U.S. agencies could use better debt collectors

July 1, 2011

By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Uncle Sam could use better debt collectors. Fraudsters, polluters and other corporate and white-collar miscreants owe government agencies more than $65 billion in fines. Only pennies on the dollar are ever paid. With private firms like Contrarian Capital making millions buying claims from creditors, maybe they and the feds should do business.

Some wrongdoers are going to be write-offs from the start. In 2009, a court ordered officers of National Century Financial Enterprises, an Ohio healthcare finance company, to cough up a whopping $2.38 billion for defrauded investors. They’ve paid only about $3.1 million, and with many in prison, there’s little hope for more.

But firmer arm-twisting could work with others. Consol Energy subsidiaries, for example, had about $2.2 million in mining penalties outstanding as of February, some from 2006. Subsidiaries of Massey Energy, recently sold to Alpha Natural Resources, were delinquent on more than $2 million in fines. These are drops in their buckets.

Yet even with billions at stake during crunching budgetary times, the feds are bad at dunning deadbeats. A just-released study found that courts scatter responsibility for collecting criminal judgments across the nation’s 94 U.S. attorneys’ offices. The result has been a 4 percent payment rate. Other agencies have been similarly inefficient. The chief mining regulator has collected about 5 percent of fines. Customs, about 31 percent.

Agencies have little incentive to go after fines, because they don’t actually keep the money they collect. The Environmental Protection Agency has taken the position that announcing big fines deters wrongdoing more than collecting them would.

There may be a better way. Banks and hedge funds make big bucks buying bankruptcy and other claims at a discount and then pursuing debtors for a higher payout. Distressed-asset firms like Contrarian bid for shares of the potential recovery from Bernard Madoff’s Ponzi scheme. Silver Point Capital and other funds similarly traded in Lehman Brothers bankruptcy claims. Why not federal claims against corporate wrongdoers?

The government still wouldn’t get paid in full. Lehman claims traded recently at 18 to 21 cents on the dollar, and Madoff shares at around 30 cents. But that’s a lot better than 4 percent, and figures are higher for better risks.
Privatizing what could be viewed as basic law enforcement may strike some critics as unseemly, particularly if it further enriched hedge fund managers. But it’s worth considering. With the deficit spiraling higher, every billion counts.

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