It focuses on the moral weakness of trumpeting the rule of law and how we treat people equally, but only doing so, only applying the laws and principles, selectively, to the cases where we expect to benefit and then suspending our interest in cases that might go against us.

Sub-level Four

One of the things Judge Griesa, in his ruling against Argentina, lamented was the way it had taken 10 years to finally force Argentina to pay up.

Oh, what it must be like to have the moral high ground.

Back in 1993  the indigenous people of Ecuador filed a lawsuit against the American oil company Conoco alleging that the company had polluted and despoiled their land and water. It was, in fact, the case that the area had been heavily polluted, especially the rivers. It was the case that in those areas Conoco had been a major and sometimes the only large industrial concern. It was also the case that the pollution that had occurred was typical of oil drilling and oil production activities. In 2001 Texaco who had bought Conoco admitted that its operations had dumped 16 billion gallons of the highly saline and toxic water, that is a by-product of drilling, in to the forest’s rivers.  When the oil company left the area, it left behind around 900 open and untreated  waste pits.

The case filed against Conoco alleged the company had knowingly used sub-standard equipment and practices, including waste treatments which the  company knew were so inadequate they would have been illegal in the USA.

For over 10 years Conoco denied guilt or liability and refused to pay recompense. When it was clear that a case would be filed against them Texaco/Conoco lobbied hard – spent hard cash – to make sure the case was NOT heard in an American court but in Ecuador. Cynics at the time suggested this was because the company had calculated that buying an Ecuadorean court and judge would be easier and cost less than buying the same back home. It is certain that a US court battle would have cost more than one in Ecuador.

But then the unthinkable happened. In 2011 the court in Ecuador found against Texaco/Conoco and ordered the company to pay $18.2 billion in costs and compensation. The company rejected the ruling and appealed. The Appeal Court rejected the appeal and upheld the original ruling finding against the company again.

Texaco/Conoco’s response  was to refuse to pay and instead to declare,

“The Ecuador judgment is a product of bribery, fraud, and it is illegitimate … We do not believe that the Ecuador judgment is enforceable in any court that observes the rule of law,”

If Texaco/Conoco had lost in an American court would they have been so quick to assume and declare, they could ONLY have lost because the court must have been bribed and the process corrupt? It seems to me this is rather blatant racism. If the white man loses in a brown people’s court then..well… you know those brown people , corrupt and on the take. Unlike Western Oil companies obviously.

Now where has been the moral indignation over Conoco refusing to obey a court decision?  In the financial and even popular press Argentina is cast as morally in the wrong for refusing to obey a lawful ruling, but in those same papers I have read hardly a word about Conoco.  Is this Pari Passu?

Well in one rather fun aspect it is. The problem for the Vulture Fund was finding a way to enforce its home court ruling. It was the same problem for Ecuador. When Conoco left Ecuador it made sure it left no valuables, no assets behind. Nothing for Ecuador to seize.

The break through for Elliot Associates in getting its money was to find a way to tap in to Argentina’s assets as it tried to use them to pay the bond holders it had settled with. The trick was to find that those assets would be passing through a NY bank and get at the bank.  So in a delicious parallel Ecuador has found a way of getting at an oil company which is richer than it is. And it has done it with Argentina’s help. As reported in CorpWatch

Adrian Elcuj Miranda, a judge in Buenos Aires, has ordered the seizure of Chevron’s assets in Argentina, to force the company to pay a $19 billion penalty for polluting the Amazon in Ecuador.

You’ll note the ruling is against Chevron. Chevron bought Texaco/Conoco a while back. Chevron is now the second largest U.S. oil company after Exxon. The report goes on,

If Elcuj’s ruling is enforced, Chevron may forfeit as much as $2 billion in Argentine assets and also lose roughly $600 million a year in revenue from ongoing operations in that country, according to estimates by the plaintiffs.

Why Argentina is doing this may not be entirely simple or altruistic. But it does at least have a certain Pari Passu about it, does it not?

As one of the plaintiffs said,

“We have fought now for almost two decades to correct the injustice created by Chevron in Ecuador,” commented Pablo Fajardo Mendoza, the lead lawyer in the lawsuit, who grew up in the oilfields polluted by Texaco. “While Chevron might think it can ignore court orders in Ecuador, it will be impossible for Chevron to ignore court orders in countries where it maintains substantial assets.”

