Sub -level Three. Vulture world.
Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.
Argentina defaulted on its debts. It borrowed money, said it would pay it all back, signed contracts binding it to that promise and then reneged. It forced its creditors to agree to get back only a few cents out of each dollar they had lent it. Argentina simply said, ‘that is all we are going to pay. Accept or get nothing at all’. The creditors, the bond holders, agreed. Except of course for the stealthily circling Vultures who bided their time.
Surely, despite the sordid stink of what was done to Argentina, how she came to default, on another level Argentina has also done wrong to those who lent to it and must therefore pay? Well on one level sure. But before we wag a moralizing finger lets take a step back. Borrowing and then not paying back, defaulting, is not a crime against God and Nature known only to the dregs of statist madmen. Companies default. They take on debts, sign contracts to pay it all back and then default on their creditors. When they do it is often due to mis-management, stupidity, greed and even fraud. Whatever moral case we might think Argentina has to answer it is not peculiar to them or to the bloated and corrupt governments which loom large in the minds of fervent Libertarians.
Lets take a recent example, Chrysler . In 2007 Chrysler had revenue of $49 billion. That makes it larger than many nations. It defaulted. The company had knowingly, not forced to by IMF inquisitors, but of its own free-market will, taken on debts that it could not pay. Did statues bleed, or horses give birth to monsters? Did the very heavens cry out at the crime? No they didn’t. It’s business. Just business.
What Chryser did do was use the sheer size of its possible default to force its creditors to accept cents on the dollar on what they were owed. Sound familiar? And the US government itself weighed in on their side to force the creditors to accept. Why? Because, they said, it would be best for the nation. And then the critical bit, (From “The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and other Legal Fauna” Duke University School of Law)
Once Chrysler negotiated the terms of a sale with the majority of its creditors, it entered bankruptcy with a prepackaged petition, and, shortly thereafter, a new Chrysler entity emerged from the process as a going concern, no longer burdened by billions of dollars of debt.
A ‘going concern’ because it was now no longer crippled by an unpayable weight of debt. That is what Argentina had hoped to do.
Although a minority of creditors challenged the Chrysler sale as a draconian invalidation of their contract rights, those efforts failed under the debtor-friendly rules of Chapter 11.
So, for private companies the free-market has debtor-friendly Chapter 11. But not for nations? What Crysler did the Law upheld even as it pursued Argentina for doing the same thing.
And what are some of those debtor-friendly provisions of Chapter 11?
Once a private company or individual enters bankruptcy, debt service and litigation against the debtor is automatically stayed pending the completion of a mandatory restructuring plan. Bankruptcy rules also allow for a post-insolvency market for “superpriority” (debtor-in-possession) financing, which the debtor can access to jump start its reorganization.
So why is this a good ‘free-market’ idea for companies but not for nations? Why should something of the like not be available to nations? There is no good reason – excpet one. Suing nations is lucrative AND it is part, I believe of a far broader wresting of power from nations states in favour of ‘The Market’. An ideological desire to elevate private over sovereign power. Or to put it another way to reduce nations to actors within a global market framework instead of markets and companies being required to act within a framework of soveriegn, nation state power. The question is what levers can ‘free market’ ideologues use to force this change?
The key to the Elliot Associates case against Argentina, the point of law used by them and ruled in favour of by Judge Griesa, and one of the levers that can be and has been used to attack nations, is what is known in law as Pari Passu – to treat equally.
I do not intend here to deal with the argument over whether nations need to borrow at all. I have some thoughts on this subject but they are for another article. All I wish to note here is that it is an odd thing, perhaps a legacy of the time when princes borrowed gold and silver from merchants, that nations who do not have to borrow, given that they can print instead, should chose to borrow. What is not at all odd is that holders of private wealth and creators of private credit, should be delighted to lend to them. Why is this not odd? Because nations are very large borrowers and, most of the time, very good payers.
The only down-side to an otherwise wonderful trade is that IF a nation should decide to default – how can a private creditor take an entire nation to court? The answer for centuries was they couldn’t. The old, English Common Law of Champerty prevented it.
an English common-law doctrine that precluded the purchase of debt with the intent and purpose to sue upon it. (P.49)
A clear law which makes the very notion of a vulture fund impossible. At this point it is worth taking a moment to remind ourselves that the laws which codify what we mean by debt: who must pay what to whom and under what conditions are not natural laws. Debt and its laws do not spring from the fabric of reality like Gravity. Debt and its laws are human conventions that is all. We can see it one way or we can see it another.
Champerty said you cannot buy up a nation’s debt, when you know that nation has or soon will default, for the express purpose of then suing the nation. Champerty says the nation and its creditors are the only interested parties and thus they alone must be left to work it out for themselves. And since most of the lenders were the largest banks and other nations who generally had long term and lucrative relations with the debtor nations, the lenders would generally feel obliged to swallow the losses. And that reality ‘tended’ to give the lenders some pause for prudent thought when it came to how much they lent and to whom.
