Debt Vultures: Scavengers and Victims of the Economy

Debt collectors are feeling the downturn in the economy. As the times get harder, one can almost hear the collection managers yelling at the collectors to squeeze the consumers for every last dime.

The consulting firm Kaulkin Ginsberg even maintains an index of economic factors which affect the performance of debt collectors (euphemistically called the “accounts receivable management” or ARM industry). The KG Index is at its lowest point since a peak in October 2006. The index is, in a sense, a measure of the American consumer’s financial distress.

Nevertheless, the collection industry is still thriving. After all, there’s a lot of debt going into default and a lot of that consumer debt eventually ends up in the ARM industry’s hands with a share of any proceeds staying in their pockets. As more consumers get into debt trouble, more opportunities come to collectors to take a cut. And many collection agencies are reporting strong performance in an InsideARM Confidence Survey, despite the fact that their targets — consumers — are facing harder times providing the luxuries of food, housing and transportation.

On the other hand, the stock market had not been so kind to the vulture investors who buy “distressed” (bad) debt. InsideARM also reported this week that the market capitalizations of the five largest publicly-traded debt buyers fell by over $1 billion — almost a one-third cut — in the last year.

In a way, the market issues with the debt buyers is Kafka-esque. These companies bought debt which lenders already could not collect, typically with their own collection departments and then with outside debt collectors. Those lenders would have written down the value of the account on their books. Then the vulture investor steps in and pays a few cents on the dollar and takes the account. It becomes a new asset for the debt buyer and they in turn make projections about how much they expect to earn collecting on this account…that another lender could not collect and already wrote down.

Needless to say, when the economy gets dicey their projections go wrong. So, as InsideARM reports, many of these companies have had to take charges on their books for the lower probability of collecting…on the debt that the first lender already gave up on collecting. No wonder some of the players in this industry have so much trouble playing by the rules.