It seems to me the parallels could hardly be clearer, with two exceptions. Elliot’s case against Argentina is for the benefit of a Vulture fund only and to the detriment of a nation AND the rest of its creditors. Ecuador’s case and its Argentine extension is for the benefit of a nation and its people, and to the detriment of a polluting global corporation. And while Argentina’s original default is unfortunate, it is accepted  that default can and does happen in the normal course of business. Massive despoliation and pollution, on the other hand, is NOT an accepted facet of doing business.

If we in the affluent countries of the North wish to lecture others on moral probity and the rule of law and rub terms like Pari Passu in their faces then perhaps it might be a good idea for us to actually live up to what we preach? The trumpeting of Pari Passu rings rather hollow to me when it is only applied very selectively.

Striking back from the bottom up

For those feeling this has degenerated in to an anti American rant please bear with me. The American government – some parts of it at least – argued against Elliot’s Vulture tactics. The American courts have also not been terribly friendly towards Chevron/Conoco/Texaco’s sudden enthusiasm for a new trial in the USA after they lobbied so hard to avoid a US trial in the first place.

My argument is not with ‘America’ as if it were one single entity. My argument is with American corporate power and how it uses the courts, and fears little or no criticism from the press. Which by now is largely corporate owned or advertising dependent anyway.

If you remember I wrote a couple of articles called The Eurofiscal Corruption contest. Consider this an honourary US entry.

When BP polluted the Gulf Coast of The USA there was widespread outrage at BP’s corporate arrogance and guilt. And quite right too. BP deserved everything thrown at it and more. But where was the outrage and press campaign over Conoco? Or for that matter over Union Carbide in Bhopal. Thousands died in Bhopal and the US response, governmental as well as corporate, was to fly the Union Carbide chief out of the country and stonewall all enquiries.

Now however US corporate power, led by financial power, is bringing those habits back home. The rule of law? What happened to the robo-signing fraud?  Swept aside or talked till it died. What happened to all those threatened court actions from all those State Attorney Generals? Not a lot.  What happened to the cases brought against Citi, or Goldman or JPMorgan or Wachovia or even HSBC?  Mostly token fines and no-admission-of-guilt settlements.

For decades too many citizens of the United States and Europe have turned a deaf ear to injustices as long as they happened to someone else and might have benefited ‘our’ interests. But those ‘interests’ have become used to being above the law and are importing their habits back home. Now it will be the American and European people who find it is one rule for the global companies and banks, and another for ordinary citizens.

I think perhaps Americans and the rest of us should look to Argentina for both a warning of what could happen to us – I think this is particularly true for countries like Greece who are on the cusp of the same exact path, but also for inspiration of how nations and their people can strike back.

What I like about the Argentine ruling to sequester Chevron/Conoco assets and profits is that it points how global companies, even banks have assets and assets can be seized. Argentina has been using the idea quite a lot.

Only a few weeks ago the Argentine government nationalized the formerly national oil company, YPF, which was sold off in the era when Argentina was being looted by its creditors. The oil company  ended up owned by Spain’s Repsol oil company. Spain is now furious.

The chairman of Spain’s Repsol told a Spanish newspaper he still hoped for an agreement with Argentina,

“to compensate us for that which belonged to us.”

“That which  belonged to us”? You could not make this stuff up. Irony? Whatever the intricacies of the legal arguments about nationalization I surely can’t be the only one to find a wonderful, poetic justice in hearing Spain cry about how someone stole treasure FROM them in S. America. That’s not a crime that’s Karma for all those tons of stolen gold and silver.

Argentina is showing that what companies can do, so can nations. They use the courts to sequester assets. So can we.

Of course you could ask will fighting back, as Argentina is doing, work? Won’t such action backfire on Argentina? Won’t companies and nations simply refuse to deal with a nation that plays that way? Well actually not at all.  Argentina has shown that if a U.S. court tries to sequester its assets and force bankruptcy then Argentina can strike back and seize the assets of a U.S. company. I suggest this was more Argentina’s motive than solidarity with Ecuador. But they have said, as reported in this informative FT article that the hold on Chevron’s assets will stay till the company pays what it owes to Ecuador.

