TBR News August 15, 2014

Aug 15 2014


The Voice of the White House


          Washington, D.C. August 13, 2014:  “The Internet is filled to overflowing with news, national and international.

In putting a newsletter together, we read a number of reliable sites, paying no attention to the sensationalistic and generally worthless blogs.

We read Russian sites like Russia Today, Novosti, ITAR/Tass and several others and from these, we get the Russian point of view.

The New York Times, the Washington Post gives us the official American point of view.

All informational sites, be it RT or the Guardian have their own views but in reading them daily, it is fairly easy to winnow the wheat from the chaff at get at what could possibly be the truth.

For example, there is no question that the Malaysian civil aircraft, and an Air India plane behind it, were diverted by Kiev aircraft controllers away from the usual civil air corridor and moved 200 miles to the north.

This path would place them directly over the area where the separatists were waging civil war against Kiev.

Neutral ground observers saw the plane explode but saw no signs of a trall left by a surface to air missile.

Later, when various investigative groups sought to inspect the wreckage, the separatists, and Russia, agreed.

Once these observers arrived at the scene, the Ukrainian military began to shell them.

This happened twice and is an excellent reason to suspect the direct involvement of the Kiev people in the destruction of the aircraft.

Some of the wreckage showed signs, very clear signs, of bullet holes punched in from the outside.

Ground to air missiles do not fire bullets.

Since Kiev is now an American ally, we hear nothing from Washington on this side of the issue and neither is the domestic media at all interested in condeming our reliable and freedom-loving CIA asset in easten Europe.”


Putin is Winning the New Cold War

August 13, 2014

by Mike Whitney


             “History shows that the United States has benefited politically and economically from wars in Europe. The huge outflow of capital from Europe following the First and Second World Wars, transformed the U.S. into a superpower … Today, faced with economic decline, the US is trying to precipitate another European war to achieve the same objective.”… Sergey Glazyev, Russian politician and economist

“The discovery of the world’s largest, known gas reserves in the Persian Gulf, shared by Qatar and Iran, and new assessments which found 70 percent more gas in the Levantine in 2007, are key to understanding the dynamics of the conflicts we see today. After a completion of the PARS pipeline, from Iran, through Iraq and Syria to the Eastern Mediterranean coast, the European Union would receive more than an estimated 45 percent of the gas it consumes over the next 100 – 120 years from Russian and Iranian sources. Under non-conflict circumstances, this would warrant an increased integration of the European, Russian and Iranian energy sectors and national economies.” Christof Lehmann, Interview with Route Magazine

            August 13, 2014 “ICH” – “Counterpunch” – The United States failed operation in Syria, has led to an intensification of Washington’s proxy war in Ukraine. What the Obama administration hoped to achieve in Syria through its support of so called “moderate” Islamic militants was to topple the regime of Bashar al Assad, replace him with a US-backed puppet, and prevent the construction of the critical Iran-Iraq-Syria pipeline. That plan hasn’t succeeded nor will it in the near future, which means that the plan for the prospective pipeline will eventually go forward.

            Why is that a problem?

            It’s a problem because–according to Dr. Lehmann–”Together with the Russian gas… the EU would be able to cover some 50 percent of its requirements for natural gas via Iranian and Russian sources.” As the primary suppliers of critical resources to Europe, Moscow and Tehran would grow stronger both economically and politically which would significantly undermine the influence of the US and its allies in the region, particularly Qatar and Israel. This is why opponents of the pipeline developed a plan to sabotage the project by fomenting a civil war in Syria. Here’s Lehmann again:

            “In 2007, Qatar sent USD 10 billion to Turkey´s Foreign Minister Davotoglu to prepare Turkey´s and Syria´s Muslim Brotherhood for the subversion of Syria. As we recently learned from former French Foreign Minister Dumas, it was also about that time, that actors in the United Kingdom began planning the subversion of Syria with the help of “rebels”’ (Christof Lehmann, Interview with Route Magazine)

            In other words, the idea to arm, train and fund an army of jihadi militants, to oust al Assad and open up Syria to western interests, had its origins in an evolving energy picture that clearly tilted in the favor of US rivals in the region. (Note: We’re not sure why Lehmann leaves out Saudi Arabia, Kuwait or the other Gulf States that have also been implicated.)

             Lehmann’s thesis is supported by other analysts including the Guardian’s Nafeez Ahmed who explains what was going on behind the scenes of the fake civil uprising in Syria. Here’s a clip from an article by Ahmed titled “Syria intervention plan fueled by oil interests, not chemical weapon concern”:

            “In May 2007, a presidential finding revealed that Bush had authorised CIA operations against Iran. Anti-Syria operations were also in full swing around this time as part of this covert programme, according to Seymour Hersh in the New Yorker. A range of US government and intelligence sources told him that the Bush administration had “cooperated with Saudi Arabia’s government, which is Sunni, in clandestine operations” intended to weaken the Shi’ite Hezbollah in Lebanon. “The US has also taken part in clandestine operations aimed at Iran and its ally Syria,” wrote Hersh, “a byproduct” of which is “the bolstering of Sunni extremist groups” hostile to the United States and “sympathetic to al-Qaeda.” He noted that “the Saudi government, with Washington’s approval, would provide funds and logistical aid to weaken the government of President Bashir Assad, of Syria”…

According to former French foreign minister Roland Dumas, Britain had planned covert action in Syria as early as 2009: “I was in England two years before the violence in Syria on other business”, he told French television:

            “I met with top British officials, who confessed to me that they were preparing something in Syria. This was in Britain not in America. Britain was preparing gunmen to invade Syria.” … Leaked emails from the private intelligence firm Stratfor including notes from a meeting with Pentagon officials confirmed US-UK training of Syrian opposition forces since 2011 aimed at eliciting “collapse” of Assad’s regime “from within.”

            So what was this unfolding strategy to undermine Syria and Iran all about? According to retired NATO Secretary General Wesley Clark, a memo from the Office of the US Secretary of Defense just a few weeks after 9/11 revealed plans to “attack and destroy the governments in 7 countries in five years”, starting with Iraq and moving on to “Syria, Lebanon, Libya, Somalia, Sudan and Iran.” In a subsequent interview, Clark argues that this strategy is fundamentally about control of the region’s vast oil and gas resources.” (“Syria intervention plan fueled by oil interests, not chemical weapon concern“, The Guardian)

             Apparently, Assad was approached by Qatar on the pipeline issue in 2009, but he refused to cooperate in order “to protect the interests of his Russian ally.” Had Assad fallen in line and agreed to Qatar’s offer, then the effort to remove him from office probably would have been called off. In any event, it was the developments in Syria that triggered the frenzied reaction in Ukraine. According to Lehmann:

            “The war in Ukraine became predictable (unavoidable?) when the great Muslim Brotherhood Project in Syria failed during the summer of 2012. …In June and July 2012 some 20,000 NATO mercenaries who had been recruited and trained in Libya and then staged in the Jordanian border town Al-Mafraq, launched two massive campaigns aimed at seizing the Syrian city of Aleppo. Both campaigns failed and the ”Libyan Brigade” was literally wiped out by the Syrian Arab Army.

            It was after this decisive defeat that Saudi Arabia began a massive campaign for the recruitment of jihadi fighters via the network of the Muslim Brotherhoods evil twin sister Al-Qaeda.

            The International Crisis Group responded by publishing its report ”Tentative Jihad”. Washington had to make an attempt to distance itself ”politically” from the ”extremists”. Plan B, the chemical weapons plan was hedged but it became obvious that the war on Syria was not winnable anymore.” (“The Atlantic Axis and the Making of a War in Ukraine“, New eastern Outlook)

            There were other factors that pushed the US towards a conflagration with Moscow in Ukraine, but the driving force was the fact that US rivals (Russia and Iran) stood to be the dominant players in an energy war that would increasingly erode Washington’s power. Further economic integration between Europe and Russia poses a direct threat to US plans to pivot to Asia, deploy NATO to Russia’s borders, and to continue to denominate global energy supplies in US dollars.

             Lehmann notes that he had a conversation with “a top-NATO admiral from a northern European country” who clarified the situation in a terse, two-sentence summary of US foreign policy. He said:

             “American colleagues at the Pentagon told me, unequivocally, that the US and UK never would allow European – Soviet relations to develop to such a degree that they would challenge the US/UK’s political, economic or military primacy and hegemony on the European continent. Such a development will be prevented by all necessary means, if necessary by provoking a war in central Europe”.

