Rolling Jubilee: can a crowdsourced bailout of personal debt work?

A new spin-off of Occupy Wall Street wants to cancel debt. Can it?

By Alex Hern Published 09 November 2012 15:29
New Statesman

This is an interesting thing. The Rolling Jubilee:

A bailout of the people by the people.

We buy debt for pennies on the dollar, but instead of collecting it, we abolish it. We cannot buy specific individuals' debt - instead, we help liberate debtors at random through a campaign of mutual support, good will, and collective refusal.

So how does this work? Distressed debt – debt which is in default – is frequently more trouble than it is worth for banks. Those institutions specialise in making money from money they hold, not recovering money they are owed. So if they have too much trouble getting that debt repaid, they sell it on. Someone pays less than the full value of the debt, and hopes to profit by recovering it and pocketing the difference

For really troublesome debt, sometimes that value can shrink to pennies in the pound – hence the Rolling Jubilee's plan, to buy $16,000 of debt for every $500 they raise (that is, $32 for $1).

That's how it works. But will it work? Maybe.

The legal mechanics of what they are doing are pretty clearly in their favour. Debt collectors really can cancel the debt if they want.

The problem is that if you try to actually do that, you may find very quickly that people stop selling you debt.

A similar idea was proposed a while back by an organisation called American Homeowner Preservation. It also deals with distressed debt, but focuses exclusively on mortgages, buying up pools of bad loans, and restructuring them to make it easier for the homeowners to pay them off.

But the original plan was simpler still. Felix Salmon explains:

Investors would buy a house in a short sale at the market price, and then lease the home back to the homeowner until the homeowner had the ability to get a mortgage and buy it back at a pre-set price.

The idea might have been elegant, but it didn’t work in practice, because the banks wouldn’t play ball: they (and Freddie Mac) simply hated the idea of a homeowner being able to stay in their house after a short sale, and often asked for an affidavit from the buyer saying that the former owner would certainly be kicked out.

There's not really any cold hard economics at play here. The banks have no reason to care what happens to a house after they've sold the mortgage for it, but they do. The best explanation for their stubbornness is that they fear that organisations like American Homeowner Preservation are creating a sort of moral hazard by reducing the penalties for defaulting on mortgages.

Will the debtholders be similarly reluctant when it comes to playing along with Rolling Jubilee? We'll see, but I don't have high hopes for a change in tactics any time soon.

 
 

3 comments

A right wing capitalist's picture

Wed, 2012-11-14 14:17 — A right wing capitalist (not verified)

WIll it work? It rather depends on how you count success.

A fund could be set up to buy and cancel debt. I can see this working in the sense that the mechanics of the process complete and some people have debt cancelled. For those lucky few this will of course be a welcome windfall. However,

Will it make any difference in the grand scheme of things? No.
Will it change the public perception of the morality of debt and lending? No.
Will it establish principles, shift paradigms or any other woolly success criteria you care to mention? Only in the febrile minds of occupy activists. The rest of the world will sail gloriously on.
Will the banks profit? Yes.

Even if the amount raised ran into millions it would be a tiny drop into the great debt ocean. The financial system will not be undermined by this new little player. Instead they will provide a useful avenue for the most toxic of assets. Their alternative business model coupled with their naivety will mean they will end up overpaying for debt the banks would otherwise struggle to sell. There will be no ‘fairness’ in this debt relief as the loan books will not be able to differentiate between the luckless and the feckless. Personally I’d be quite happy for anti capitalist types to put their energy into this kind of arbitrary small scale debt relief if it meant stopping them from getting up to their usual mischief.
The moral hazard issue can be overplayed too as too few people will have their debt cancelled for there to be a wider societal impact. One potential pitfall I do see is the potential for corruption within the fund around choosing which assets to buy. If the unpaid volunteers running the fund don’t declare what debt they have will there be mechanisms in place to stop them from effectively buying and cancelling their own debt?

spcclientdotcom's picture

Sun, 2012-11-11 18:22 — spcclientdotcom (not verified)

Abolish the DEBT? Only a few will benefit from this and it could still wind up on your credit report.

Once a bank sells the debt for pennies and possibly sends you a 1099 for the difference there is no legal claim to that debt anymore once they sell/write it off. Instead we have advocate organizations believing they can save you when fact is you can save yourself for free.

Go to spcclient and sign up for free use code 1000-1000 and go to drcreditfix module and start out send the step one to everyone of your debt collectors and in 45days from the program you will see it gone with no legal chance of its return.

We offer training classes for free on how to overcome these bastards. Give us a call or email us and get your REAL REMEDY, not some hope and prayer of some BS advocate group promising you a possibility of you getting a chance. They will look for the lowest and largest bang for the buck to say we did something.

If you have real debt try it. i promise you wont be disappointed.

THE REAL OCCUPY BANKS - financial screen shots dotcom

Gillian Noero's picture

Sat, 2012-11-10 02:41 — Gillian Noero (not verified)

In the USA, we use use a phrase - 'moral hazard' to explain that people mustn't be allowed to ignore their debts in case everyone starts to ignore their debts.
In the 'moral hazard' view of the world, human beings are toxic. We're little criminals, just hopping from foot to foot till we can race off with our ill-gotten gains.
We have been though an economic catastrophe, a human and social disaster that bears no relation to the everyday world of debt obligation, which should be taken extremely seriously by individuals and corporations.
In the case of Rolling Jubilee's planned action, however, the debtholders cannot claim'moral hazard' because the proposed debt relief will be anonymous, random and tiny. Rolling Jubilee's action will establish the principle that people are worth 'moral protection', that we deserve 'moral assurance'.
"From this principle it will follow, that the form of government which communicates ease, comfort, security, or, in one word, happiness, to the greatest number of persons, and in the greatest degree, is the best."

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