So for years Champerty did prevent nations being sued AND helped concentrate the minds of the lenders. But then along came the first Oil Shock/Crisis and the subsequent South American defaults of the 80’s in Mexico, Argentina and beyond, and the eventual game changer – The Brady Plan.
Each of these things, like everything else in this article, can be seen in two entirely different ways. What you see depends on what you are told to look for, what you expect, what you want to see.
Sorry to introduce all these elements but I think it helps to know why things happened not just that they did happen. So to take them one at a time. The first Oil Shock was a crisis at the pumps but a bonanza at the well-heads. Suddenly the world was flooded, literally flooded, with petro-dollars (Oil was traded in dollars). That money belonged to the oil nations but it flowed to the world’s banks. Suddenly they had more cash than they knew what to do with.
So it was not a coincidence that a long list of nations who wanted to borrow suddenly found the taps opening for them. I’m not saying nations didn’t borrow or banks lend to them before. They did. But go back and look at the growth in lending just to Argentina – from $8 billion in ’76 to $43 billion in ’83. An increase of over 400% in just 7 years .
A subsequent rise in interest rates and a global recession resulted in a string of defaults on these loans,starting with Mexico in 1982. (P. 50)
The banks let the influx of cash go to their gonads and lent too much to ‘sub-prime’ borrowers, content to let them get deeper and deeper in to debt paying the banks more and more interest. The scale of the bad loans was sufficient to cripple if not bring down at least some of those banks. Sounding familiar at all?
Cue the Brady Plan. Officially a plan to save S. American nations (one way of seeing it), but equally, or perhaps more, to save the U.S. banks who would have suffered/collapsed if widespread defaults had been allowed to go ahead. The Brady Plan repackaged the defaulting debts in to new bonds imposing some ‘hair cuts’ but off-setting even worse possible losses by various means AND, critically, allowing the new bonds to be sold to a far wider set of financial institutions. The idea – again stop me if any of this rings any bells with you – was, by allowing the new bonds to be sold more widely it got the risk off the bank’s books where it had been concentated and ‘spread’ the risk more widely across the market.
Seen one way, the official way, the plan was to save the countries from default and ruin. Of course the countries were considered to have defaulted and their credit rating suffered. Which does seem to me to take the shine off the official version. But no matter. Moving on. The un-official way of seeing The Brady Plan is that it was a way of preventing nations from defaulting and entering any sort of ‘Chapter 11’ restructuring and re-thinking of their borrowing and instead kept them firmly attached to their banks and their habit of debt dependency. Debt dependance is what was being saved along with the pushers who profited from the dependancy. The banks profited financially. The U.S. profited politically.
Of course both ways of seeing are there in the picture. Both have to have some basis in fact. I suggest my way is far more relevant than the usual story allows.
The point of this diversion is that this was the event which launched the modern market in the trade in sovereign debt which is such a boon to countries today. It was the birth of the era of sovereign debts as we now know them, the place where the old order and old power structure of nation states and their citizens confronts the new and rival power of the global Free-market and of nearly-but-not-quite stateless capital.
This was the arena where Mr Singer of Elliot Associates had his good idea – the idea that if he could somehow get rid of or find loopholes in the old law of Champerty, then he would be able to buy up debt when it was cheap – for a few cents on the dollar when a nation defaulted – but then sue that nation for the full 100 cents on the dollar. Elliot Associates are a law firm their expertese is in twisting the law to suit themselves. ie they are lawyers. Mine might be an unflatering description of what lawyers do for a living but I think it is nevertheless accurate.
Elliot set about challenging Champerty and to cut a long story short they succeeded. The key case for them was against Peru. Remember Champerty says it is illegal to buy a nation’s debt for the purpose of suing. Elliot’s argument, up-held in U.S court was that when they bought the debt (defaulted debt), their “intent” was simply “to be paid in full”, nothing more. There was no ‘intent’, no plan from the outset, to sue. This was depsite Elliot and the court accepting, as the court said in its ruling
“Elliott knew Peru would not, under the circumstances, pay in full.”
And yet the court accepted and agreed that Elliot hadn’t bought the debt with the express ‘intent’ of suing, only of somehow being paid in full. And they resorted to suing only when their original intent was thwarted. And that is how you get round Champerty.
That, to me, is a fine example of the law and lawyers at work. It has been described as ‘the narrow interpretation’ of the law of Champerty. I think that is the sort of narrow, like the eye of a needle, that a camel would not be able to pass through.
But just to be doubly sure Elliot and Mr Singer also lobbied the New York State Legislature , the government of New York State, to amend the laws of New York State to remove the defence of Champerty. Which they did. Suddenly there is no defence of Champerty in N.Y. state, which means there is no such defence in Manhattan or in its courts and the Southern District Court of Manhattan is Wall Street’s court where Elliot Associates are suing Argentina.
However, it is one thing to win it is another to enforce. Elliot had found the means of suing, but for enforcement they needed Pari Passu.
They have used it before and it is what Judge Griesa has used to clobber Argentina. It is simple really. Pari Passu says all creditors owed by Argentina must be treated equally. Argentina cannot chose to pay some and not others. It cannot play favourites. Which is lovely. To which Argentina replied – yes but what makes you think a US court in Manahattan has any jurisdiction over Argentina?
