.*

And that's the key element missing here. A big shift in the present that won't be repeated is an anomaly that can be safely ignored. Things will shift to reflect the short term equilibrium state, and then they'll shift right back when it's gone. We could see that happening with both QE1 and 2. Only when there's a commitment to keep doing that thing over and over and over again into the future do people believe it'll still be there. And that's because investments take time. Factories can't be built overnight after all! And if I think that the Fed will raise rates to keep income growth and price rises on exactly the same track they are right now (in other words raise rates to choke off inflation once it breaches 2%), well, then I know I'll have the same amount of demand while my refinancing gets ever more expensive.

tl;dr: so long as the central monetary authority does its job (which none of them are right now) then no one can impact short term growth trends. when non-monetary authority institutions can impact short term growth (ex: huge multipliers on fiscal stimulus per the IMF study recently released) then we know ipso facto that the monetary authorities have fallen asleep on the job. in the long run money is super neutral and government (which writes the rules that define how we interact with one another) dominates growth.

tl;tl;dr: wizard did it


*You can also see the stockmarkets move right at the very moment of the notes release from the September meeting. I mean the exact second it happened, markets were already shifting. That's how fast information propagates!

I agree with you completely, but I think there are still points being misunderstood. Rolling Jubilee (what the group is actually called) is aiming to be a force that makes "a commitment to keep doing that thing over and over and over again into the future." The People's bailout is a one shot deal, but that's not the whole story.

I also don't think the Fed negating all the distressed debt in one blow would result in "nil" reactions. There are plenty of time and resources spent tracking, buying, selling and collecting these debts, and these would be free to go somewhere else. Where would they go? There would be a new equilibrium point, but what would it be? Would banks be harsher on existing debts, or would they be more open to negotiate?

I could also quibble about 1/150 being "insignificant" when you're talking about one organization trying to manipulate a national economy, but I'm willing to let that drop.

These folks don't really have the power to do anything about any of this stuff anyways. This at least seems a bit more constructive than physically occupying various places. Instead of tilting at windmills they're going to try to mow a golf course with a single pair of nail clippers. It's... mildly more useful I guess.

Well sure. Honestly, I'm trying to decide if this effort is "hilariously misguided," "horribly, ironically misguided" or just misguided.

I would like this to result in some reform on the side of selling debt, though. I hate the fact that the person I enter the contract into can sell my obligation. My mortgage broker was a nice friendly man, whose organization turned around and made me deal with Bank of America. What if I didn't want to pay money to them? I can't call my creditors and say, "Hey, Bernie owes me 50 grand, go ahead and get the money from him."

Theoretically you can sell the right to get the monthly payments from Bernie, or to sue him if he defaults. No idea how (or even if) an individual could go about doing that in practical terms. If you've secured your loan to Bernie with a promissory note, and if Bernie has good credit, the prom note might be worth something.

More likely, your creditor can be awarded the right to collect from Bernie in a lawsuit or in your bankruptcy.

I really like this idea, although I agree it wouldn't do much (or any) macro good except as a propaganda piece. All kinds of such efforts are drop-in-the-bucket type things, and there may be better uses of the money, but sometimes you get something like this that inspires someone to give who otherwise wouldn't bother.

The homeless and poorly-educated-black-man-with-a-felony* problems are genuine problems too, and arguably more "worthy" or "useful" to address, but they also aren't as easily solved by throwing $250 at them.

We could also go back to a more liberal bankruptcy policy rather than the prohibitive and limited BK laws of the present. We shouldn't need private charity to accomplish something for which there is actually federal law.

*as a law librarian who talks to a lot of folks looking for expungements, I will point out that a large number of them are, in fact, women and/or non-African American. Not to discount special challenges to the black community.

Come to think of it, doing this with student loan debt might be more effective since it cannot be discharged under bankruptcy except in extraordinary circumstances.

The optimist in me wants this to be awesome.

The pessimist in me can't help but wonder if this goes large-scale if the only lasting effect it will have is to drive up the price on distressed debt packages banks sell to collection agencies, thereby making those agencies come down even harder on distressed debtors.

MrsWidget student debt can't be discharged through normal channels so wouldn't have the steep discounts you'd find on, say, distressed cc debt.

But we can actually show those things economically. A one time "gift" has no impact on people's consumption patterns. If I gave you ten thousand dollars tomorrow, you'd pay down some debt, spend some on a one time purchase and save the rest. We actually tested that with the stimulus checks, if you recall. After the windfall has been disposed of consumption patterns return to nil because a one time gift has no impact on income*.

