Bad Paper: Chasing Debt From Wall Street to the Underworld Page 7

  There was a problem, however, and it became apparent as soon as Aaron’s agencies started collecting on the paper. Almost all the debtors appeared to be elderly, which meant that they generally had less disposable income. Aaron had stipulated many things in the contract, but “date of birth” of debtors was not one of them. “I got a bunch of senior citizens living on social security,” Aaron said. Or, as Brandon put it: “They fucked us!”

  The particulars of the $9 million Bank of America deal remained a source of much hand-wringing and second-guessing for both Aaron and Brandon. Four years after the fact, I spent an evening with the two of them and listened to them rehash the episode so heatedly that it was as if the deal had happened the previous day. On that occasion, as Brandon worked himself up into one of his tirades, he cursed Bank of America as a bunch of “scumbags” and yelled, “Even though I was gonna make a half a million dollars in commission [on the deal], I said, ‘Aaron, I’m really happy right now, but just for the record, I don’t think we should buy this file.’”

  “That’s not entirely true,” Aaron protested. “You looked at it. Nobody could even give me—”

  “I said it’s worth the price,” Brandon interrupted. “It’s good paper, but we’re blowin’ all the money on somethin’ I don’t really have one hundred percent knowledge on, and I don’t know if I can get my guys to collect on it, because they’re used to collecting ten-year-old shit.”

  When the paper did prove troublesome to collect on, it wasn’t just because the debtors were “a bunch of senior citizens.” The other problem was that the economy never really bounced back. According to the National Bureau of Economic Research, the recession officially ended in June 2009; but this was hardly a consolation to the millions of Americans who had lost their jobs, their homes, and their savings. In fact, several months later—in October 2009—the unemployment rate peaked at 10.2 percent, hitting double digits for the first time in twenty-six years. And by the end of 2009, foreclosure notices had been sent to some 2.8 million properties in the United States. All of this made it that much tougher for Aaron’s agencies to collect.

  “In 2006, if people owed ten thousand dollars in credit-card debt, we would push them to refinance their house,” Aaron told me. By 2009, “those days were gone,” he told me, because “no one had any equity in their homes anymore.” Aaron gave an example: “You are an average guy who bought a home for three hundred thousand, and then, during the boom years, the house was suddenly worth five hundred thousand. So you now have two hundred thousand in equity.” In those circumstances, Aaron’s collectors could encourage debtors to borrow against that equity. But that was then. Now that the real estate bubble had popped, everything had changed. The equity had been lost and, sometimes, the homes, too. “Now you, the debtor, cannot pay back the ten thousand that you owe on your credit card. So what was a friendly discussion before 2007 has become more adversarial now.”

  After buying the Bank of America paper, Aaron was now doubly committed to acquiring more of the older debt that Brandon specialized in because, as he put it, “We felt like we had to make up ground.” And he had the money to do it. As part of Aaron’s agreement with his investors, he had the right to reinvest some of their profits for a limited time, and this ultimately gave him at least an additional $6 million to spend on paper. If he bought the right paper cheaply enough, and the economy recovered, he still might do well for his investors. If he didn’t, the misguided Bank of America deal might pull him down.

  As Aaron struggled to keep his fund profitable, the cumulative stress of his work life and his personal life was taking its toll. By 2009, he was living with his second wife, Andrea, the beautiful brunette whom Herb Siegel had called a “femme fatale.” Andrea vacillated between feeling sympathetic and resentful. “I remember him coming home and just looking stressed out,” said Andrea. “I would feel bad because I could tell the weight of the world was on his shoulders.” Aaron says he worked late and drank heavily, and Andrea complained that, suddenly, she couldn’t “get his full attention,” whereas once she “never had to ask for it.” Like the Mrs. Siegel before her, she had become the wife waiting at home. What really galled her was that when Aaron did come home, they always ended up talking about Brandon. “God, I would hate that,” she said. “I feel like when he started working with Brandon is when the wheels came off. I don’t know, it just seemed to get [Aaron] into these murky, murky, murky things.” He and Brandon would fight “like a married couple,” she said. “It reminded me of like this high school relationship between these two idiots that I just wanted to knock both their heads together and say, ‘I’m out—you guys should just date.’”

