Rating Implications of U.S. Debt Ceiling Crisis

   LONDON - (BUSINESS WIRE) -10/12/2013 - Fitch Ratings spokespersons said they continue believe that an agreement will be reached to end the current political impasse and raise the U.S. debt ceiling. Nonetheless, the U.S. Treasury has said that extraordinary measures could be exhausted as soon as October 17, leaving a cash balance of just $30 billion.
   The treasury would still have limited capacity to make payments after that date but would be exposed to volatile revenue and expenditure flows. As in the debt-ceiling crisis in the summer of 2011, it is useful to outline how Fitch may react to a failure to raise the debt ceiling, and to the potential consequences, including a default on U.S. Treasury securities.
   As we said when the U.S. government shut down on Oct. 1, a formal review of the U.S. sovereign 'AAA'/Negative Issuer Default Rating (IDR) with potentially negative implications would be triggered if the U.S. government has not raised the federal debt ceiling in a timely manner before the treasury exhausts extraordinary measures and cash reserves. In such a scenario, Fitch would consider placing the U.S. sovereign IDR on Rating Watch Negative (RWN), reflecting the increasing risk of a near-term default event. If the U.S. sovereign IDR were placed on RWN, all outstanding U.S. sovereign debt securities would also be placed on RWN.
   A widespread and prolonged delay of payments to suppliers of goods and services to the federal government, including salary payments to federal employees, would not in itself constitute an event of default from Fitch's rating perspective. It would, however, damage perceptions of U.S. sovereign creditworthiness and, if payment delays were extensive on non-prioritized obligations, signal that the U.S. government was in financial distress, with negative rating implications. It would also have a detrimental effect on the economy.
   Fitch would only recognize a sovereign default event if the government failed to honor interest and/or principal payments on the due date of U.S. Treasury securities. In this scenario, Fitch would lower the U.S. sovereign IDR to 'Restricted Default (RD)' until the default event was cured. We would also lower the rating of the affected issue(s) from 'AAA' to 'B+', the highest rating for securities in default in expectation of full or near-full recovery. Debt approaching maturity would be vulnerable to a downgrade.
   Once cured, the U.S. sovereign IDR would be raised to a level reflecting Fitch's assessment of the creditworthiness of the U.S. sovereign. This would reflect the scale and duration of the default, the perceived risk of a similar episode occurring in the future, the likely impact on the U.S. sovereign's cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.
   Willingness to pay, as reflected in the sovereign debt service record, is an important component of all sovereign credit analysis. Even a short-lived default that did not impair the long-term capacity of the U.S. government to service its obligations would call into question the effectiveness of the country's political institutions in ensuring that sovereign debt obligations are honored in a timely manner. This means that if the U.S. sovereign IDR were lowered to 'RD', it would be unlikely to return to 'AAA' in the short to medium term.
   If the U.S. sovereign IDR were downgraded to 'RD', there would be negative rating consequences for those entities whose issuer and issue ratings are underpinned by U.S. sovereign support, such as the government sponsored entities (GSEs). Any rating impact on those entities would be influenced by the potential path of the U.S. sovereign rating as well as the stand-alone credit profiles of the affected issuers.
   The ratings of U.S. states and municipalities would not be directly affected, reflecting their autonomy and discrete powers and taxing authority, although a limited number of U.S. municipal obligations with direct links with the U.S. rating would be. These include pre-refunded and other municipal bonds secured by AAA rated U.S. government and agency obligations held in escrow and U.S.-guaranteed debt obligations, such as debt guaranteed by the Department of Energy under its renewable energy programs. If Fitch downgrades the U.S. sovereign to 'RD' - following the placement on RWN - that would not necessarily lead to an immediate downgrade of these linked ratings. These ratings would remain on RWN and would not be adjusted until the sovereign rating is ultimately resolved.

Illegal Scheme Targeted Debt-ridden Customers

   NEW YORK - 5/10/2013 - Mission Settlement Agency, its owner Michael Levitis and three of its employees – Denis Kurlyand, Boris Shulman and Manuel Cruz – were charged recently with mail and wire fraud charges in connection with a multi-million dollar scheme that victimized more than 1,200 debt-ridden individuals across the country, announced U.S. Attorney for the Southern District of New York Preet Bharara and Inspector-in-Charge of the New York Office of the U.S. Postal Inspection Service (USPIS) Philip R. Bartlett.

