Felix Salmon on Vulture Funds
Sunday, February 25, 2007 at 09:31PM Felix Salmon has a very interesting note up on his blog about vulture funds which engage in purchase of debt securities on which the issuer has defaulted. Why, on earth would you do that you ask? Well, go ahead and read Felix's note which provides a concise description of it. Now, of course the waters are bit more muddied than Felix merely describing what vulture funds are and do. In fact, Felix defends vulture funds and the function they perform in financial markets contrary to Greg Palast who over at his blog has been arguing against vulture funds recently.
So what are these vulture funds then?
So. What is a vulture fund? Here's Palast's definition (actually, I should be accurate here – the byline on the piece is actually Newsnight's Meirion Jones, who was the producer on Palast's report):
Vulture funds - as defined by the International Monetary Fund and Gordon Brown amongst others - are companies which buy up the debt of poor nations cheaply when it is about to be written off and then sue for the full value of the debt plus interest - which might be ten times what they paid for it.
I have not been following this debate so I won't take sides but merely say that Felix's note goes a long way to convince that something good can come of these funds or as they are aptly described 'depreesed debt collectors.' Especially, the point about how these funds can act as sort of hedge against buying risky government debt or crucially how vulture funds inderitctly allow less developed countries to raise capital to finance the running of a country. This does not mean that there cannot be a flipside to the story but these are points well made in my opinion.
CV
The discussion is rapidæy expanding over at Felix' blog. Among others, Brad Setser has stopped by and left a thoughtful comment which somewhat challenges Felix' defense of the vulture funds.
Here is an excerpt from Brad's comment ...
I think there is a meaningful difference between say your run of the mill hedge fund buying Argentina's old bonds off ill-advised Italian retail investors who stayed out of an exchange that would have (by now) returned them about 70 cents on the dollar (the par is above 50, close to 55, and the GDP warrant is now at 13, plus you got a bit of cash and a smallish coupon ... )in the hope Argentina will reopen the exchange and a litigation specialists. And there is a difference in my view -- between the role litigation specialists play when a sovereign basically walks away from its debt and the role litigation specialists play when there is a restructuring deal on the table and the litigation specialists walks away from a deal acceptable to a super-majority in the hopes of getting paid more. in the current legal regime, the legal claim from a sovereign that just decides it doesn't want to pay is identical to the legal claim from a sovereign that defaults and does a restructuring but there are a few holdouts who stay out of the deal.
Another comment (by Carlini Savini) also points to a general article on the mechanims by which vulture funds operate ...
Like vultures they swoop down onto weak prey and feed. Vulture funds have been receiving surprisingly little press attention despite the number of cases currently going through the US courts. Two weeks ago, on Friday February 16, 2007, a court in London ruled that an investment fund could claim upto $20 million on a debt which it bought for under $4 million.
Vulture funds, simliarly to the creatures they are named after, circle a debtor as they become increasingly weakened by debt then swoop in and buy their debt at a vastly reduced rate- then sue for the full amount plus interest. The history of vulture funds begins in 1996 when Paul Singer, a reclusive billionaire, paid $11 million for discounted Peruvian debt then threatened to bankrupt the country, unless paid $58 million. A Peru desperate to keep its reputation clean paid the $58 million. Now they're suing Congo Brazzaville for $400m for a debt they bought for $10m.
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