Let's look at this another way: what happened in 2008 that caused easily supported debt to become suddenly unsustainable?

Hint: not the 2007 housing crisis, which the Fed cleaned up with ease.

The problem was a sudden tightening of Fed monetary policy (or more accurately a slower than expected easing which, functionally, is the same thing) that caused asset prices and incomes to fall relative to fixed nominal debts. Nominal debt remained unchanged, but nominal incomes dropped precipitously!

If debt didn't change*** can we really consider it a cause of the economic crisis? Of course not. Debt problems are an effect. The cause is the lower than expected income growth**. Raise income growth in aggregate and you solve the debt overhang. How do you do it? You, as the Fed, commit to buying stuff until unemployment**** returns to the precrisis rate of ~5%.

What this program -- depressingly -- shows us is that people are attempting to find a way to adjust their prior commitments to a serious reduction in incomes that the Fed has no desire to rectify. In other words, they expect dramatically lower income for the foreseeable future. Welp!

edit: cleaned up format to improve readability

http://www.bls.gov/news.release/empsit.t02.htm

(in more readable format here: http://www.deptofnumbers.com/unemployment/demographics/ )

Black individuals make up 15% of the population, but account for ~20-25% of the population of the unemployed and have a significantly higher rate of unemployment. They're also -- statistically speaking -- more likely to have no education past high school and net negative wealth. These factors in particular make the black (and immigrant) communities especially vulnerable to economic downturns. Add to that the greater likelihood of a felony for black individuals (especially male) and you end up in a community incredibly likely to end up structurally unemployed as a result of long term unemployment or underemployment.

While there are indeed numerous individuals in other categories suffering from the impact of unemployment and discrimination (women in particular), I'm of the opinion that this group in particular would benefit from targeted aid.

That said, we've seen greater impact in poverty reduction in developing countries with targeting of programs at women rather than men. So, uh, v0v. All this micro shit is basically voodoo as far as I can tell.

I don't know if it would be as effective here. The problem is that developing countries have "traditional" (scare quotes only meaning that I couldn't think of a better word for it, but you know what I mean) social structures and thus the (economic) fate of the women is tightly hitched to the fate of the men. Since the women are more responsible spenders, targeting aid towards them helps everybody, including the men, more. In the US, that relationship is not as tight, and black women have done considerably better in recent times than black men. Which is not to say that they couldn't still use some targeted aid--only that targeting aid at the women probably wouldn't also fix the men's problems.

This thing is today. Their website is much more impressive and has a ticker and all sorts of other things.

Here's what I would do:

1) Have this event. Raise some money (looks likely to be in the low-to-mid hundred thousands).

2) Use half that money to buy some debt.

3) Send out letters that look very impressive and sweepstakes win-y (We've cleared your debt!) to all the debtors. Ask for a response.

4) Publish selected responses. Go out with film crews and film the people with the most interesting responses.

5) As payment to the people filmed, negotiate and abolish their remaining debts (of which there are positively many) with remaining RJ funds. Get a good host/ess. Demonize all the things poor people are forced to do to compound debt.

5) Pitch a show to TLC; "The Rolling Jubilee" (or: "Debt to Society")

6) Profit. Now you are able to make "a commitment to keep doing this thing over and over and over again into the future."

FTFY.

Just got another RSS note about this -- this time emphasizing that they are buying up medical debts that have gone to collections.

http://blog.nolo.com/fundraising/2012/11/18/fundraising-kudos-to-strike-debt/

Study after study has shown that in developing countries economic aid to women is much more effective than aid to men. This is why all my Kiva donations go to women only. It's not becuase of my personal feminist leanings or epididimal agitation, it's plain statistical fact. I would really like to see any sociological (or otherwise) studies investigating why it is different in developed countries though; you're right that it's different, I'm wondering if anyone has looked at why.

I don't think it's implying that it's "feminist leanings" or anything of that nature to say that the household structure is different in developing countries than it is in developed countries. In the traditional household structure, earning the income is the man's role and spending it efficiently is the woman's. This wasn't controversial when J. B. Say stated it in "A Treatise on Political Economy" in 1803, and it can still be seen in operation in Japan, where salarymen often (though the practice is declining along with the whole salaryman model) turn over their incomes to their wives, who do the budgeting and give them an allowance out of it. The sexism isn't in the household structure per se, but rather comes from the facts that the man's role is accorded far greater prestige, and the measures in place to prevent him from trampling this division by force are very weak.

If you can accept that, it shouldn't be a surprise that women in developing countries spend the aid much more effectively; that's what they do in those societies.