   As alleged, the defendants fraudulently tricked people into paying Mission for debt settlement services by lying to prospective customers about its fees and its purported affiliation with the federal government and one of the three leading credit bureaus in the U.S., as well as the results it supposedly achieved for its customers. 

   In connection with the scheme, Mission received over $6.6 million in fees. For over 1,200 of its customers, Mission took fees totaling nearly $2.2 million and has never paid a penny to the customers’ creditors. Each of the individual defendants was arrested this morning. They are expected to be arraigned in New York federal court before U.S. District Judge Paul G. Gardephe. Also unsealed were the guilty pleas of two former Mission employees, Felix Lemberskiy and Zakhir Shirinov, for their participation in the fraudulent scheme. 

   Shirinov pleaded guilty pursuant to an information before U.S. District Judge Denise Cote on April 26, 2013 and Lemberskiy pleaded guilty pursuant to an information before U.S. District Judge Ronnie Abrams on April 29, 2013. 

   In a separate action, the Consumer Financial Protection Bureau (CFPB) announced civil charges against Mission and Levitis, among others.

    “As alleged, Mission preyed upon the financial desperation of people around the country who – like so many ordinary Americans – were simply struggling to pay down their debts after the financial downturn. But the true mission of Mission turned out to be fraud and deceit, and for more than 1,200 consumers, the dream of debt relief turned into a nightmare of deeper debt trouble. Today’s case is a harbinger of an especially potent partnership between this Office and the CFPB that will benefit hardworking Americans everywhere,"   Bharara said.  

   According to the allegations in the indictment unsealed today and the forfeiture complaint filed in New York federal court: 

Background 

   Since its inception in 2009, Mission has offered “debt settlement” services to financially disadvantaged individuals who were struggling or unable to pay their credit card debts. Like other purported debt settlement providers, Mission held itself out as a company that could successfully negotiate to lower the overall debt its customers owed to credit card companies and banks. Levitis operated and controlled Mission which, at varying times, had offices in Brooklyn and/or Manhattan, N.Y. 

   The defendants targeted financially disadvantaged individuals known to be struggling to pay credit card debt and reached out to them through telemarketing and mail solicitations. Thereafter, Mission’s sales representatives typically spoke to the prospective customers on the phone, describing Mission’s work and its ability to renegotiate debt. Where an individual ultimately expressed an interest in engaging Mission, Mission then had the individual enter into a contract. 

Overview of the Fraud 

   From 2009 through May 2013, the defendants systematically exploited and defrauded over 1,200 financially disadvantaged individuals across the country who were struggling to pay their credit card debts. The individual defendants falsely and fraudulently tricked them into becoming Mission’s customers by making materially false and misleading statements about Mission’s ability to help settle their debts and about the fees Mission would charge in exchange for that help. 

   Specifically, the defendants commonly lied about and/or concealed Mission’s fees, falsely stating both verbally and in their written solicitations, that Mission would charge a mere $49 per month and/or that there would be no up-front fees. In fact, Mission took thousands of dollars in up-front fees from funds that its customers had set aside because they had been told the funds would be held in escrow and used to pay creditors. The defendants also deceived prospective customers by fraudulently promising that Mission could help slash their debts – typically by 45% – when, for the majority of customers, Mission actually did little or no work and failed to achieve any reduction in debt whatsoever. And the defendants deceptively created an air of legitimacy for Mission’s business by falsely suggesting that it had affiliations with the federal government and with one of the three leading credit bureaus in the U.S. 

   Overall, Mission had approximately 2,200 customers who paid a total of nearly $14 million in connection with its purported debt settlement services. Of these funds, Mission took over $6.6 million in fees, while paying only approximately $4.4 million to customers’ creditors. For over 1,200 of its customers, Mission took fees totaling nearly $2.2 million, but never paid a single penny to the customers’ creditors as payment for any negotiated debt. Levitis used the money that Mission took from its customers to pay for things including the operating expenses of a restaurant/nightclub he controlled, lease payments for two different luxury Mercedes cars and credit card bills for his mother. 