            This is the crux of the issue. The United States is not going to allow any state or combination of states to challenge its dominance. Washington doesn’t want rivals. It wants to be the undisputed, global superpower, which is the point that Paul Wolfowitz articulated in an early draft of the US National Defense Strategy:

            “Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”

            So the Obama administration is going to do whatever it thinks is necessary to stop further EU-Russia economic integration and to preserve the petrodollar system. That system originated in 1974 when President Richard Nixon persuaded OPEC members to denominate their oil exclusively in dollars, and to recycle their surplus oil proceeds into U.S. Treasuries. The arrangement turned out to be a huge windfall for the US, which rakes in more than $1 billion per day via the process. This, in turn, allows the US to over-consume and run hefty deficits. Other nations must stockpile dollars to purchase the energy that runs their machinery, heats their homes and fuels their vehicles. Meanwhile, the US can breezily exchange paper currency, which it can print at no-expense to itself, for valuable imported goods that cost dearly in terms of labor and materials. These dollars then go into purchasing oil or natural gas, the profits of which are then recycled back into USTs or other dollar-denominated assets such as U.S. stocks, bonds, real estate, or ETFs. This is the virtuous circle that keeps the US in the top spot.

            As one critic put it: “World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy.”

            The petrodollar system helps to maintain the dollar’s monopoly pricing which, in turn, sustains the dollar as the world’s reserve currency. It creates excessive demand for dollars which allows the Fed to expand the nation’s credit by dramatically reducing the cost of financing. If oil and natural gas were no longer denominated in USDs, the value of the dollar would fall sharply, the bond market would collapse, and the US economy would slip into a long-term slump.

            “This is one of the reasons why the US invaded Iraq shortly after Saddam had switched over to the euro; because it considers any challenge to the petrodollar looting scam as a direct threat to US national security.

             Moscow is aware of Washington’s Achilles’s heel and is making every effort to exploit that weakness by reducing its use of the dollar in its trade agreements. So far, Moscow has persuaded China and Iran to drop the dollar in their bilateral dealings, and they have found that other trading partners are eager to do the same. Recently, Russian economic ministers conducted a “de-dollarization” meeting in which a “currency switch executive order” was issued stating that “the government has the legal power to force Russian companies to trade a percentage of certain goods in rubles.”

            Last week, according to RT:

            “The Russian and Chinese central banks have agreed a draft currency swap agreement, which will allow them to increase trade in domestic currencies and cut the dependence on the US dollar in bilateral payments. “The draft document between the Central Bank of Russia and the People’s Bank of China on national currency swaps has been agreed by the parties…..The agreement will stimulate further development of direct trade in yuan and rubles on the domestic foreign exchange markets of Russia and China,” the Russian regulator said.

Currently, over 75 percent of payments in Russia-China trade settlements are made in US dollars, according to Rossiyskaya Gazeta newspaper.” (“De-Dollarization Accelerates – China/Russia Complete Currency Swap Agreement“, Zero Hedge)

The attack on the petrodollar recycling system is one of many asymmetrical strategies Moscow is presently employing to discourage US aggression, to defend its sovereignty, and to promote a multi-polar world order where the rule of law prevails. The Kremlin is also pushing for institutional changes that will help to level the playing field instead of creating an unfair advantage for the richer countries like the US. Naturally, replacing the IMF, whose exploitative loans and punitive policies, topped the list for most of the emerging market nations, particularly the BRICS (Brazil, Russia, India, China and South Africa) who, in July, agreed to create a $100 billion Development Bank that will “will counter the influence of Western-based lending institutions and the dollar. The new bank will provide money for infrastructure and development projects in BRICS countries, and unlike the IMF or World Bank, each nation has equal say, regardless of GDP size.

According to RT:

            “The big launch of the BRICS bank is seen as a first step to break the dominance of the US dollar in global trade, as well as dollar-backed institutions such as the International Monetary Fund (IMF) and the World Bank, both US-based institutions BRICS countries have little influence within…

            “This mechanism creates the foundation for an effective protection of our national economies from a crisis in financial markets,” Russian President Vladimir Putin said.” (“BRICS establish $100bn bank and currency pool to cut out Western dominance“, RT)

            It’s clear that Washington’s aggression in Ukraine has focused Moscow’s attention on retaliation. But rather than confront the US militarily, as Obama and Co. would prefer, Putin is taking aim at the vulnerabilities within the system. A BRICS Development Bank challenges the IMF’s dominant role as lender of last resort, a role that has enhanced the power of the wealthy countries and their industries. The new bank creates the basis for real institutional change, albeit, still within the pervasive capitalist framework.

            Russian politician and economist, Sergei Glazyev, summarized Moscow’s approach to the US-Russia conflagration in an essay titled “US is militarizing Ukraine to invade Russia.” Here’s an excerpt:

            “To stop the war, you need to terminate its driving forces. At this stage, the war unfolds mainly in the planes of economic, public relations and politics. All the power of US economic superiority is based on the financial pyramid of debt, and this has gone long beyond sustainability. Its major lenders are collapsing enough to deprive the US market of accumulated US dollars and Treasury bonds. Of course, the collapse of the US financial system will cause serious losses to all holders of US currency and securities. But first, these losses for Russia, Europe and China will be less than the losses caused by American geopolitics unleashing another world war. Secondly, the sooner the exit from the financial obligations of this American pyramid, the less will be the losses. Third, the collapse of the dollar Ponzi scheme gives an opportunity, finally, to reform the global financial system on the basis of equity and mutual benefit.”

Washington thinks “modern warfare” involves covert support for proxy armies comprised of Neo Nazis and Islamic extremists. Moscow thinks modern warfare means undermining the enemy’s ability to wage war through sustained attacks on it’s currency, its institutions, its bond market, and its ability to convince its allies that it is a responsible steward of the global economic system.

            I’ll put my money on Russia.





Good neighborly relations are Russia’s priority in Arctic – security chief

August 8, 2014



Russia aims to develop the Arctic as a region of peace and international cooperation, but will always defend its national interests said Security Council Secretary Nikolay Patrushev.

He was speaking at the opening of the international conference on stable development and security issues in the Arctic region that took place this week in North Russia’s Naryan Mar. The Security Council is Russia’s top consultative body on strategic issues of national importance that provided support for the two-day conference.

President Vladimir Putin addressed the forum with a letter of greetings.

“While Russia is planning to defend firmly its geopolitical and economic interests in the Arctic zone, we also seek to strengthen the cooperation with other member countries of the Arctic Council and to turn the Arctic region into a zone of peace, stability and cooperation,” the message read.

Patrushev said in an interview with the RIA Novosti that the last meeting was attended by delegations from almost all Arctic nations and also representatives of observer states such as China, India, South Korea and Singapore.

He noted that the United States chose not to send its representatives to this year’s event and offered no explanations for the step.

However, Patrushev recalled that in bilateral consultations US officials confirmed their interest in cooperating with Russia in the Arctic.

One possible field of such cooperation could be the Arctic monitoring system presented by the RTI (Radio-technical and Information Systems) corporation during the conference.

RIA Novosti quoted one senior RTI manager as saying that the system allows to get a real time picture of the situation and automatically report about various emerging risks. These include emergency situations in the transport sector, natural and man-made accidents and also acts of terrorism targeting infrastructure sites.

The executive noted that the Russian system is, in fact, a full pledged geo-analytical platform that can also work beyond the borders of Russia’s zone in the Arctic and said that the services would be offered to all partner nations.

Russia has intensified the development of its Arctic Regions over the past few years, including works on the Northern Sea Route, which is gradually becoming an alternative to traditional transport corridors between Europe and Asia.

Larger economic participation has required a more intensive military presence and in April this year Putin announced that Russia was creating a new united fleet of new generation combat ships and submarines permanently deployed to the Arctic.

In late 2013, Russia began extracting oil on the Arctic shelf. The country claims about two-thirds of large oil and gas deposits in the Arctic shelf zone, but plans to claim more territory through the so-called Lomonosov Ridge. Russian authorities plan to lodge the documents with this claim to the United Nations as soon as next year.