But having sequestered $2 billion’s worth of assets belonging to Chevron and its subsidiaries what has happened to relations with Big Oil? Actually they have never been better. How can that possibly be? Simple, when Argentina nationalized YPF they did so knowing the company was sitting on,

approximately 774 trillion cubic feet of shale gas in the Vaca Muerta basin…

This is a large and potentially very lucrative asset. Enough to revolutionize Argentina’s fortunes. What has Big Oil done in response? It has formed an orderly line at their door asking if they can be partners. Waiting politely in line are …Chevron, Exxon and Apache. In fact Chevron has already signed a memorandum of understanding with YPF!  Presumably ‘understanding’ that Argentina may have sequestered their assets but doing more business is better than doing none.

So Argentina nationalizes YPF, sequesters $2 billion of Chevron’s assets saying they will NOT be released until Chevron pays the $18 billion it owes Ecuador and STILL everyone wants to do business with Argentina. Where is the – ‘You can’t mess with the bond holders – you can’t default, the sky will fall in’ scenario in all this? Other countires should pay attention and learn from what Argentina is doing. Greece should NOT sell its assets. Greece should grow some balls, organize its own ‘chapter 11’ default and bankruptcy protection and then sequester whatever it bloody well takes. Instead of cringing in the gutter like Germany’s whipped dog.

Companies and banks can flit from one jurisdiction to another so can nations. If a court in Manhattan rules to enforce upon a NY bank then move banks. Use banks in Luxembourg or Hong Kong to simply move the money where it cannot be touched. Who says Argentina even needs to tell the USA or anyone else who their agent bank is? Insert a confidentiality clause binding upon the bank and the bond holders that no one can reveal where  the funds are being paid.  Why should we pay fines to companies when they won’t pay taxes to us?

It seems corporations expect nations and their tax payers to pay them but refuse to pay when it is their turn.  We bail them, they screw us. We should pay fines when we owe them but they walk away from their guilt? And they have to cheek to invoke Pari passu? I don’t think so.

Banks and private capital want bankruptcy protection and confidentiality for them but not for us. I say Pari bloody Passu to that.

If people, ordinary people in every country, rich and poor, creditor and debtor, core and periphery alike do not wake up to the way private capital is trying to shift power from us and our vaguely democratic institutions to their entirely undemocratic institutions then we will all be the losers in the end. They will come for the rights and freedoms of the Argentinians and the Greeks first but they will come for yours eventually. Don’t kid yourself otherwise.

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?

Pari Passu

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.

Champerty is –

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 .

But then,

 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?

As the Economy Minister, Hernan Lorenzin put it,

“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.

Argentina told to pay hedge funds $1.3bn

Was the headline in the FT on Thursday 22nd November 2012.

The judge who made the ruling, Thomas Griesa, said “After 10 years of litigation this is a just result.”

I’m not so sure. In my opinion the headline and the ruling it reports are just the tip of a shit-berg. Like all bergs the fatal mistake is to think the bit you can see above the water is all there is. In my opinion if you look beneath the surface, almost everything which this article and the case it reports on claim to show, is turned on its head.

The visible tip

Argentina borrowed money, got in to trouble and defaulted on its creditors. What could be simpler? That was back in 2001. Since then the bond holders, or some of them at least, have pursued Argentina through their home courts in America and a judge sitting in Manhattan’s Southern District Court  has finally ruled in their favour. Justice at last for the bond holders. The rule of law, majestic, like a shining island of ice.

Now lets take a peek beneath the waterline.

Sub-level One – Vulture Funds

The Bond holders described rather coyly in the article as an ‘Hedge Fund’are not just any old hedge fund and are not in fact one of the original bond holders who lent the money to Argentina in the first place. The hedge fund in question is what is commonly known as a vulture fund. Vulture funds like most parasites have a very specific niche. Vulture funds go around buying up what is often called distressed debt. Which in their case means bonds which have been or are thought very likely to be defaulted on. Why would they do such a thing? Well the original bond holders, faced with default, will either settle with the defaulter to get back some portion of what they lent – in this case they settled with Argentina for 30 cents on the dollar  – or if a circling vulture fund settles next to them they may sell to them instead. The Vulture funds will say – ‘You never know how much Argentina will offer you but we will offer this much to you  right now’. The original bond holders generally want as clean an out as they can. They will have lost money but that is the the nature of lending it is it not? You win some you lose others. Exactly like lending on a mortgage or buying stocks and shares – the value of your investment can go down as well as up. You pays your money in the hopes of a reward and accept that there is an accompanying risk.