“To pay the vultures is not only unfair but illegal in terms of our internal rules,”
To which the Argentine President Cristina Fernandez added that her country would not pay
“one dollar to the vulture funds”
And now we come to the rub of Judge Griesa’s ruling. He has said the obligation to treat all creditors as equal – pari passu – applies not just to Argentina but also to any agents working for Argentina. By which he means the banks who handle Argentina’s money and make its payments.
When a nation pays its creditors, the creditors don’t call round to Buenos Aires with a suit case. They go to whichever global bank is Argentina’s paying agent. Argentina’s is Bank New York Mellon. BNY Mellon is perhaps the largest paying agent bank in the world. It handles trillions of dollars in payments.
Judge Griesa’s ruling says BNY Mellon must also treat all Argentina’s creditors equally or the bank will run foul of his ruling. In other words though the court cannot get at Argentina directly, it can enforce its ruling upon Argentina’s bank. The court ruling prevents the bank from paying those creditors that have settled with Argentina unless it also pays the vulture fund. And moreover the bank must pay the Vulture funds the whole amount. If they don’t then it is the bank which will find its assets seized and actions taken against it. Thus the bank will have to do nothing.
Is this Pari Passu? Well certainly not as it was originally intended. The judgement in fact jeopardizes anyone getting paid at all. If Argentina tries to pay anyone through BNY Mellon it must pay them all. If it doesn’t want to pay the vulture fund the full amount demanded by Mr Singer then BNY Mellon cannot pay anyone. If it does, obeying Argentina’s instructions over the ruling of the court, then BNY Mellon will suffer. So BNY Mellon will not release any of Argentina’s money to pay any creditors. In which case the ruling will force Argentina to default again. This will punish the other bond holders. Thus the judgement is not very Pari passu at all. In fact it is a ruling specifically favouring the rights and welfare of Elliot Associates OVER the rights and welfare of all other bond holders. Which is what their lawyers argued in court,
“It is far beyond the bounds of equity to seek to enforce the rights of one litigant by jeopardizing the rights of others,” lawyers representing a group of bondholders who participated in the exchange, led by Gramercy Funds Management LLC.
So although the Elliot case is often written of in terms of Argentina having to pay its debts, it is worth being clear that Judge Griesa’s judgement is not on behalf of the orignial bond holders. It is not seeking to redress any wrong done to them at all. In fact it is a judgement against them as much as it is againt the people of Argentina. This judgement is purely and soley for Elliot Associates, its owners and its wealthy investors. The ruling says Argentina MUST pay Elliot Associates what Elliot wants, which is FULL payment. It is a judgement which says it is an American court in Manhattan which decides who the people of Argentina must pay and how much not their own government. The judgement punishes everyone except Elliot. It is a judgement for their benefit only. And that, in my opinion, is the essence of what a Vulture fund is about.
Thus this is not about Pari Passu, nor the sanctity of contracts, it is about enriching Elliot Associates. The long term effect will be to make bond holders afraid to settle with a defaulter for fear that a vulture fund will come in later and force themselves to the front of the queue for payment. This judgement seeks to close down the world of compromise, of bankruptcy protection, of helping a bankrupt emerge as a going concern and force us all to live in a new, Vulture World.
I think Pari passu even if it is declared to work as a ‘narrow’ legal argument fails as a broader moral one. And moreover let’s go back for a moment to the idea that debt and its treatment is a social construction not a law of nature. Who does it really benefit to allow nations to be sued? The people? No. The other creditors? No. Is it even consistent to afford private debtors a form of ‘Chapter 11’ type bankruptcy protection and the chance to emerge as a ‘going’ concern but not to allow anything of the like for nations and their people? No. And does allowing nations to be sued by private entities, push us towards a world of mutual understanding and positive compromises? No. It pushes us towards the Vulture World at whose threshold we already stand.
We should not allow nations to be sued. Such a simple decision would rid the world of Vulture Funds and close at least this one path to the world of vulture morality. It would also restore the incentive for bankers to alloy their greed for profits with a need for prudence – in this one area at least.
And that is sub-level Three in which I hope to have offered some answers to how suing nations works, why it works, for whose benefit and to whose detriment. I hope I have also suggested how the narrow legal arguments sit inside a broader moral framework.
The next level down takes us further in to the necessary moral underpinning of how nations treat other nations and how they allow private companies to treat them. For it is my contention that legal arguments such as pari passu, treating people equally, while they can exist in isoaltion, and can be applied arbitrarily, only where it suits and not where it is inconvenient, will end up, in that case, being applied by sheer brute power, and will lose much if not all of their moral authority. They will quickly cease to have the sway of laws which are seen to be morally right, and become just the law that is there simply to enforce the wishes of the powerful. Or to put it another way, the law will become seen as not the guardian of the weak that speaks truth to power but the paid servant of power who says to it, ‘Yes lord, who shall I crush for you today’.
In sub level four we leave NY and its courts but bring in Ecuador and Big Oil to play along with Argentina.