ExxonMobil, Rosneft start joint Arctic drilling in defiance of sanctions

August 9, 2014

            US oil giant ExxonMobil and Russia’s Rosneft will continue joint exploitation of the Russian Arctic despite Western sanctions, the American company said as the two giants launched exploration drilling in the Kara Sea.
            “Our cooperation is a long-term one. We see great benefits here and are ready to continue working here with your agreement,” Glenn Waller, ExxonMobil’s lead manager in Russia, told President Vladimir Putin during a videoconference call.
            The Russian leader hailed the exploration project as an example of mutually beneficial cooperation that strengthens global energy security.
            Rosneft head Igor Sechin said the launch of the Universitetskaya-1 well drill is one of the most important events for the company this year.
            “We hope that this work will discover a new oil reserve here in the Kara Sea. The development of the Arctic shelf would have a big and positive effect for the Russian economy,” he said.
            Sechin compared the resource base of the project to that of Saudi Arabia.
            “This project will give Russia a new perspective and will ensure energy security for the whole world. Comparing this project with others in the world from the resource stand point, we can confidently say that it is comparable with the largest resources, such as in Saudi Arabia, and significantly exceeds the capabilities of offshore supply in the Gulf of Mexico, Alaska and Canada,” he told reporters on Saturday.
            Sechin added that he is confident in the project. “At the moment there is no project that is implemented at such latitudes, but at the same time, we are confident in our success, we have good partners,” he said.
            ExxonMobil Russia chief Glen Waller confirmed the strong partnership between the companies. “Ours is a long-term partnership and we see great prospects here, we are ready to continue our work,” he said.
             Optimistic company forecasts put oil reserves in the Kara Sea as high as 13 billion tons, more than in the Gulf of Mexico, or the whole of Saudi Arabia.
            The drilling is being done by the West Alpha oilrig, built by Norway’s North Atlantic Drilling. It has a deadweight of 30,700 tons and can drill wells in the shelf up to 7 km deep.
            The rig was equipped with an advanced iceberg warning system, which tracks potentially dangerous icebergs, giving enough time for either support ships to tow them away, or for the rig itself to seal off the well and evacuate to safety.
            Rosneft is one of the Russian companies targeted by Western nations, imposed to punish Moscow for its stance over the Ukrainian crisis. Russia’s retaliation so far has been to ban the import of foodstuffs from the countries that approved anti-Russian sanctions.



Extreme weather becoming more common, study says

Rise in blocking-patterns – hot or wet weather remaining stuck over regions for weeks – causing frequent heatwaves or floods


August 11, 2014

by Damian Carrington



Extreme weather like the drought currently scorching the western US and the devastating floods in Pakistan in 2010 is becoming much more common, according to new scientific research.

The work shows so-called “blocking patterns”, where hot or wet weather remains stuck over a region for weeks causing heatwaves or floods, have more than doubled in summers over the last decade. The new study may also demonstrate a link between the UK’s recent flood-drenched winter and climate change.

Climate scientists in Germany noticed that since 2000 there have been an “exceptional number of summer weather extremes, some causing massive damage to society”. So they examined the huge meanders in the high-level jet stream winds that dominate the weather at mid-latitudes, by analysing 35 years of wind data amassed from satellites, ships, weather stations and meteorological balloons. They found that blocking patterns, which occur when these meanders slow down, have happened far more frequently.

“Since 2000, we have seen a cluster of these events. When these high-altitude waves become quasi-stationary, then we see more extreme weather at the surface,” said Dr Dim Coumou, at the Potsdam Institute for Climate Impact Research. “It is especially noticeable for heat extremes.” The intense heatwaves in Russia in 2010, which saw 50,000 people die and the wheat harvest hit hard, and in western Europe in 2003, which saw 30,000 deaths, were both the result of blocking patterns. The Intergovernmental Panel on Climate Change concluded in 2011 that extreme weather would become more common as global warming heats the planet, causing both heatwaves and increasingly severe rain storms.

The rise in blocking patterns correlates closely with the extra heating being delivered to the Arctic by climate change, according to the research which is published in the journal Proceedings of the National Academies of Science (PNAS). Coumou and his colleagues argue there are good physical reasons to think there is a causal link, because the jet streams are driven by the difference in temperature between the poles and the equator. As the Arctic is warming more quickly than lower latitudes, that temperature difference is declining, providing less energy for the jet stream and its meanders, which are called Rossby waves.

Prof Ted Shepherd, a climate scientist at the University of Reading, UK, but not involved in the work, said the link between blocking patterns and extreme weather was very well established. He added that the increasing frequency shown in the new work indicated climate change could bring rapid and dramatic changes to weather, on top of a gradual heating of the planet. “Circulation changes can have much more non-linear effects. They may do nothing for a while, then there might be some kind of regime change.”

Shepherd said linking the rise in blocking events to Arctic warming remained “a bit speculative” at this stage, in particular because the difference between temperatures at the poles and equator is most pronounced in winter, not summer. But he noted that the succession of storms that caused England’s wettest winter in 250 years was a “very good example” of blocking patterns causing extreme weather during the coldest season. “The jet stream was stuck in one position for a long period, so a whole series of storms passed over England,” he said.

Coumou acknowledges his study shows a correlation – not causation – between more frequent summer blocking patterns and Arctic warming. “To show causality, computer modelling studies are needed, but it is questionable how well current climate models can capture these effects,” he said.

Prof Tim Palmer, at the University of Oxford, wrote in a PNAS article in 2013 that understanding changes to blocking patterns may well be the key to understanding changes in extreme weather, and therefore to understanding the worst impacts of climate change on society. But he said climate models might have to run down to scales of 1km to do so. “Currently, national climate institutes do not have the high-performance computing capability to simulate climate with 20km resolution, let alone 1km,” he wrote. “[I] look forward to the day when governments make the same investment in climate prediction as they have made in finding the Higgs boson.”


American writer arrested in bizarre confrontation


August 13, 2014

by Robert Hinsley



            American writer Tyler Durden, was arrested yesterday by Rumanian police in Bucharest when he was reported running nude through the market section of the city, screaming that vegetables had feelings and the local farmers were torturing and killing them.

            City police were called to the market and when they tried to subdue Mr. Durden, he attacked the police with a large squash.

            Durden, 43, was eventually taken into custody and is being held in a Bucharest mental hospital while he undergoes testing.


from the FAS Project on Government Secrecy
Volume 2014, Issue No. 52
August 13, 2014


            Nearly two years after President Obama issued a National Insider Threat Policy “to strengthen the protection and safeguarding of classified information” against espionage or unauthorized disclosure, the effort is still at an early stage of development.
            Only last week, the U.S. Air Force finally issued a directive to implement the 2012 Obama policy. (AF Instruction 16-1402, Insider Threat Program Management). And even now it speaks prospectively of what the program “will” do rather than what it has done or is doing.
            The new Air Force Instruction follows similar guidance issued last year by the Army and the Navy.
            The Air Force Insider Threat Program includes several intended focus areas, including continuous evaluation of personnel, auditing of government computer networks, and procedures for reporting anomalous behavior.
            “Procedures must be in place that support continuous evaluation of personnel to assess their reliability and trustworthiness,” the AF Instruction says.
            Such continuous evaluation procedures may eventually sweep broadly over many domains of public and private information, but they are not yet in place.
            “There are a number of ongoing pilot studies to assess the feasibility of select automated records checks and the utility of publicly available electronic information, to include social media sites, in the personnel security process,” said Brian Prioletti of the Office of the Director of National Intelligence in testimony before the House Homeland Security Committee last November.
            The Air Force directive also encourages reporting of unusual behavior by potential insider threats.
            “Insider threat actors typically exhibit concerning behavior,” the directive says. But this is not self-evidently true in all cases, and the directive does not provide examples of “concerning behavior.”
            A Department of Defense training module recently identified expressions of “unhappiness with U.S. foreign policy” as a potential threat indicator, the Huffington Post reported last week. (“Pentagon Training Still Says Dissent Is A Threat ‘Indicator'” by Matt Sledge, August 4.) If so, that criterion would not narrow the field very much.
            The “CORRECT Act” (HR5240) that was introduced last month by Rep. Bennie Thompson and Sen. Ron Wyden would require any insider threat program to meet certain standards of fairness and employee protection, and “to preserve the rights and confidentiality of whistleblowers.”
            That message may have been partially internalized already. The terms “civil liberties” and “whistleblowers” are each mentioned four times in the eight-page Air Force Instruction.


            New products from the Congressional Research Service that Congress has withheld from online public distribution include the following.

            Safe at Home? Letting Ebola-Stricken Americans Return, CRS Insights, August 5, 2014:

            2014 Quadrennial Homeland Security Review: Evolution of Strategic Review, CRS Insights, August 6, 2014

             Reducing the Budget Deficit: Overview of Policy Issues, August 7, 2014

            Juvenile Victims of Domestic Sex Trafficking: Juvenile Justice Issues, August 5, 2014

            U.S.-EU Cooperation on Ukraine and Russia, CRS Insights, August 7, 2014

Investors Profit From Foreclosure Risk on Home Mortgages

August 13, 2014

by Matthew Goldstein

New York Times


Rises in housing prices have been profitable to private equity firms and institutional investors that bought foreclosed homes to flip them or to rent them out. Now the recovery in housing is fueling a niche market for newly minted bonds that are backed by the most troubled mortgages of them all: those on homes on the verge of foreclosure.

