Bad Paper: Chasing Debt From Wall Street to the Underworld Page 2

  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 indu
stry 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.