For example, you own Joe’s Bank. Joe’s Bank issues VISA Credit cards. In your portfolio, you have 100 delinquent credit cards with an outstanding debt of $250,000 that have not received a payment in 6 months, so you write them off. You can take that $250,000 loss as a tax deduction, lowering your taxable income by $250K, or you can sell the paper for $2,500 to a Junk Debt Buyer, and still write off the remaining $247,500 against your taxes.

The Junk Debt Buyer ( a type of collection agency that buys debts that are in default, rather than collecting them under contract) then attempts to collect on the full face value of the $250,000. Often, they will go after anyone they can using any tactic they can, even people who do not owe money, but whose names are similar to the true debtor. These tactics are not legal, but the chances of getting caught are almost zero, because most consumers don’t know their rights, and the shame of being chased by a debt collector often prevents them from seeking help. The FTC is charged with enforcing the laws on this, but they rarely do anything.

What this means for the Junk Debt Buyer is that if they collect on even a few of the 100 credit cards, they are in profit territory. The Junk Debt Market is one of the fastest growing segments of the financial industry. Many of these portfolios allow profit of up to 5,000%.

Sub-prime debt, and the illegal tactics used in enforcing it, are very lucrative.

She emailed back:

“Your Basic WriteOff:

Lisa boys stock in AT&T. Stock is worth $100,000.

Lisa fills out a Financial Statement listing her assets and her debts. She lists as an asset $100,000 in AT& T Stock.

AT&T phones prove to be cancer-causing – bottom drops out of the market. Lisa’s stock is now worth $ 00.00

Lisa fills out a financial statement – she must “write-off” the value of the stick – that is, she can no longer claim it as an asset because now it is worthless. (But if she also had stock that soared in value, she can use her losses to pay less taxes on her gains.)

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CDO:

Lisa’s Swell Securities (LSS) buys shares in 10 different Residential Mortgage Backed Securities Trusts. LSS buys the lowest, riskiest level (called tranches) LSS then makes an investment vehicles out of its purchases. The assets in this LSS are the shares of the 10 different RMBS. So the CDO doesn’t own any properties itself – it owns shares of the trusts that own the properties.

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SWAPS
LSS realizes it owns some pretty iffy shares. LSS goes to AIG and says: sell us a policy that if our grand plan to make money investing in the riskiest level of these 10 trusts does not work out – and we actually lose money, when we are down 40%, the insurance company will be required to reimburse us for any further losses.

Now the insurance company has taken on the bad risk created by LSS. Or has “swapped” with LSS – taking much of the risk in exchange for a nice hefty insurance premium.

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WHAT IF THE riskiest properties were even riskier than disclosed? What if each of these properties was purchased by some crooks who were telling big fat lies about the qualifications of the buyers? AND what if the trust never obtained any notes or assignments so they absolutely could not successfully foreclose. The investors in those lowest levels would see their investment fall to zero value.

And if you were pitiful enough to have bought the CDOs put together by LSS (a collection of the riskiest levels of 10 different trusts) then you also have ZERO value – AH, but wait, where is that insurance policy – AH, right here – OK, AIG, we will take our losses up to 40% – but the next layer of losses – the 60% – you must reimburse us for all of that because we “swapped” risk for premium.”