  “I wanted to shoot myself in the face,” recalled Aaron. “I’m awake at night, I’m drinking way too much, you know, and I’m pulling out my hair because I’m doing something I don’t enjoy.” One day he asked his deputy, Lilly, to drive him to the hospital because he thought he was having a heart attack. It turned out it was just ulcers—six of them.

  The ultimate source of dread for Aaron was his investors and his persistent fear that he might fail them. His biggest investor was a Texas real estate tycoon—whom I will identify only by his first name, John—whose company had developed billions of dollars’ worth of commercial properties across the country. According to Aaron, on their first face-to-face meeting, John flew up to Buffalo on his private jet, with his chauffeur in tow, and rented a black Lincoln Town Car to shuttle him around. He met Aaron for lunch and got right to the point: “He asks, ‘How much money are you looking for?’ I’m like, ‘I don’t know, twenty million.’ He goes, ‘Son, my wife’s got more money in her checking account than you’ve got in your whole goddamn fund.’ I’m like, ‘Okay, then write me a check.’ He found that somewhat amusing, but not really.” In the end, Aaron estimates that John gave him roughly $10 million.

  Aaron subsequently flew down to Texas and gave reports, in person, on how the fund was performing. On his first trip, Aaron arrived by taxi at an office complex solely devoted to managing John’s personal finances. “It looks like Versailles,” he recalled. “I don’t even know what you would call the architecture—I’m not an architecture buff. We pull up along this circular gravel driveway. You can imagine it, right? There are gardens and there’s a guy with a fucking rifle there. Only in Texas, right? What do you need a guy with a rifle for? Because you can afford one. So you walk in and it is this beautiful marble palace. The doors open up, whoosh, and then there’s a stairway that goes up to the top, and I’m waiting there after I talk to the receptionist, and he comes down the spiral staircase. He could’ve been like—what’s-his-name from Gone With the Wind? Rhett Butler. All he needed was a girl with a gown on his arm made out of drapes.

  “He walks me through the whole place. I get to look at every piece of art on the wall, which means nothing to me, and finally I go into the meeting room and they’re all waiting.” This is where Aaron was scheduled to give his report to a cadre of John’s financial advisors. Aaron described some of the advisors as “really capable guys” and others simply as friends and family members. During his visits, “I’d give my presentation, and he’d berate me in front of everybody else. They all just sat there mutely. Clearly, they had seen this show before.”

  * * *

  Even though John was the investor who had given Aaron the most money, he wasn’t the one to whom Aaron felt the most indebted. There was another big investor, who had been instrumental in helping Aaron launch his fund. He was a Boston-based financier who began his career at Salomon Brothers and eventually founded his own hedge fund, which managed well over $1 billion in assets. The investor—who insisted that I identify him only by his middle name, Joseph—was a camera-shy man who religiously avoided the press.

  Joseph had contributed roughly $1 million to Aaron’s venture and had also helped him round up additional investors, back in 2008, when Aaron was just getting under way. “He was sort of like my godfather in this whole thing,” said Aaron.
“He introduced me to a lot of folks.” Joseph found the idea of debt collections amusing, Aaron said, and relished Aaron’s crackpot stories about the collectors, the debtors, and the craziness of the industry. “You got to understand, part of [the attraction] for him is the sheer joy of being able to tell people that he’s involved in all these crazy things,” said Aaron. “Just like a gambler who goes to a casino and says, ‘I doubled down on black and won,’ he likes to say, ‘I’m involved in all these wild ventures that you, my friend, don’t have the balls to do. But I do—and I make money.’”

