A horrid thought has been incubating for the last few days.
I don’t know how many of you know much about Vulture Funds, what they do and how they do it, but it forms the basis of my horrid thought.
Nations issue debt. After it is bought, it often gets re-sold on what is called the secondary market. The price of debt on the secondary market changes much as stock prices change. The market is big.
When a nation looks like it might default the price of its debt begins to sink. What was bought for full price is offered for sale at a reduced price – say 60 cents on the dollar. Buyers and sellers have to decide if they think the nation will proceed to default or avoid it. The decision is, sell now and accept a loss but avoid a potentially larger loss later, or buy now at a discount and if the nation avoids default, profit as the value of that cheaply bought debt recovers its original value.
But then there are the vulture funds. They follow a quite different path. They are creatures of the law not of finance and there are not many. One of the biggest, most notorious and best connected is Elliot Associates of Manhattan. They have very close links with the Republican Party and to Mitt Romney in particular ( They are large donors to his campaign). Another is FG Capital management. These companies are financial companies all founded and largely owned by Wall Street lawyers. FG Capital Management was founded by a former Morgan Stanley consultant.
Vulture funds buy the bonds others have given up on. They buy what is often referred to as ‘distressed debt’. That is debt that has been defaulted upon and is, for the ordinary bond manager, worthless. The vulture buys it and then sues the defaulting nation. It is a very specialized area of the law and of finance. As an IMF study from 2003 said of vulture funds,
“Investors in this market posses specialized knowledge of bankruptcy law and international litigation and are willing to hold out for many years before seeing any recovery”
The study looked at Elliott Assciaites and others and found that those vulture funds trading in distressed sovereign debts who resorted to litigation to force repayment made profits of between 50-333% net of legal fees. Elliot Associates, for example, sued Peru.
You might wonder to what court you could take a whole nation? And what sanction could any court have over a sovereign nation? The answer is rather clever and like many clever things also simple. You sue a nation in the jurisdictions in which that nation does other sovereign business, such as transferring its sovereign funds in order, for example, to pay its debts. And where is that ?
Most nations have funds residing outside the nation most often in the global centres of finance, New York and London. All Nations have to move money around, albeit electronically, in order to conduct business, such as selling more debt to finance its on-going activities, or to pay debt. Central banks of all nations buy and sell on the foreign exchanges and debt markets in order to keep a balance of currencies to facilitate the international trade of businesses in that nation. In all these examples the wealth of a nation is outside that nation under the jurisdiction of the place the business is being done. Vulture funds attack those points. The main one is the Southern District of New York – Wall Street’s Court.
For example, Elliott Associates sued Peru in the Southern Distric Court of Manhattan by filing to seize money Peru had in the vaults of Chase Manhattan Bank. Chase was acting as agent for Peru when Peru was paying certain other debts. Elliott argued that if Peru had money to pay other creditors then it – and more importantly Chase – had a legal duty to treat Elliott and its claim equally. The suit held up payments and seemed to threaten Peru with financial paralysis. The threat worked. Peru paid. Elliott had bought the distressed debt for cents on the dollar and got the whole dollar plus interest. This is only one of several strategies used by Vulture funds.
Now to my horrid thought.
The ECB had been accepting lots and lots of dubious sovereign debt as collateral for ECB loans. This has been done direct from the ECB, via the ‘temporary’ bail-out fund (the EFSF), the larger temporary bail-out mechanism (the LTRO) and the other bail out mechanism (the ESM).
One way of interpreting this policy, as I and many others have done, is to say it’s a frontal attack on democracy and justice. The transferring of the private debts of private banks, to National Central Banks and then onwards to the ECB, is a multi layered scam run by the financial and political elite to transfer their private bank debts beyond the reach of our democratic accountability.
But what if a European nation did default? What then? Well what is to stop the ECB going vulture? It has ‘bought’ up assets from various European nations at a discount. If one of those nations were to default after,… oh I don’t know – a referendum (think Greece’s disallowed attempt at democracy) or elections that might derail imposed austerity measures (think Spain’s forthcoming elections)? What is to stop the ECB or better yet one of it’s arm’s length funds turning vulture and suing the defaulting nation? Who says the major creditor nations, France and Germany, or those who are themselves hanging by a thread, like Italy, have to accept default?
Of course for Germany or France to actually pursue Greece or Spain and their people, in order to squeeze more blood from the open wounds would be ugly. Granted. But then I ask myself why was so much effort put in to creating the complicated and seemingly nonsensical funding structures of the EFSF. ESM and the LTRO? They seemed typically Eurocratic, designed just to hide and confuse the real extent of the bail-outs, the lack of actual cash underlying those bail-outs and thus the frightening extent of the empty leverage involved. BUT they did create legal entities which are arm’s length from the funding nations and the EU itself. How much less ugly if something called the EFSF were to sue the Greek or Spanish people should the default. And of course it is the threat that it could be done, rather than actually doing it, that is the main weapon.
I wonder, in the run up to the massively important elections in Spain, when the Spanish people might want to reject the slash and burn edicts of the ECB and IMF, if certain unelected financial eurocrats might not mention in passing to the leaders of the main Spanish parties what nasty creatures vultures can be.
Far fetched? Look at what our rulers have been happy to do so far. The Greek Prime Minister suggests a referndum to ask ask the Greek people for authority and legitimacy. He is removed. The referendum is killed. In Italy a wholly unelected government and new ruler – a Prime Minister in name only since he was not elected – is intalled at the head of what is called a ‘government of national unity’. Except that ‘the nation’ had no say whatsoever in its imposition. In Portugal critical and far reaching measures were pushed through by the interim government before elections took place.
Does anyoe think a result in Spain, which might reject the latest round of austerity measures, will be allowed? Unlike Ireland or Greece, a default in Spain, or an election result which would lead to one through a rejection of more austerity. could not be survived. An election result in Spain which set in motion a rejection of austerity would signal a terminal crisis for european bank debt and those nations currently hiding it. Do you really think they will allow such a result.
Our political and moral landscape has already altered. Those who rule over us have accepted without discussion, on our behalf, that some banks are too big to fail and that inconvenient laws that threaten them can and must be routinely set aside. I see no reason why our leaders won’t also decide that certain nations whose debts are considered too big and too important for other nations, shouldn’t be seen as too big to be allowed to vote.