And it is not just vulture hedge funds swooping in to try to profit from the last remnants of the housing crisis. The investors making money off these obscure bonds — none are rated by a major credit rating agency — include American mutual funds. And one of the biggest sellers of severely delinquent mortgages to investors is a United States government housing agency.

The demand for securitizations of nonperforming loans illustrates Wall Street’s never-ending hunt for higher-yielding investment opportunities. The market also reflects in part an effort by regulators to close a chapter on the housing mess.

For mutual funds and other institutional investors, the appeal of these bonds is obvious. They have yields of about 4 percent and pay out quickly — often in just two years — if the foreclosure process on the loans in the portfolio goes smoothly. The yields look enticing compared with the current 2.42 percent yield on a 10-year Treasury note.

So far this year, there have been 28 deals backed by $7 billion worth of nonperforming loans sold to investors, according to Intex Solutions, a structured finance cash-flow modeling firm. Last year, Intex said, there were 72 deals backed by $11.6 billion worth of nonperforming loans.

Regulatory records show that over the last two years mutual funds either offered or advised by firms like JPMorgan Chase, SEI Investments, Weitz Investments and Edward Jones have been buying unrated bonds with names like Bayview Opportunity Master Fund IIa Trust NPL, Kondaur Mortgage Asset Trust and Stanwich Mortgage Loan Trust NPL.

The market for these bonds is still small when compared with the heyday of the mortgage-backed securities market before the financial crisis. But the demand is expected to grow as institutional investors search for yield, and analysts estimate that there are still some $660 billion worth of delinquent mortgages in the United States. The trade publication Asset Backed Alert recently said that bond deals worth $4 billion to $5 billion were in the works for the second-half of the year.

“These are very short-duration bonds, which really operate as liquidation trusts,” said Ken Shinoda, a mortgage backed securities portfolio manager with DoubleLine Capital, which has reviewed but not yet invested in unrated bonds of nonperforming loans.

Representatives for some of the mutual funds that have invested in these securities say so far these bonds have paid out as anticipated and the risk of loss is low because their funds’ relative exposures are small.

Carlene Benz, a JPMorgan spokeswoman, said in an emailed response that the bank’s portfolio managers were comfortable investing in these unrated bonds because they have a “short duration yet provide yields higher than many longer duration assets.”

John Boul, a spokesman for Edward Jones, said unrated investments accounted for a small percentage of the firm’s bond funds. He added that the firm’s bond fund was managed by outside advisers, including some at JPMorgan.

For the investment firms, hedge funds and private equity firms buying the distressed mortgages and packaging the bonds, securitization is way to finance their operations and cash in their investments.

The catalyst for the emergence of this unusual market was a decision by the Housing and Urban Development Department to begin selling some of the most severely delinquent mortgages guaranteed by the Federal Housing Administration to avoid losses to United States taxpayers. Since 2010, HUD has sold 101,290 soured home loans with a combined unpaid balance of $17.6 billion in more than a dozen auctions, and more distressed sales are planned.

Recently, Freddie Mac, the giant mortgage finance firm that operates under government control, also got into the act when it sold $659 million worth of troubled mortgages. Banks are also sellers of nonperforming mortgages.

Institutional investors are especially drawn to the Housing and Urban Development auctions because these nonperforming loans, which are spread across the United States, can be purchased for between 60 cents and 70 cents on the dollar of the unpaid principal. The list of investment firms buying HUD loans includes firms affiliated of the Blackstone Group, Oaktree Capital Management, Lone Star Funds, Angelo Gordon & Company, the Kondaur Capital Corporation and Pretium Partners.

The most recent auction in June attracted bids from 27 institutional investors, about double the number of bidders for a similar auction of soured mortgages a year ago. The HUD loan sales have gained favor with some institutional investors that were buying foreclosed homes because there are now fewer good-quality properties to be had after a rush of distressed home buying.

The government housing agency has set up its loan sale program to encourage the private buyers to rework the mortgages and make them more affordable so the borrowers can start making payments again. But given that most of the borrowers have not made a single mortgage payment in two years, the agency has assumed that most of the loans will end up in foreclosure. In many cases, foreclosure proceedings were already well underway even before the mortgages were sold at auction.

The housing agency contends that even if a small percentage of the loans are reworked in a way that avoids a foreclosure or permits a borrower to gracefully exit a mortgage without being burdened with additional debt payments, it’s a good outcome.

Biniam Gebre, a general deputy assistant secretary at HUD, said, “While the primary objective of the note sale program is to minimize losses to F.H.A.’s insurance fund, and ultimately to taxpayers,” it was also providing “an opportunity for borrowers with no alternatives” to avoid foreclosure.

The agency, he added, has no problem with the private buyers finding ways “to securitize and bring private capital into the mortgage market” as long as it doesn’t detract from the program’s goals.

Before the end of the summer, the buyers of these HUD loans are supposed to file the first of several periodic reports outlining their ability to either rework the mortgages or foreclose on the properties. Representatives for several investment firms declined to discuss their performance figures before the reports are submitted to HUD.

Some firms that have sold bonds backed by nonperforming loans said they were also working on putting together securitizations of once-distressed loans that had been reworked or made to be “reperforming” in the parlance of Wall Street. Reperforming loans are ones in which the overall debt owed by the borrower has been reduced or the monthly payment cut to a level the homeowner can afford. Some of these reworked loans have been included in a number of the nonperforming loan deals as well.

But a review of some of the early pools of delinquent loans bought by the investment firms from HUD suggests that the percentage of reworked loans is likely to be small.

An analysis of 633 soured mortgages purchased by Kondaur Capital from HUD in June 2013 found that just over 20 percent were already in the foreclosure process at time of the sale. The analysis of local property records by RealtyTrac, a firm that monitors housing sales and foreclosures, also found that since the sale about 33 percent of the homes in that pool were subsequently sold, most likely either in a foreclosure, a short-sale or a deed in lieu of foreclosure — a transaction where a borrower essentially forfeits the rights to a property.

HUD’s bidding rules bar buyers from bringing a foreclosure action for at least six months after the auction process is completed. An official with Kondaur Capital, a firm based in Orange, Calif., declined to comment.

Still, rating agencies, which are largely reluctant to get involved in reviewing nonperforming loan deals, are gearing up to review bonds that are backed by reperforming mortgages. The thinking is that as the economy and housing markets continue to improve, the ability of delinquent homeowners to start making payments on a more affordable mortgage will rise.

In anticipation of a new wave of securitizations, Fitch Ratings just this week published a proposal for its criteria for rating mortgage securities backed by reperforming loans. It has asked players in the market to provide feedback on its proposal by mid-September.

 “The absence of a rating hasn’t been an obstacle to these deals so far,” said Michele Patterson, a senior director with Kroll Bond Rating Agency, which like Fitch has begun reviewing how it might rate reperforming mortgage deals. She said some “some issuers may be looking for a rating to diversify their investor base.”




The Dark, Lucrative World of Debt Collection  

August 15, 2014

by Jake Halpern  

New York Times


One afternoon in October 2009, a former banking executive named Aaron Siegel waited impatiently in the master bedroom of a house in Buffalo that served as his office. As he stared at the room’s old fireplace and then out the window to the quiet street beyond, he tried not to think about his investors and the $14 million they had entrusted to him. Siegel was no stranger to money. He grew up in one of the city’s wealthiest and most prominent families. His father, Herb Siegel, was a legendary playboy and the majority owner of a hugely profitable personal-injury law firm. During his late teenage years, Aaron lived essentially unchaperoned in a sprawling, 100-year-old mansion. His sister, Shana, recalls the parties she hosted — lavish affairs with plenty of Champagne — and how their private-school classmates would often spend the night, as if the place were a clubhouse for the young and privileged.

So how, Siegel wondered, had he gotten into his current predicament? His career started with such promise. He earned his M.B.A. from the highly regarded Simon Business School at the University of Rochester. He took a job at HSBC and completed the bank’s executive training course in London. By all indications, he was well on his way to a very respectable future in the financial world. Siegel was smart, hardworking and ambitious. All he had to do was keep moving up the corporate ladder.