  Following the Great Recession and the $9 million Bank of America deal, however, it was unclear whether Joseph would make any money from his investment with Aaron. Aaron’s fund was intended to exist for just four years, which meant that by the summer of 2012 the investors were supposed to be paid in full. But as that deadline came and went, Aaron was still collecting on some of the paper that he had purchased. Many debtors, for example, had set up payment plans that involved giving Aaron fifty dollars a month for the next several years. Aaron could have sold these accounts prematurely—at a discount—but instead, he persuaded his investors that it was better to be patient and collect as much money as possible. The fund had, in effect, gone into extra innings and Aaron’s investors had opted to sit, watch, and see how it all played out.

  It was during this extended waiting period, in early 2013, that I accompanied Aaron on a trip to Boston for a meeting with Joseph. Joseph never expected Aaron to give him in-person updates; but Aaron was nonetheless determined to maintain a cordial relationship with him and, from time to time, meet in person.

  We arranged to meet Joseph for dinner at Grill 23, an upscale restaurant a few blocks from Boston Common. The place was packed with the affluent, after-work crowd, mainly men in gray suits downing shots of bourbon and slicing into sixty-two-dollar Kobe cap steaks. Joseph was a middle-aged man with a paunch and florid complexion. He showed up in casual slacks and a blue short-sleeved shirt, complaining of how badly he had just golfed. With him were his college-age son and an old friend. The friend worked on Wall Street, for a Swiss bank, and he, too, asked that I identify him only by his middle name, Saul.

  The maître d’ led us upstairs to a table with four chairs. “I called and said it would be five of us,” Aaron told the maître d’.

  “Make it a table for six,” Joseph interjected, as if he were annoyed. “He’s not in charge,” he said, gesturing toward Aaron. “I’m in charge.” Then he turned to Aaron and said dismissively, “You can’t set a table for five—you set it for six.” Moments later, the waitress appeared to take our orders for drinks and appetizers. “Where is the crabmeat from?” asked Joseph. “Is it fresh or canned from the Philippines?”

  “I’ll find out, sir,” she replied.

  “What they do is they dig a hole in the ground and fill it with salt water, put in some crabs, feed them with fish guts, then send it all over the world in cans,” Joseph said. “I don’t want that.” Moments later, the waitress returned and explained that the crabmeat was both fresh and domestic. Joseph nodded his head. That would do.

  I soon asked Joseph about his hedge fund, but before he could answer, Saul intervened. “Joseph only succeeded because of when he was born,” Saul said. He turned to his friend and said, “You had great timing, a big set of balls, and a force of personality.” Joseph nodded his head appreciatively and went on to explain that, in the early 1990s, when he left his job on Wall Street, people thought he was crazy.

  “This is the John Belushi of hedge funds,” added Saul, pointing at his old friend.

  Joseph waved off the analogy with a smile, noting that Belushi died in his thirties, whereas he was already in his fifties. He then joked: “I [recently] went to a strip club in New Orleans and I told my wife they have these clubs in Texas and Oklahoma and all over this country. They are not all supported by me. I don’t have enough wealth.”

  “This is where rich men go and support single women with kids,” Saul added thoughtfully. “Really, what better way to redistribute wealth?”

  As drinks and appetizers arrived, Joseph began to recount his life story. He described growing up in a middle-class family with a father who earned a modest living in the lumber business. When I asked him if he always knew that he wanted to make money, he replied, “Absolutely. Always. It was just there. You asking that is like someone saying, ‘Were you born gay?’ People who want this have that spark from the beginning. It is not something you pick up sophomore year of college. Abso-fucking-lutely.” The only question was how much money he could make. When running a hedge fund, he explained, there are no limits: “If you are an eye doctor, there are a limited number of procedures that you can do in a day. If you are a lawyer, there are a limited number of hours that you can bill. Every business has a cap. In this business, you can leverage O.P.M.”—other people’s money—“and make lots of money.”