Lies About Mission’s Fees 

   In conversations with prospective customers, the defendants represented that customers would be asked to make affordable monthly payments for a set period of time, that these payments would be held in escrow by a third-party payment processor until Mission had negotiated down the customers’ debt obligations and that the money held in escrow would then be used to pay the creditors. The defendants further promised that Mission would only charge a nominal monthly fee of $49 in exchange for its efforts and they often explained that Mission would charge an additional fee only if it succeeded at obtaining a greater reduction in debt than what had been promised. They also claimed in both their written solicitations and in scripted phone calls that there were no up-front fees. 

   In reality, in addition to the $49 monthly fee, Mission also charged an up-front fee equal to as much as 18% of the debt the customer owed. Mission deducted these fees from the monies that customers paid to the third party payment processor, in accordance with a monthly payment plan it established and that customers understood would be held in their escrow accounts and used to pay their creditors. Instead, Mission regularly took as fees for itself all of the funds that its customers paid to the payment processor during the first three months of their contracts with Mission. This was done in order to insure that the company would receive up-front fees before any of the customers’ debt was even paid down. Lies About Mission’s Results The defendants typically promised prospective customers that Mission would negotiate a substantial reduction in their debt, promising prospective customers that they would have to pay only 55% of the amount owed to creditors. 

   When potential customers questioned that assertion because it sounded too good to be true, a written script directed sales representatives to tell them: “The creditors today are content to get the settled amount in light of all the bankruptcies, charge offs and bad debt out there today.” This assertion and the underlying promise were false. In reality, Mission did little or no meaningful work to negotiate reductions in debt for many of its customers and the sort of result Mission was promising prospective customers was substantially more favorable than the results Mission typically achieved for prior customers. The written script also instructed sales representatives to promise potential customers that if they worked with Mission, their credit scores would ultimately go up. 

   The script said, “Your credit score will go down in the short term while the accounts are put into position for settlement. Then your score will go up as the payments are made and ultimately your score will be significantly higher.” 

   This was also untrue. 

Lies About Mission’s Affiliations 

   The defendants also made material misrepresentations to prospective customers about Mission’s relationships and affiliations in a deceptive effort to make Mission seem more credible and trustworthy. For example, in an effort to attract business, Mission sent a solicitation letter to prospective customers that falsely suggested that it was acting on behalf of or in connection with a federal governmental program. The letter included an image of the Great Seal of the United States and indicated that it was coming from the “Reduction Plan Administrator” of the purported “Office of Disbursement.” However, the only phone number and address provided in the letter belonged to Mission and Mission did not have any relationship with any federal agency, nor was it operating in connection with any federal program. 

   Bharara also announced the filing of a civil forfeiture complaint seeking to forfeit the proceeds of the alleged fraud and the assets involved in money laundering related to the scheme. Those assets and proceeds include: the Rasputin nightclub, the title for which is in the name of Levitis’ mother, whom the government alleges is the real owner of the club; two pieces of real property; and 40 bank accounts.

   Levitis, 36, of Brooklyn, Kurlyand, 30, of Brooklyn, Shulman, 27, of Brooklyn, and Cruz, 30, of Brooklyn, are each charged with one count of conspiracy to commit mail and wire fraud, one count of wire fraud and one count of mail fraud. Each defendant faces a maximum sentence of 20 years in prison on each count. 

   Lemberskiy, 29, of Staten Island, New York and Shirinov, 29, of Brooklyn each pleaded guilty to one count of conspiracy to commit mail and wire fraud, one count of mail fraud and one count of wire fraud. They each face a statutory maximum sentence of 60 years in prison.

   Bharara praised the outstanding investigative work of the USPIS. He also thanked the CFPB for referring this case to this Office and acknowledged with appreciation, this extraordinary partnership. If you believe you were a victim of this crime, including a victim entitled to restitution and you wish to provide information to law enforcement and/or receive notice of future developments in the case or additional information, please contact Wendy Olsen-Clancy, the Victim Witness Coordinator at the U.S. Attorney's Office for the Southern District of New York, at (866) 874-8900, or Wendy.Olsen@usdoj.gov. 

