One of my favorite fantasies involves waking up debt free. I accumulated a chunk of debt in school, both by taking out student loans (I couldn’t have paid for college or graduate school without them) and using credit cards in combination with money I got from family contributions and paid labor–that’s how I paid to live in New York. At the rate I’m paying it back, I’ll be debt free in my mid 50s.
So imagine my delight and joy when I awoke this morning to news that the Occupy people would be buying and forgiving consumer debt! I found out via an invitation to the People’s Bailout, a variety show and telethon being held at New York Club (Le) Poisson Rouge Thursday, November 15 at 8pm. The performer list is reason enough to take notice (Janeane Garofalo , Lizz Winstead , Max Silvestri , Hari Kondabolu , David Rees , The Yes Men , John Cameron Mitchell , Jeff Mangum of Neutral Milk Hotel, Lee Ranaldo of Sonic Youth, Guy Picciotto of Fugazi, Tunde Adebimpe of TV on the Radio, among others). So, raising money for what? How do I make my fantasy true? I wanted to know more.
I first went to the main website for Rolling Jubilee, and found this video explaining the “bailout” of citizens.
The idea’s seductive–if I add money to the pot, Occupy can buy more debt, and I–in theory–increase the odds that my own student loan and credit card debt will be among those bought and forgiven, right? It just seemed too good to be true, so I was glad when a friend of mine whose work involves setting up credit systems in new and emerging markets, wrote to share his impressions.
It might be easiest to explain his interpretation using a hypothetical situation. Let’s imagine that Bank of America has a mortgage/credit card/student loan on its books that the consumer, Bob, hasn’t paid on in 9 months. The outstanding amount of the loan is $1,000. So, BofA recognizes that at this point they have either tried everything (i.e., threats, seizing assets, foreclosure, reporting non-payments and successive non-payments to credit bureaus) to get Bob to pay and will likely never collect on this loan. So, they write off the loan. It becomes -$1,000 for the bank.
Now, to the “shadowy” debt market. In writing off the loan the bank is essentially saying that the opportunity cost to BofA of chasing down payment on this $1,000 is too large and therefore they’re willing to sell this “distressed” loan to someone else if they want to assume the hassle of trying to collect. So, traditionally, collections agencies and other players will then bid on distressed debt markets for the right to buy Bob’s bad loan from BofA. Let’s imagine that ABC Collections then buys Bob’s BofA loan for $100 and in exchange gets the right to collect $1,000 (the full amount of Bob’s non-paid loan). ABC Collections does this in hopes that they can get Bob to actually pay $300 (or, $100 + the cost they invest in collection + some extra) of that $1000. If they got Bob to pay $300, the net revenue for ABC Collections would then be $200 on Bob’s loan and BofA would show a loss on their books (that their shareholders see) of $900 instead of $1,000.
So, when Rolling Jubilee pools money to buy distressed loans they are, in effect, lowering the real loss incurred by the banks who previously held those loans (i.e., Rolling Jubilee buys Bob’s loan for $100 and the bank shows a loss of $900 instead of $1000). This improves the balance sheet of the bank in the long-term.
And it isn’t clear what benefit the debtor gets, either. When their debt was declared distressed (and sold), they’d already seen their credit score plummet, and of course their assets are long gone.
I think the sentiment is well-meaning, but in practice, it doesn’t seem like this is going to help the average borrower and may only improve the profitability and stability of the bank in the long-term.
Tell me I’m wrong, will you? I’d like to be free.