I do not mean to make light of bond holders losing their money, nor imply that a country defaulting is a mere bagatelle. I want only  to remind that lending is always a risk – an accepted and normal risk – which is part of what the interest on a loan is for. Potential default is part of the risk that is priced in to the bonds as we hear every day when we are told of a county’s borrowing costs going up.

So back to the vulture fund. In this case called Elliot Associates. To be more precise, for the happiness of the corporate PR men reading, the  case concerns NML Capital ( A Cayman Island registered fund) which is part of Elliot Capital Management which is part of Elliot Associates. Elliot Associates and its subsidiaries together make up one of, if not the, biggest vulture fund. It is certainly the most aggressive. It is based in New York and its founder and CEO is Mr Paul Singer. I do not know Mr Singer. He may be a wonderful person. But it is my opinion, that if there is something more repulsive than a scaly necked corpse-eater spattered with the gore of some unfortunate beast – if there is something more repulsive – it is what Mr Singer’s business does. Vulture funds Buy to Sue. They feed upon misery for their profit.

Vulture funds do not buy bonds as a form of lending. They do not lend. They are not there to help. They wait until a country is on its knees,  buy its bonds while they are cheap and then use the law to insist, that in its moment of pain and misery, the government, instead of using whatever it has left to get its house in order and help its citizens, must instead pay the Vulture fund, its owners and its investors.

Now supporters will say – but it is the law. The country owes and must pay. What then is the difference between this icy attitude and the cold heartlessness which put families out in to the cold and children to the Workhouse? Debtors prisons and work-house morality. The morality of fat men and their lawyers lecturing the poor and the huddled who owe them money.

Histrionic nonsense! What about the rule of law?  We are not cruel men nor heartless, but we  insist the law be observed. Yes indeed.  The law. Before which all men, all nations must be equal. Is that it?  Yes! Yes!  And what of probity and taking responsibility for ones mistakes and paying for them?

Sub Level Two – How Argentina came to default

Every level is larger than the one above it. It is 1976. Isabel Perón is gone, the military dictatorship led by General Jorge Rafael Videla, Admiral Emilio Eduardo Massera and Brigadier-General Orlando Ramón Agosti now rule.  (All the following quotes are from a very good piece from the Argentina Independent which was founded and is staffed by British journalists. You can read about it here)

On 2nd April 1976, just over a week after the military coup, newly appointed economy minister José Martínez de Hoz, launched a deep restructuring of the economy, based on the principles of neo-liberalism. In his landmark speech that day, he announced a fundamental move “from stifling state intervention to make way for the liberalisation of productive forces.”

In a short space of time, wages were frozen and new labour laws (in favour of companies) were introduced, the banking sector was deregulated, and obstacles to international trade and investment flows were eliminated.

The Neo-liberal experiment had begun. For those close to the military junta, for the corporations and the already wealthy it was the time of what became called plata dulce (Sweet money). The deregulated banks opened up to cheap money and international funding. Sound familiar? But not all boats were lifted.

Just one year into the dictatorship, acclaimed writer and journalist Rodolfo Walsh wrote in his famous open letter to the military junta: “the economic policy of this government, rather than a justification for its crimes, is a greater atrocity that punishes millions of human lives with its planned misery.”

While the few prospered, real wages for the many were crushed by 40%. Child mortality and poverty rose.  Did it stop the ideologues of the free market? Of course not. Mammon is Great! Mammon the all merciful. When did fundamentalists ever pay attention to the real world sufferings of those they disdain? Turban or T-bill, fundamentalists are always certain. Certain that they deserve all they have and so do you.