   For more information, go to: http://www.usdoj.gov/usao/nys/victimwitness.html. For guidance on coping with debt or credit issues and information about dealing with debt settlement companies in particular, consider the following links to publications issued by the Federal Trade Commission and the Council of Better Business Bureaus: http://www.consumer.ftc.gov/articles/0150-coping-debt; and http://www.bbb.org/credit-management/overwhelming-obligations/advice-about-quick-easy-solutions/index.html. The prosecution of this case is being handled by the Office’s Complex Frauds Unit. Assistant U.S. Attorneys Nicole Friedlander and Edward Imperatore are in charge of the prosecution. Assistant U.S. Attorney Carolina Fornos of the Office’s Asset Forfeiture Unit is responsible for the forfeiture aspects of the case. The charges contained in the indictment are merely accusations and the defendants are presumed innocent unless and until proven guilty.

   Source: Financial Fraud Enforcement Task Force

Recession Adds $2.2 Billion to Illinois’ Debt

   (Illinois Statehouse News) - By Mary Massingale - 8/8/2010 - As Illinois faces a $13 billion budget deficit, a separate $2.2 billion debt has quietly accumulated during the recession – and because of the recession.
    Illinois started borrowing from the Federal Unemployment Account last summer to bolster the state’s dwindling unemployment trust fund. The federal account serves as a line of credit for states across the nation so that unemployment benefits can continue to be paid to eligible out-of-work residents.
    “It is continuously something that we monitor on a daily basis,” said Greg Rivara, spokesman for the Illinois Department of Employment Security.
   Rivara said borrowing from the federal account is simply a necessary evil during a lingering recession that has left more than a half-million residents dependent on unemployment checks while the state grapples with an unemployment rate of 10.4 percent for June. The national unemployment rate for June stood at 9.5 percent.
   “If we were not borrowing money, we’d have to take a higher contribution from the business community or decrease benefits, or a combination of both,” he said.
   Illinois joins 31 other states in looking to the federal account, which has been tapped for more than $39 billion nationwide. According to federal data as of Wednesday, Illinois ranks fifth in most owed at $2.2 billion, Rivara said. California leads the pack at $7.76 billion, with Michigan ranking second at $3.8 billion, New York, third at $3.1 billion, and Pennsylvania, fourth at $3 billion.
   Businesses annually pay a contribution to the state’s unemployment trust fund based on its industry and previous history of layoffs. For 2010, the amount businesses paid annually per worker ranges from $81 to $908, Rivara said.
   Because second quarter contributions have recently been collected, the state has not had to borrow from the federal account for a couple of months, Rivara said, leaving the state trust fund with a balance of $275 million.
   However, the $2.2 billion still needs to be repaid, and a likely 4 percent interest rate will be tacked on come Jan. 1, if Congress doesn’t vote to extend the waiver of interest on the loans granted by the federal stimulus program.
   Rivara noted the $2.2 billion is separate from the $13 billion budget deficit since the budget relies on General Revenue Fund dollars. GRF dollars cannot be used to repay the unemployment loan, which is repaid partially through a portion of the business contribution.
   However, that’s not enough to whittle down the entire $2.2 billion, meaning options such as borrowing, increasing the business contribution, decreasing benefits or a combination of all three may have to be looked at, Rivara said – after Congress decides whether or not to extend the loan interest waiver.
“This does not jeopardize claimants receiving benefits,” he said.
   Illinois, like other states, chances losing federal funding if it maintains a deficit balance for two Januaries in a row, Rivara said, putting at risk $1.5 billion in annual tax credits for businesses and more than $100 million annually awarded for IDES operations.
   But he also noted that because of the nature of the state unemployment trust fund and its ties to a fluctuating economy, the fund is expected to run a deficit balance at times.
   “It begs a debate of what is the appropriate fund balance for the trust fund,” he said.
   However, he said he believes Illinois is “probably through the worst of times,” noting that Illinois follows the national economy in a recovery. The nation is gaining jobs, and so is Illinois — 60,000 since the end of 2009, he said.
   An economist at the University of Illinois Urbana-Champaign agreed the worst appears to be over, but noted the pace of Illinois’ recovery is “painfully slow.”
J. Fred Giertz has the numbers to prove it in his just-released “Flash Index,” showing the Index rose to 91.6 in July, up three-tenths of a point from its June level.
   A Flash Index level below 100 indicates the economy is in contraction, while readings above 100 indicate economic growth.
   “Recessions always end, but this time it’s not going to be in six months,” Giertz said. “It’s going to be in one or two years.”
   Story courtesy of Illinois Statehouse News.