Instead, he decided to take a gamble. Siegel struck out on his own, investing in distressed consumer debt — basically buying up the right to collect unpaid credit-card bills. When debtors stop paying those bills, the banks regard the balances as assets for 180 days. After that, they are of questionable worth. So banks “charge off” the accounts, taking a loss, and other creditors act similarly. These huge, routine sell-offs have created a vast market for unpaid debts — not just credit-card debts but also auto loans, medical loans, gym fees, payday loans, overdue cellphone tabs, old utility bills, delinquent book-club accounts. The scale is breathtaking. From 2006 to 2009, for example, the nation’s top nine debt buyers purchased almost 90 million consumer accounts with more than $140 billion in “face value.” And they bought at a steep discount. On average, they paid just 4.5 cents on the dollar. These debt buyers collect what they can and then sell the remaining accounts to other buyers, and so on. Those who trade in such debt call it “paper.” That was Aaron Siegel’s business.

It turned out to be a good one. Siegel quickly discovered that when he bought the right kind of paper, the profits were astronomical. He obtained one portfolio for $28,527, collected more than $90,000 on it in just six weeks and then sold the remaining uncollected accounts for $31,000. Siegel bought another portfolio of debt for $33,388, collected more than $147,000 on it in four months and sold the remaining accounts for $33,124. Even to a seasoned Wall Street man, the margins were jaw-dropping.

Siegel soon realized that there was the potential to make a fortune. What he needed was capital to invest in portfolios on a grand scale. Using his connections from his school days and from the banking world, he courted eight investors to fund a private-equity firm that would deal exclusively in such paper. He opened the firm, which he named Franklin Asset Management, in an elegant old home at 448 Franklin Street in Buffalo. In the ensuing year and a half, he bought $1.5 billion worth of unpaid debts. This would be his trial run. If all went smoothly, he would soon start another fund with even more money in it.

But all did not go smoothly.

Some of the deals Siegel made were hugely profitable, while others proved more troublesome. As he soon discovered, after creditors sell off unpaid debts, those debts enter a financial netherworld where strange things can happen. A gamut of players — including debt buyers, collectors, brokers, street hustlers and criminals — all work together, and against one another, to recoup every penny on every dollar. In this often-lawless marketplace, large portfolios of debt — usually in the form of spreadsheets holding debtors’ names, contact information and balances — are bought, sold and sometimes simply stolen.

Stolen. This was the word that was foremost in Siegel’s mind on that October afternoon. He had strong reason to believe that a portfolio of paper — his paper — had been stolen and was now being “worked” by one of the many small collection agencies on the impoverished and crime-ridden East Side of Buffalo. Using his spreadsheets, this unknown agency was calling his debtors and collecting debt that was rightfully his. The debtors, of course, had no way of knowing who actually owned the debt. Nor did they have any reason to suspect that they might be paying thieves. They were simply being told they owed the money and had to pay.

This was not a problem Siegel was used to handling. There had been no classes at Simon Business School on how to apprehend crooks who appropriated your assets. He could, of course, call the police or the state attorney general, but by the time they intervened, the paper would be picked clean, worthless. His problem was more fundamental, more pressing. At this point, he didn’t know exactly how many files had been stolen, but he knew he needed immediate intervention.

Fortunately, Siegel had someone to call — a fixer who knew just what to do.

-What got Siegel into this mess — and into the shadowy realm of debt collecting — was the simple desire to return home. In 2005, when he was 31, Siegel left Wall Street and decided to move back to Buffalo, where his parents and sister still lived. He took a job at a local division of Bank of America, specializing in private-wealth management. The only problem was that he had almost no work. “I spent my days spinning around in a chair and throwing pencils at the ceiling,” Siegel said. “There was nothing to do. There’s very little private wealth to manage here.”

In many ways, Buffalo never recovered from the loss of its steel mills in the 1980s. Yet at least one industry was booming: debt collection. Buffalo is among the nation’s debt-collection hubs. One of the largest collection agencies in the country, Great Lakes Collection Bureau, was once based there. When many of the com­pany’s managers eventually struck out on their own, their companies prospered, multiplied and hired still more collectors.

Siegel was intrigued by the fact that so many people in his midst were toiling to collect on debts that his employer — the bank — had given up on and had sold at huge discounts. He sensed an opportunity and in the fall of 2005, using $125,000 from his personal savings, he bought his first batch of paper and opened a collection agency. During the day, he worked at the bank; after hours, he ran his new company.

The most pressing order of business was hiring collectors. Those who applied to work for him were mainly a downtrodden lot, and their ranks included ex-convicts, drug addicts, 20-somethings without high-school diplomas and a variety of other hard-luck cases. “Oh, my God, they were like thugs,” Siegel recalled. He quickly concluded, however, that the more clean-cut types simply couldn’t get the job done. As he put it: “You realize that you’re sitting on an investment and you’ve hired a bunch of Boy Scouts who can’t turn any money.” What he needed were telephone hustlers. The problem with the hustlers, Siegel explained, was that they hustled not just the debtors, but him as well. Siegel said one of the first truly great collectors he hired — an overweight, womanizing aspiring bodybuilder — robbed him of several thousand dollars by counterfeiting the firm’s checks.

Still, he was making money. And that was largely because of a former armed-robber named Brandon Wilson, whom Siegel met in 2006. Wilson worked as Siegel’s most valued debt broker, buying portfolios on his behalf. He also served as Siegel’s emissary to the collection industry’s many unsavory precincts.

From the outset, they were a most unlikely duo. Siegel likes to wear $2,000 custom-­made pinstripe suits, and he strikes a patrician demeanor from the moment he shakes your hand. His sister 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.”

Wilson, by contrast, favors loosefitting sports clothing — the style and the brand don’t matter, so long as they come with a Red Sox or Celtics logo. He spent much of his youth in the notorious housing projects along Mystic Avenue in Somerville, Mass. His mother recalled that “when he was growing up, I was chasing Brandon around the projects with a bat, and he was throwing stones at me, and I was hitting the stones back at him with the bat — but boy, could he run.” When Wilson 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.

By the time he was in his early 20s, Wilson had amassed an impressive criminal record. His many offenses included assault and battery, armed robbery (three counts), larceny, armed assault in a home (two counts) and knowingly receiving stolen property. And these, of course, represented only the times he was caught. He was never busted for robbing toy stores or night deposit boxes at banks, both of which he claimed to have done repeatedly.

            ‘You realize that you’re sitting on an investment and you’ve hired a bunch of Boy Scouts who can’t turn any money.’

            Not long after getting out of prison, Wilson took a job as a debt collector. He proved quite good at it, and soon he bought some paper and opened his first agency. Later, he also became a debt broker or dealer, a type of role he knew quite well: “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 [I’m] doing in debt.”

Initially, at least, Siegel knew very little about Wilson, except that he was in his mid-30s, shrewd, plain-spoken and very candid about the decade he spent in jail. What mattered to Siegel, however, was simply that Wilson delivered. From the moment they started doing business, Wilson was providing good paper, with “plenty of meat on the bone,” as they say in the business. “The paper that I bought from him performed wonderfully,” Siegel said.

The secret to Wilson’s success was that he knew how to find “crap,” as he called it. Instead of buying “fresh” paper directly from the banks — paper that just a few of the banks’ own collectors or subcontractors had tried to collect on — he looked for older paper that had been bought and sold many times over. He often bought credit-­card debt, for example, that had been sold off by the banks 10 or even 15 years ago. Old paper was much cheaper, but the trick was figuring out which portfolios had not been collected on efficiently and thus wrung dry. If you called the debtors from these sorts of portfolios and simply reminded them what they owed, they would often send you a check. “I am a bottom feeder,” Wilson said. “I specialize in finding paper that everyone else thinks is worthless.”

A dizzying array of variables affects a portfolio of debt’s true potential — the age of the debt, how many agencies have tried to collect on it, the size of the balances, the type of credit card, where the debtors live and the current economic climate. What’s more, 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, and Wilson seemed to have a genius for exploiting it. He was quick with numbers and was a tenacious haggler. Wilson talked to everyone, did his research and found opportunities that no one else could — like, for example, a portfolio of paper that no one had touched for five years, other than an incompetent call center based in Brazil. This was the bedrock of his reputation as a debt broker. “I buy old crap,” Wilson said. “I’m the King of Crap.”