Like virtually all those free-marketeers who came after them in Washington and in every nation where they were installed they talked about shrinking the state but didn’t. The Generals spent. Their bankers approved. In 1976 before the military and their neo-liberal experts took over, Argentina’s external debt was $8 billion. After 7 years of their financial prudence and free-market can-do the debt was $43 billion. And not a socialist to  in sight to blame it upon.

Not that it dented the zeal of those latter-day crusaders for Mammon and money – the IMF. With Argentina now in serious debt and poverty and inequality rising it was time for the IMF to insist on its special medicine – of more ‘market liberalization’ and more austerity to pay for it. Naomi Klein has written brilliantly about the wider, shameful and wicked experiment in her book The Shock Doctrine.

By 1991 the free-marketeers had been forced to dispense with their dictator. But all was not lost. Argentina’s debt had swollen like a boil to $61 billion which was earning $ 3 billion a year in interest for those who had advised them and lent to them.  And better yet. this time the Argentine people voted the right way, and when Domingo Cavallo was appointed minister of Finance he embraced the free-market, neo-liberal ‘Washington concensus’ with all his stony heart. He was after all a former World Bank President. He was one of us. Not one of those left leaning radicals.  No need for regime change in Argentina. Not this time. That would come later, in another country that had something Washington and the West wanted.

Cavallo embarked on more liberlization, more deregulation and more privatizations. The result was economic contraction. The IMF and the bankers offered more loans and ‘helped’ with more selling of state assets. Argentina sold off one of its crown jewels, its oil company, YPF (remember the name)  at prices critics cried were corruptly low and seemed bidderless, gifts to the powerful and connected. But it was a ‘concensus’ right? It was the 90’s when ‘the smartest men in the room’ were just rolling up their power-dressing sleeves and inventing all the insanely wonderfulf financial things that we have learned about since 2008.

By 1996 Argentina’s debt had now nearly doubled to $110 billion. Cavallo resigned amidst widespread claims of corruption throughout President Menem’s government. But Menem held on for three more years in which another $35 Billion debt was added. No one was to worry though. The IMF had a plan and as long as Argentina continued to follow it, the IMF would smile upon her leaders as would the banks who were getting so very rich from all the interest.

1999 Menem fell.  Fernando De la Rúa took over. But the real power, behind the presidential throne did not blink or close its eyes. Not for a second. Greed and evil don’t sleep. After nearly three decades of neo-liberal policies, away from the golden lives of the urban elite, of Polo matches and private banking, there was no better future coming for the mass of Argentinians, there was recession. But Argentina had become used to turning whatever trick her pimps told her to. So when the IMF said the answer was another loan the new President, much like the old one, got to his knees to give special thanks.

In December 2000 he wiped his mouth clean and addressed the nation.

“[the IMF credit line] is a guaranteed fund so large [$40 billion] that it clears any doubts or threats over Argentina’s future…Argentina has no more risk,

And now it is Greece which will have ‘no more risk’ just like Ireland or Portugal, as long as she can have a big enough hit of that crystalmeth bail out goodness. Now it is Greece that must do what it is told for another tranch of funding Just one more bail out and one more round of austerity to pay for it and Greece, like Aregentina who blazed down this the path before it, will be fine.

‘Greece will not need another bail out’. Of course not. ‘Spain isn’t Greece’. And Spain’s banks are secure and funded and their debts are under control. And Italy isn’t Spain and France isn’t Spain and no one wants to be reminded of Argentina. After all that was then and this is now and now is different. Isn’t it?

Argentina is safe and transparent, and can now grow in peace…2001 will be a big year for Argentina”.

And it was. Argentina continued to follown the IMF dictats of government spending cut backs and austerity. But the country’s economic decline and contraction accelerated. De la Rúa lost control.

Cavallo was brought back, this time with extraordinary powers to force through whatever the IMF said.

A patchwork collection of new taxes, spending caps, debt swaps, and cutbacks (including a 13% in pensions and some social payments) only deepened the country’s social problems and turned more people against the De la Rúa government.

September 2001 another $8 billion loan brought Argentina’s debt to somewhere around $193 billion. And then on December 5th 2001 the music stopped. The IMF felt it had done enough to help the ungrateful and said ‘no’. Argentina defaulted. And the bond holders were, as they are now, outraged.