  In addition to running his hedge fund, Joseph also enjoyed making a diverse range of investments with his own personal fortune. He had put his money into everything from restaurants, to movies, to tanning salons, to Franklin Asset—which was Aaron’s company. “If you are good at picking your investments, you win more than you lose,” he said. “It’s like playing blackjack.”

  Aaron, looking for an entry point into the conversation, asked Joseph how his restaurant was faring. “It’s like Franklin Asset,” he replied dryly. “It’s not out of business, but it’s not making any money.” There was an awkward silence and then Joseph continued. “If I have an investment, it is better for it to be either terminally ill or a home run. The worst is to have someone who is on life support. You can’t kill him, and you can’t party with him.”

  “I am in the life-support column,” said Aaron.

  Both Joseph and Saul were largely ignoring Aaron at this point. Perhaps this was because the two of them were very old friends. But there seemed to be another reason as well. Aaron, perhaps by no fault of his own, had underperformed—and Joseph was effectively telling him to shut up and listen because the right to pontificate about money, strippers, and life was a luxury that he hadn’t earned. In a way, he was shaming Aaron for not being able to pay what he owed. It was, of course, the very tactic that Aaron’s collectors sometimes used when they tried to embarrass debtors into paying what they owed.

  When I pressed Joseph for details about his investments, he shook his head in frustration. “The mistake that people make is thinking about investments in absolute dollars,” he told me. “You have to look at the whole picture. Most people do not know what they are worth because they don’t think properly. If you asked ninety percent of people what their balance sheet looked like, they wouldn’t know. People don’t understand the bets that they are making.” The key for him, he explained, was diversification. “That means that you only have one percent of your wealth invested in a company, so if it goes bust, you won’t die.” He estimated that he had invested just this, one percent of his wealth, with Aaron. Understanding this idea, he told me, was the key to making money.

  “How much are you worth?” he asked me at one point.

  “I don’t know,” I admitted to him. Then I added, rather sheepishly, “Well, I just bought a home, so I kind of know.”

  “You should know exactly what you are worth!” said Joseph, seeming genuinely disgusted with me. “You should know what your bets are.”

  I confessed that I was probably among the 90 percent of Americans who didn’t know what their bets were—along with all of the debtors from Franklin Asset.

  “Yes!” said Joseph. “The debtors from Franklin Asset, they don’t know what their bets are. They are idiots. Like ninety percent of people, they don’t know what they are worth. People make mistakes. But Franklin didn’t put them in debt. They were just trying to collect. If the pitcher throws a bad pitch, and the hitter hits a home run, the batter isn’t in the wrong. He is just doing his job.” When it came to Franklin Asset, Joseph said that he simply saw an op
portunity.

  “It wasn’t that I was so handsome and charming?” asked Aaron.

  “No,” said Joseph. “It was a window into an interesting world.”

  I was intrigued by the possibility that Joseph really wanted a “window” into this world—into the lives of the people whose debts he owned. I thought for a moment of Joanna, returning to her modest apartment in the suburbs, after working a sixteen-hour shift at the assisted-living facility, doing a final load of laundry before she went to bed. It seemed strange to think that I was staring across the table at the man who had purchased her debt for a few pennies on the dollar.

  But apparently that wasn’t the sort of window that Joseph wanted to look through. When I asked him if he ever paused to consider the lives of the people whose debts he owned, he said no. “Let me explain it this way. A guy came to me with a business plan to open stores with tanning booths. He wanted seventy-five thousand dollars. You turn the tanning lights on and the girls come. I think it’s a shitty business. It’s carcinogenic. I wouldn’t let my family do it. But the numbers are compelling. And I got all my money back in six months. The beds were paid for. We have five thousand women who are signed up to pay for the annual fee. It’s not illegal and it throws off cash. So, if someone is going to collect on people’s debts, I might as well be in bed with them, if I can make a profit. It turns out that the suntanning business is better than the debt-collecting business.”