Siegel felt confident that if he could enlist Wilson to help him buy an enormous quantity of paper — crap, but good crap — he could make a fortune. Instead of running his own collection agency, he would start a private-equity fund, buy large portfolios of debt and have them worked at other agencies. The fund would be set up as a one-time deal with a limited life span: Investors would make an initial investment and then, over the course of the next several years, receive returns until all of the money the fund earned was dispersed. Best of all, Siegel wouldn’t be responsible for the actual collecting. That meant no more headaches, no more bodybuilders making off with his checkbook. All he needed to do was persuade Wilson to join his operation.

Until then, Siegel simply bought paper from Wilson without knowing where he had purchased it or for how much. This worked out well for Wilson. In fact, as Wilson told me, he often bought paper for one penny on the dollar and then instantly sold it to Siegel for two pennies on the dollar, doubling his money. Now, Siegel wanted him to reveal all of his suppliers, help him analyze prospective deals and then step aside and let Siegel make the deals directly.

In theory, though, this new arrangement meant that Wilson stood to make a lot of money. Siegel had $14 million to spend, and he was also authorized to reinvest his profits for a limited time, which meant that he would most likely be purchasing closer to $20 million worth of paper. Siegel would offer Wilson a 5 percent commission on all of the purchases he made from Wilson’s sources. If Wilson brokered all of these deals, he could make $1 million. Still, Wilson was skeptical. This deal meant going against a way of doing business — dating back to his criminal days — in which you never, ever gave up your sources or suppliers. But eventually Wilson agreed, in the hopes of becoming a millionaire. As Wilson remembered: “At first, I was like, I am not giving you my sources or my prices — that is how I feed my family. But I did it to make a million bucks.”

Siegel’s gut feeling about Wilson 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 Siegel himself once worked.

In Wilson’s view, his checkered past actually enhanced his pedigree. “Part of the package you get of being my business associate or my friend is that I’m going to protect you from the sharks,” he explained. By “sharks,” Wilson meant the industry’s many unscrupulous collectors, brokers and agency owners. “If you don’t give them a little bit of fear, right — if it’s just the law, if it’s just the attorney general, if it’s just a civil suit — they could care less. So they need someone to go put a stop to that right now. That might not be bashing someone over the head, it might be sitting them down and saying: ‘Look, man, you ever do 10 years in the can? I have. You ever sat there for 10 years waiting for your date? I have. You think you’re getting away with this? You’re not.’ ”

-Not long after Siegel started his fund, Wilson became interested in a debt buyer based in Painesville, Ohio, known as Hudson & Keyse. Wilson suspected that the company was in financial trouble — and he was right. An insider at Hudson & Keyse later told me, “There was a desperation to sell paper to raise funds.” At Wilson’s urging, Siegel capitalized on this desperation. On Dec. 16, 2008, Siegel bought a parcel of debt from Hudson & Keyse containing 8,518 accounts with a face value of $47.5 million for precisely one penny on the dollar.

The portfolio of debt that Siegel purchased — which I will refer to simply as “the Package” — was the archetype of the kind of paper he hoped to buy. It was cheap paper that proved very collectible. The debtors in the Package hailed from a range of places across the country, including Ewa Beach, Hawaii; Dutch Harbor, Alaska; Prairie Village, Kan.; and Rock Springs, Wyo. Some of these debtors owed as much as $29,777, and others as little as $209; some were as young as 19, others were as old as 85; some had accounts that were charged off by the banks as long ago as 1989, others had accounts charged off as recently as 2008.

            For Siegel and Wilson, the Package represented money — plain and simple — but, in truth, this Microsoft Excel spreadsheet represented much more than this. The various columns and rows told the stories of several thousand Americans whose financial lives had fallen into ruin and whose futures dangled precariously in the balance. Wilson understood this. At his collection agency in Bangor, Me., where he worked some of Siegel’s paper, he was often on the phones himself. He heard the excuses, the tirades, the lies, the desperation and the heartbreaking stories of loss.

For Wilson, none of it was personal. Instead, he saw the challenge of collecting in very professional, even empirical terms. He’d developed his own quasi-scientific taxonomy, grouping debtors into some 38 different species or types. For example, a D.H.U. (Debtor Hung Up) was a sorry specimen because he had hung up the phone and would probably do so again; a C.B. (Call Back) was a better prospect, because he had at least bothered to call back; a Promised to Pay had potential, because he acknowledged that the debt was his; a Broken Promise had failed to honor his guarantee, but that wasn’t entirely bad because you could now use that against him; and a Broken Payment simply needed a little nudging because he had started to pay and just needed to get back on track. Using a software system that Wilson developed himself, he could program the office’s auto-dialer to call only those debtors who fell into certain classifications. One day, I watched as the auto-dialer at his office called Broken Promises, Broken Payments and C.B.s.

One debtor was an elderly woman who was apparently too poor to pay her debts. Wilson strove for empathy, trying to “marry the debtor,” as he put it.

“I’d love to tell you to forget the whole thing,” Wilson said. “I have a mother, I have a grandmother. But I can’t do that. Unfortunately, it’s in your name, it’s under your Social and the balance is due. I could give you a settlement, I could work out some kind of hardship plan with you.”

“Sir,” the woman said, “I get Social Security, and that’s it.”

“Right,” Wilson said.

“I barely get enough to live on,” the woman added.

“Right, well, I understand times are hard, ma’am,” Wilson said, undeterred. “There are a lot of people in that situation.”

One imperative for Wilson and his collectors was conveying the calm, cool, unshakable understanding that they were, in fact, the rightful owners of these debts and that these debts needed to be paid promptly. It remained unsaid, of course, that this “paper” had often been purchased for as little as one penny on the dollar, and there was no mention of the fact that many of the debts that Wilson specialized in were too old to appear on a credit report or to be sued for in court. Most negative information disappears from credit reports after seven years and, depending on state law, debts may be unrecoverable through a lawsuit after as little as three years.

Yet Wilson’s pitch — you owe the money, and now you need to pay — was both simple and perfectly legal. In most states, you can still try to collect on a debt even after its statute of limitations has expired. As the Federal Trade Commission notes on its website: “Although the collector may not sue you to collect the debt, you still owe it. The collector can continue to contact you to try to collect.” Wilson knew the rules and used them to his advantage. As far as I could tell, that’s what Wilson loved about collections: It was a hustle, but a legitimate hustle.

In the fall of 2009, however, it appeared that Wilson and Siegel were the ones being hustled. Someone was pre-empting them, collecting the debts from the Package before they could. The first people to be affected, of course, were the debtors themselves; the danger they faced was that if they paid the wrong collectors, they would still be liable for their debts.

Debtor No. 3,159 from the Package, for instance, was a woman named Theresa from a small town in the Southwest. Theresa defies almost all the stereotypes of debtors. She joined the Marines in the early 1990s, at 18, and served for the next eight years. Theresa was so determined to live responsibly that throughout much of her teens, she worked more than 30 hours a week at a McDonald’s, earning $4.25 an hour.

After the Marines, Theresa married, bought a house and landed a job as the manager of a grocery store. Life was good. And that’s precisely when everything fell apart. “What happened was, I found out that my husband of 11 years had another family somewhere else,” she said matter-of-factly. Theresa filed for divorce in 2005, but this quickly created a new set of problems. “He left me with everything except the truck that he took, and that was fine, except that I now had to pay for everything,” she said. “I had the credit-­card debt. I had the mortgage. I had everything.”

Theresa’s credit-card debt included a Washington Mutual account that had a balance of $4,184 as of July 2006. In August, September and October, she continued making steady payments even though she wasn’t using the card to make any purchases. Eventually, finances became so tight that she stopped paying altogether. Things came to a head in 2009 when she began receiving phone calls from people who claimed to work at a law firm. She was told that unless she paid off the balance in full, they would take her to court.

At the time, Theresa had no way of knowing that the threat was a bluff, nor did she realize that such bluffs are increasingly common. According to annual reports filed by the F.T.C., the number of complaints about “false threats of lawsuits” from collectors more than doubled from roughly 12,000 in 2008 to more than 30,000 in 2012. And the combined number of complaints about threats of violence and “false threats of arrest or seizure of property” have jumped, more than tripling. David Torok, who oversees the F.T.C.'s complaint database, speculates that there were “more consumers truly on the edge” and that collectors were therefore simply “trying to squeeze even harder to get some money out of an extraordinarily dwindling pot.”

For Theresa, the possibility of being sued was deeply unsettling. She had recently landed a job with the Border Patrol and knew that a lawsuit could destroy her career as a federal law-enforcement officer. (As a matter of policy, the Border Patrol says that debts and “financial issues” may render candidates “unsuitable” for service.) The collectors explained that she now owed more than $6,000 with interest, but they offered her a deal in which she could settle the matter for just $2,700. Theresa said that she set up a payment plan and that over the course of the next six months the money was withdrawn directly from her checking account.

