Bad Paper: Chasing Debt From Wall Street to the Underworld Read online

  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.

  2

  THE KING OF CRAP

  Brandon and Aaron lived roughly seven hundred miles from each other by car, which is no small distance, but Brandon was a fan of road trips and he periodically made the journey from Bangor to Buffalo. Brandon never drove himself. He preferred to be chauffeured by his driver, Quincy, who worked as a stand-up comic when he wasn’t shuttling his boss around. It was always difficult for Aaron to anticipate when, exactly, Brandon would arrive. “If he says he will be here Monday, to visit me in Buffalo,” Aaron told me, “I book him for Thursday because he stops at every casino between here and Maine and he shows up with a black eye.”

  When they met, Aaron would occasionally arrange for them to have dinner or drinks. At Aaron’s invitation, one evening, I joined one of their get-togethers at one of Aaron’s favorite haunts, the Buffalo Club—a relic from the time when a handful of plutocrats and industrialists ran the city. In 1867, the former president Millard Fillmore helped found the club as a place where like-minded gentlemen could socialize and do business. To call the place stuffy is a spectacular understatement. The interior is a maze of hallways and ballrooms paneled with gleaming wood, lit with chandeliers, and adorned with oil paintings of somber-faced former members who could easily be mistaken for members of a morticians’ hall of fame.

  Before our dinner, Aaron issued a lengthy disclaimer, warning that Brandon was “rough around the edges,” had a “criminal past,” and looked like “Uncle Fester on crack.” He was an old-school Irishman who had the classic accent of the Boston tough and the personality to match. “I have a lot of trepidation about Brandon, but he will always pay you, unlike Wall Street types who may have a suit and talk nicer, but will hire a lawyer so they don’t have to pay you,” Aaron said. “I respect Brandon. Going to jail for armed robbery—it’s tough to rebound from that.”

  On our first meeting, and on many subsequent occasions, Aaron and Brandon struck me as a most unlikely duo. Aaron likes to wear two-thousand-dollar custom-made pinstriped suits. He is always well coiffed and perfectly shaven. He strikes a polished and patrician demeanor, right from the moment that he shakes your hand. His sister, Shana, told me, “I always say that you can tell he hasn’t worked a manual labor job in his life because his hands are like butter.” Aaron is five feet ten, with light brown hair, quick eyes, and soft facial features. “He’s always worried about his face looking fat,” Shana told me, and for this reason, he regards “cocktails as an acceptable form of dinner.”

  Brandon, by contrast, favors loose-fitting sports clothing—the style and the brand don’t seem to matter, so long as they come with a Red Sox or a Celtics logo. Brandon isn’t especially tall, but his chest, shoulders, and neck are hulking. He is overweight, but his wide torso gives you the sense that it is densely packed and would feel like a sack of bricks if you ran into it. With his shaved head, he looks like a bull ready to charge at a moment’s notice. When he pulls up his shirt, which he does with some regularity, his arms and upper body are covered with scars, the marks of various knife fights. This is a guy you’d cross the street to avoid.

  Upon his arrival at the club, Brandon looked around the place nonchalantly, as if unimpressed. We headed upstairs, where Aaron had reserved a private dining room. As waiters in crisply pressed suits brought us steaks and whiskeys, Brandon held court—talking in his characteristically loud voice, which sounded as if he were shouting at a three-hundred-pound, half-deaf offensive lineman through a megaphone. At first, Brandon spoke mainly about the ins and outs of one of his former lines of work (that is, armed robbery). “We used to wait outside of strip malls for when they’d drop off the night deposit bags, and, in the morning, the first person in would be like the assistant manager of the bank,” Brandon said. “The first thing they do, after they open the doors, is they empty the night deposit bags. So we would stand out front with a sledgehammer and pistol, and when they walked in, one guy would run up and smash through the glass door and make a hole in it and the other one would stick the gun in and say, ‘Give me the fucking bags.’”

  After spending almost a decade in jail, for several different crimes, Brandon was released in 1998 and took a job as a debt collector. As he rec
alls, he proved very good at it: “When I first started getting bonus checks, I remember going up to the window at the bank and getting back ten thousand dollars in cash, and I remember thinking, this is better than the days when I actually robbed the bank.” Within two years, Brandon had opened his own agency and started working as a debt broker, buying and selling paper. He related the debt market to the drug market: “I used to buy pounds of weed, all right, and then break it down and sell ounces to the other guys who were then breaking it down and selling dime bags on the corner, right? Well, that’s what we’re doing in debt. I’m buying a national portfolio, right? I’m breaking it down into ounces and I’m selling it in ounces to all these state guys, and then they’re turning around, busting a dime, diming it up and getting their money back.”

  Aaron interrupted his partner with a polite nod of his head: “I’m seeing it from a different perspective. Everybody places a different value on something than anybody else—whether it applies to drugs or whether it applies to debt. So if there is a lawyer in Georgia, and he can buy debt from me for four cents on the dollar and get eight cents back, then he’s willing to pay—”

  “I’m just relating it to what I know, all right,” Brandon interjected. “He can relate it to what he knows. And everybody can relate it to what they know.”

  “And everybody’s making money,” said Aaron, winningly.

  Aaron explained that it had taken him a while to transition from the buttoned-down banking world to the grimier world of collections. “I worked in the squeaky-clean Bank of America. You go in and everybody went to NYU, Yale, Harvard—the whole fucking nine yards.”