The echoes of history are, to me, chilling. And I wonder can we really be the only ones who hear them? I cannot believe that those echoes do not whisper through the marbled walls of the Central banks and along the carpeted corridors of the IMF. And yet the lunacy and greed roles on from country to country, from people to people. Always the same true believers burning our hopes, blighting our lives, before they walk away, with a shake of their perfectly tanned heads, to their private jets to return to the place where there is no want and despair does not go.

This is the story of Argentina’s default, so crisply summarized by Judge Griesa in his judgement, when he wrote that, “at long last…Argentina must pay the debts which it owes.”

Sorry to break here, given that most of this has been background, but I have been working more slowly than I had hoped I would.  Part two, in which I hope to get to my conclusions, begins –

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.

Europe and in particular the Germans have painted themselves into a Teutonic corner. It will make no more nor less sense for Germany to blink in two or three weeks time than now. Of course as the reality nears, of their own banks and those in France having to come clean before their own populace about the bad loans they made to Greece, they may lose their nerve. I strongly recommend Mr Tsipras reiterate his determination to set up a Debt Commission. The prospect of Europe’s and America’s banks having all their grubby and quite possibly fraudulent dealings with Greece’s oligarch families when they were in government, paraded in public will leave many powerful people wondering if  an unfortunate helicopter accident couldn’t be arranged by some friendly…. no, no no. What am I saying! Or perhaps a fire inside a sealed room? Only joking.

So who?

I think it would make perfect political sense for Russia, China, India and Iran as a loose group to offer to help Greece in its hour of need. Why them?  Well they have already formed a loose, though not so very loose, group who will accept each other’s currencies in international deals, who already use the Yuan as a Settlement Currency (a currency considered safe and stable enough for major deals, like oil and gas, to be conducted in it) and have been accumulating gold so that they could, in the event of a major currency incident, mention that their currency has large gold reserves behind it.

Russia or China as the lead country, could tell the Greeks that whatever their new currency might be, it could become part of a rival currency group. The Euro nations are, I think, assuming Greece will run its currency in parallel with the Euro perhaps still using the euro for all its international dealings.

The Russia/China group would score a major coup if Greece even appeared to consider such an offer. For them to be able to reach inside the EU’s back garden and offer the hand of help to Greece and the Greek people, when Greece’s neighbors ‘refused’ would be a major psychological and diplomatic event.

The offer would not entail China taking on any of Greece’s debts. It would leave them untouched as business between Greece and its ‘old’ friends. So the offer would cost China et all nothing.

I think Greece could potentially get a lot from such an offer. They, if they were bold, would serve notice to Europe that they were not Europe’s cur. They would not be tied to the Euro as its poorest and most powerless relation. Instead they would be poor but not powerless. They would have new diplomatic friends. Instead of being ‘outside’ the Euro they’d be inside something else.

Would this alienate them from Europe? No I don’t think it would. No more than they will be anyway. Diplomatically it could actually cast Europe and Germany in particular as the ‘false friends’ in contrast to Greece’s ‘new friends’.

Greece would also be wise, in my opinion, to make sure their new friends offered them the chance to not only use the yuan as its Settlement Currency, but also allow it to use Hong Kong to do all its sovereign business. This would be very attractive to the Chinese as I think they would like to see Hong Kong start to rival NY as the centre for sovereign settlement.  HSBC would be the obvious bank to handle it. But one of the large Swiss banks could also. In partnership with a mainland bank of course.

One massive advantage this would give the Greeks is the ability to thwart the Vulture funds who operate in the Southern District Court in Manhattan.  The vulture funds use that court as their private bully pit for suing nations.  If Greece could do its business in Hong Kong instead, the vulture funds and even vulture nations would be.. to use the technical term, stuffed.

I realize this is scurrilous fantasy but it has, I think, enough of a ring of plausibility about it that I wonder if both sides, Greece and China/Russia/Iran/India haven’t wondered themselves.

Both sides could potentially gain major advantages.  The debt commission would still run, the fraudulent debts  would still be defaulted, the banks would still run crying to their countries to force the tax -payers to bail them out AGAIN – nothing there would be changed, but politically it would be a whole new world.

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.