There was just one problem: The company never sent a letter confirming that she had paid the bill. Even worse, the payment never appeared on her credit report. She spent the next six months trying to understand where, exactly, her money had gone. “I didn’t want the money back,” she told me. “I just wanted somebody to say, ‘Hey, she tried to pay.’ ”

It wasn’t entirely accidental that Theresa’s debts ended up in the hands of thieves. When the original creditor, Washington Mutual, sold her debt, it stopped caring about what Theresa owed, how she was treated or what happened to her personal information. This is true for many banks; when they sell their unpaid accounts, their contracts testify to this indifference. According to American Banker, in a series of transactions in 2009 and 2010, Bank of America sold millions of dollars of charged-off debt to a company in Denver called CACH. In the sales agreement, Bank of America said it would not make “any representations, warranties, promises, covenants, agreements or guarantees of any kind or character whatsoever” about the accuracy of the account information it was selling. When Siegel bought the Package from Hudson & Keyse, the sale contract had similar wording. It stated, for example, that the seller was offering no “warranty of any kind” relating to the “validity, collectibility, accuracy or sufficiency of information” that was being sold. In other words, there might be problems with the debts, but they were being sold as is.

And there were problems, dating right back to the original creditor, Washington Mutual. Theresa’s­ bank records confirm that Washington Mutual issued her a significant credit — $702 — on the very same day it sold her debt. It’s unclear what the credit was for. An official at Chase Bank, which acquired Washington Mutual in 2008, told me that the credit might have been offered as relief — a gift, essentially. But he couldn’t be certain. On the monthly statement, the credit appeared as a payment alongside the words “Payment received — Thank you.” Whatever the explanation, one thing is certain: When Siegel bought the account in 2008, Theresa’s balance didn’t reflect this credit. Somewhere along the way, quite possibly at the bank itself, it was simply forgotten or ignored. Such sloppy record-keeping may seem surprising, but it is prevalent enough that in 2009, the F.T.C. said in a report: “When accounts are transferred to debt collectors, the accompanying information often is so deficient that the collectors seek payment from the wrong consumer or demand the wrong amount from the correct consumer.”

In truth, there was little that Theresa could do; she had paid off her debt to the wrong collectors and had fallen into the debt underworld. If anyone was going to help her, it wouldn’t be the state attorney general, or the Better Business Bureau, or the F.T.C., or even the police, but the former banker and the former armed-robber who bought her debt.

Around the same time that Theresa was getting phone calls from a mysterious law firm, Siegel received an email from the owner of an agency that he had hired to do his collecting. The collectors at this agency were getting the same message from many debtors: We just paid off these accounts — to someone else. Siegel was both flummoxed and concerned. Was this the work of a renegade collector at one of his agencies who was collecting on his own and pocketing the cash? Or had the paper simply been stolen from his offices?

The notion that a portfolio of debt could be stolen may seem improbable, but plenty of debt brokers are all too willing to sell “bad paper.” Such brokers sometimes “double sell” or “triple sell” the same file to multiple unsuspecting buyers. Other times, a broker may sell paper that he does not own and obtained by nefarious means. I spoke at length with one debt broker from Buffalo, who told me that he had hired a hacker from China to break into a former client’s email account and obtain his password. Once he had the client’s password, the broker had access to his paper. He then simply took a portfolio and, subsequently, sold it to another buyer — who didn’t know and didn’t ask where it came from.

On several occasions, Siegel dealt with collection agencies or debt brokers who tried to cheat him in one fashion or another. Once, after being scammed by two local debt brokers, he hired a lawyer and sued the culprits. It took Siegel two years to get a judgment, and then it turned out that the companies were shells. I accompanied Siegel to his lawyer’s office when he got the bad news. “Just because you get a judgment,” his lawyer told him, “doesn’t mean you can collect it.”

Much of the responsibility for policing debt collections falls upon the nation’s various state attorneys general — and perhaps none have been more aggressive or successful than the one in New York. Still, the Buffalo bureau consists of only two people devoted to the collections industry. Karen Davis, who is the office’s senior consumer fraud representative, said she received thousands of written complaints about debt collectors each year. After sifting through these complaints and investigating many of them, she singles out companies whose behavior seems to be the most egregious. She puts those companies on a list of the worst offenders that she, personally, has to monitor. When we spoke in the spring of 2013, there were 324 companies on her list.

One of Davis’s recent coups was against an outfit known as International Arbitration Services. The agency’s collectors had been posing as law-enforcement officers and threatening debtors with arrest. (This particular tactic, which is not uncommon, was just a slightly more aggressive version of the one used against Theresa.) Rogue agencies like I.A.S. often use fake addresses, post-office boxes and rented phone numbers to mask their whereabouts. Davis believed that I.A.S. was located somewhere in Canada, but she couldn’t determine where exactly. “It went on for months, with us being frustrated, but we could get nowhere,” Davis said. “We just couldn’t figure out where they were.” Then one day an informer showed up at the Buffalo bureau and announced that he worked as a collector for I.A.S. He said he was unhappy because he had been cheated out of his pay — so unhappy that he walked over to complain in person. Walked. That single word left Davis flabbergasted. “What do you mean?” she said. “They’re not located in Canada?” No, the informer said, explaining that the I.A.S. office was just a few blocks away. Two days later, she served I.A.S. with a subpoena. Davis’s office ultimately forced I.A.S. to shut down and fined the owner a modest $10,000. And this is how a list of 325 companies dwindled to 324.

When Siegel realized that his paper had ended up in someone else’s hands, he knew there was only one thing to do: call Wilson. Wilson quickly started his detective work. First, he spoke with some of the debtors who recently paid the mysterious other agency. None of them could recall the name of the agency, but several combed through their credit-card statements and identified the company that processed the payments they made. So Wilson called the processing company. “I got them on the phone, told them that I was the debtor and said: ‘What is this? I am reversing the charge! What company charged me for this?’ ” And, like that, Wilson had the name and the phone number of the collection agency.

            ‘We’re going to shut down this rogue agency or burn it down to the ground.’

            He called up the agency and introduced himself as the debtor. According to Wilson, the woman who answered the phone promptly told him that he was going to be arrested if he didn’t pay. Wilson asked for the address where the business was located, but the woman refused to tell him. Realizing that he was getting nowhere, Wilson hung up and glanced around his office, surveying the faces of his collectors. He called out the names of four of them. They all stood up. One was a young employee named Jeremy Mountain. As he recalls it, Wilson calmly explained to them what they were about to do: “We’re going to shut down this rogue agency or burn it down to the ground.” No one hesitated. They piled into Wilson’s small Mercedes sports car. “On average, the guys in the car weighed about 240 pounds,” Mountain said. “I was the only person who hadn’t gone to prison.”

Wilson decided to call one last time and got a man who claimed to be the owner. Wilson told him, “You guys are stealing money.” The owner, who asked to be identified only by his nickname, Bill, insisted that the accounts were his and that he would not stop collecting on them. Wilson’s last-ditch effort to negotiate had apparently failed.

Before “going to war,” as Wilson put it, he and his crew stopped by Siegel’s office in Buffalo. As it turns out, Wilson had some business to settle with Siegel as well. Under their arrangement, Siegel was supposed to notify Wilson every time he bought paper from one of Wilson’s sources and then send him a 5 percent commission. Wilson suspected that Siegel had either forgotten or simply neglected to pay him for some of these deals. In the car, Wilson apprised his posse of the situation: “I told my guys, ‘I know he has been holding out.’ ” Wilson figured that now was the perfect time to leverage his position and demand payment.

Siegel recalls Wilson’s arrival vividly: “They come down here in this small Mercedes, and they come storming out of it like clowns out of a clown car — only they’re ex-cons.” With some trepidation, Siegel invited them up to his office. Siegel’s assistant told me that she, too, was startled by the sight of Wilson: “He showed up in the office in a long black coat, drinking whiskey out of the bottle, with all these guys that I would not want to meet in a dark alley.” Siegel quickly resolved the matter of the unpaid commissions by writing Wilson a check for $50,000.

Before the posse left Siegel’s office, one final member arrived; he was the owner of another collection agency in Buffalo, which also worked Siegel’s paper. The man — who asked to be identified only by his middle name, Shafeeq — was a Muslim who said he tried to avoid charging interest whenever possible. Shafeeq had the advantage of being a local. He knew the collections scene in Buffalo — the good actors, the bad actors and everybody in between. Shafeeq knew, for example, that Bill owned and operated a corner store near Buffalo’s downtown. There was another benefit to having Shafeeq in the posse as well, namely that he ran his own security firm and was licensed to carry a firearm. Wilson recalls that when they all met up, Shafeeq had a 9-milli­meter pistol with two clips. He also had a large knife. Wilson asked him what it was for. According to Wilson, Shafeeq’s reply was, “It’s for when I run out of bullets.”

Wilson and his crew eventually found Bill at his corner store in a run-down neighborhood. Wilson gestured for several of his guys to come with him, including Mountain and Shafeeq. When he walked into the store, he saw an enormous man, roughly 6-foot-6 and 280 pounds. Wilson asked the man his name. It was Bill.

The encounter was tense. Mountain recalled seeing a gun resting on a shelf behind the checkout counter. Bill confirmed that he had a gun at the ready and said that whether Wilson knew it or not, “he was the one in danger.” Wilson looked around and saw a door that appeared to lead to a back office. He gestured toward the door and said, “I don’t want an audience.” The two men walked through the back door, where Wilson hoped they might find some privacy. “Turns out it was a closet,” Wilson later told me. “So it’s the two of us, just standing there, in a storage closet.”

As he recalls it, Wilson told Bill to sit down and then drew close so that the two of them were eye to eye. “If you collect one more dollar on this paper,” he said, “I will come back down here, I will take your server, I will burn your agency to the ground, I will come to your house and burn it down, and then I will come back here and burn this store down. Understand?” Bill, indignant, proclaimed his innocence, insisting that he had bought the file legitimately from a fairly notorious debt broker based out of Buffalo.

This news gave Wilson pause. He knew this broker both personally and by reputation. “Saying that [this guy] sold you some bad paper and ripped you off is like saying: ‘Guess who robbed me in the forest? Robin Hood!’ Of course he did.” According to Wilson, the broker and his associates were notorious in the industry for selling stolen and double-sold accounts. Wilson himself had had “a couple of run-ins with these guys.” On one of these occasions, Wilson claimed that he was cheated out of money that he was owed and drove down to Buffalo to confront them. He never found them, but he remembered the incident bitterly and wondered for a second whether what Bill said might be true.

But at the corner store, Wilson was primarily concerned with impressing upon Bill just how serious and dangerous he was. Shafeeq, who overheard much of their encounter, described it as two “big kids” trying to prove who was meanest: “It was a tough-guy show.” Bill said that he refused to be strong-armed and that he told Wilson: “It’s not going to happen here — you’re talking to the wrong guy.” Wilson was not to be outdone. As Shafeeq recalled it, Wilson went into a tirade, lifting up his shirt and screaming at the top of his lungs: “I got stabbed right here! I got a bullet hole right here!” According to Shafeeq, Wilson’s tactic worked. “As soon as you see that kind of behavior,” Shafeeq said, “you’re like, O.K., this dude is absolutely crazy.”

In the end, Bill promised to stop collecting on Siegel’s accounts. Bill said he was happy to do this because he paid only $10,000 for the accounts and had already collected many times that. What’s more, Wilson didn’t demand that he return what he had made. “It was a win-win,” Bill said proudly. Siegel resolved to make the best of a bad situation. Whenever he could confirm that a debtor had paid Bill, he closed the account and permanently retired the debt; besides that, there wasn’t much more for him to do. He eventually sold many of the uncollected accounts in the Package for a tidy profit.

How, exactly, the Package got into Bill’s hands remains a mystery. The notorious debt broker did not return my calls. I did eventually manage to speak with one of his former partners — a man who asked to be identified only by his first name, Larry. Larry insisted that he himself hadn’t handled the Package, but said it was entirely possible that his partner had, because this was how business worked in their corner of the industry. Larry told me that he had often made deals in his car in which the buyer gave him cash, and he handed the buyer a thumb drive with a spreadsheet containing the names, addresses, Social Security numbers, credit-card balances or loan amounts of several thousand debtors. Where exactly, I inquired, did such files come from? “I’m not asking where the files are coming from,” he said. “I’m just dealing.”

This, of course, was the root of the problem. No one could ever be sure how Bill obtained the accounts from the Package. The possibilities were dizzying. Bill later suggested to me, for example, that he mentioned the notorious broker’s name only as a diversion and that he had in fact bought the paper from an employee in Siegel’s office, who was selling the paper covertly. Ultimately, there was no telling where the files came from, or who else had copies of them. And this was a problem not just for Siegel, but also for the debtors from the Package.

Several years after the Package was stolen — in the summer of 2013 — Theresa received a phone call from a company called McKellar and Associates Group, trying to collect on this very same Washington Mutual debt. I spoke with the agency’s co-owner, Adam Owens, who is based out of Beverly Hills, Calif. I asked Owens how he obtained Theresa’s debt, given the fact that Siegel had permanently retired it. He told me he had purchased it from a debt broker in Florida. It was part of a much larger package of roughly $50 million worth of debt, which he bought for just 12 basis points — or one-twelfth of a penny on the dollar. It had been bad paper, Owens said, and he’d gotten burned on the deal. After the purchase, Owens discovered that another agency was collecting on the same paper and, what’s more, that some of the dates on the debts had been manipulated so that the paper appeared newer than it actually was. As Owens saw it, when buying from debt brokers, this was all part of the risk you faced. He concluded: “It is just data you are purchasing.”

The federal government is, at long last, starting to make a serious effort to clean up the collections industry and protect consumers like Theresa. In 2012, the Consumer Financial Protection Bureau announced that it would start supervising some of the nation’s larger debt collectors to “help restore confidence that the federal government is standing beside the American consumer.” The bureau vowed to police the nation’s largest 175 agencies, but one recent projection on the industry estimates that there will be 8,501 debt-collection firms in 2015 in the United States. And the companies engaging in the most grievous behavior — like falsely threatening lawsuits or collecting on bad paper — tend to be the smaller operators. It inevitably falls upon the state attorneys general to go after them, which means depending on overburdened officials like Karen Davis.

And so far, regulators have concentrated on debt collecting, as opposed to the buying and selling of debt, which is the source of many of the industry’s problems. As long as paper continues to be stolen, double-sold or otherwise exchanged without accurate supporting information — like statements or copies of the original signed contracts — consumers will be exploited and collectors like Siegel and Wilson will have to fend for themselves.

A centralized loan registry might help, and there are some in development. Mark Parsells, the chief executive of a company called Global Debt Registry, has developed a database that tracks the ownership of consumer debts once they are sold off by banks or original creditors. Each debt is assigned a “universal loan identification number,” or ULIN, which functions like a vehicle identification number on a car. When a car changes hands, its license-plate number changes, but the VIN remains the same; likewise, when a debt is bought or sold, the account number and the creditor information might change, but the ULIN would remain the same. The registry also maintains electronic records of the original data and documents associated with each debt, like statements and loan applications. If a debtor like Theresa received an inquiry from a strange collection agency or law firm, she could access the registry’s secure website and quickly verify whether this agency actually owned the debt or was authorized to collect on it.

So why hasn’t the government helped establish such a registry? After all, the Department of Motor Vehicles keeps track of who owns what car, and the Register of Deeds records who owns a piece of property. When I visited the Federal Trade Commission in Washington, I posed this very question to an official who investigates and brings actions against debt collectors. The question wasn’t entirely fair, because it fell outside his purview, but I wondered if anyone at the F.T.C. was giving this any thought. “Yeah, I don’t know,” the official said. “The commission hasn’t weighed in on something like that. I think that the commission would have to have a lot more information.”

Just this month, the Office of the Comptroller of the Currency, which supervises all national banks, issued written guidance on how debts should be sold. Banks need to vet potential buyers and provide accurate and complete information, the office says. Reform may be on the horizon. And with it there may come a time when there is no need for Wilson’s strongman services or his tough-talking antics, but for the moment, at least, they continue to fill a need. Wilson is still hunting for “crap,” selling it to his clients and promising to keep the sharks at bay. Siegel is still paying back his investors, but his fund is almost at an end. Wilson, not surprisingly, is busy looking for new clients. He even had hopes that his former foe Bill might be a good candidate. In fact, as a thank you for Bill’s prompt and polite cooperation, Wilson said he sent him a small present, a trademark Brandon Wilson tiding of good will: a file containing 1,000 old accounts. Pure crap — but crap with potential to become gold.


            This article is adapted from “Bad Paper: Chasing Debt From Wall Street to the Underworld” by Jake Halpern, to be published by Farrar Straus and Giroux in October.

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