Down by Law: Vulture Funds Feeding on the Dispossessed
Share
Written by Chris Floyd   
Friday, 18 November 2011 11:13

I am glad to see the renewal of interest in "vulture funds," where predatory elites buy up bits of the debt of impoverished nations from various creditors – at pennies on the dollar – then use the courts of the 'developed,' 'civilised' world to force the debtor to cough up the full amount, plus punitive interest payments. The Guardian is running a series of articles on this heinous practice (here, here, here, here, here, here and here), and CounterPunch has a good piece as well.

I wrote about vulture funds back in 2007. This was one of the many posts which were destroyed in the many hack attacks on the website. So I'm taking the opportunity to re-post it full here, as background to the new push to combat these avid feasters on human misery.


Down By Law: Vulture Funds Feeding on the Dispossessed

(March 2007)

I. The Lessons of Civilization

Every day, millions of people around the world are taught hard truths about how the instruments of "civilization" are used to help the powerful at the expense of the deprived. They see the brutal hypocrisy behind the soaring rhetoric of noblesse oblige that issues from the citadels of wealth and privilege. They see, and learn, that raw self-interest is the true coin of the global realm; they see it in the ruins of their own lives and in the blighted futures of their children. Is it any wonder, then, that many of them come to reject the putative offerings of civilization and embrace extremist or nihilistic or "asymmetrical" responses to their distress?

Every instance of systemic or institutional injustice contributes to the growing instability of the world community, to the violence and corruption and despair that howl outside the shrinking "Green Zones" of prosperity and security in the developed nations. This holds true at every level, from the vast and glaring crime of aggressive war, as in Iraq, to obscure rulings on arcane points of international finance – as in a London courtroom last month, when the British High Court upheld the right of a well-connected financial predator to feast on one of the world's poorest nations.

The case involved the little-known but highly lucrative world of "vulture funds" – or as its practitioners prefer to call it, the "secondary market in sovereign debt." It works like this: private investors buy up bits of the debt of impoverished nations from various creditors – at pennies on the dollar – then go to court to force the debtor to cough up the full amount, plus punitive interest payments. In the London case, a New York vulture named Michael Sheehan and his off-shore, UK-registered front company, Donegal International, were trying to turn a $.3.3 million debt purchase into a $55 million profit bonanza squeezed out of the Zambian people, some of the poorest on earth. Donegal won the case, even though Justice Andrew Smith ruled that Sheehan and one of his associates "were at times being deliberately evasive and even dishonest" in their testimony, as the Financial Times reports.

The amount Donegal is asking for would effectively wipe out the debt relief Zambia would have received this year from the deal signed at the famous "Live 8" summit in Scotland in 2005, when the G-8 nations agreed – amidst much harrumphing self-congratulation – to a large-scale debt relief and restructuring program for poorer countries. Zambia had earmarked the relief money for health programs and education, in a country where the life expectancy is 37, more than half a million children have been orphaned, and 1 in 5 adults have HIV, as Oxfam reports.

Justice Smith indicated that it is unlikely he will grant the company the full whack of $55 million when he makes his final ruling later this month; indeed, Smith made clear his distaste for the enterprise, but said current law compelled a ruling on behalf of the vultures. Even so, Sheehan and the boys will still walk away with a hefty profit – and many Zambians will die of disease or sink further into poverty and ignorance as a result. Meanwhile, some of Zambia's assets have been frozen until the final amount is set and the payoff to Donegal discharged, causing further financial distress to the poverty-wracked country, which is trying to emerge from the shadow of the corrupt and undemocratic regime that took on many of the onerous debts.

Although there are some novel elements to the Donegal-Zambia case, in many respects it is a typical example of how vulture funds use legal back alleys to profit from human misery. Donegal – a British Virgin Islands incorporation of Sheehan's U.S.-based firm, Debt Advisory International – uses all the tricks of the trade, including highly-placed political influence. For years, DAI paid huge fees to the lobbying firm of Jack Abramoff – the convicted wheeler-dealer at the center of the Republican Party's fund-raising (and fund-shuffling) apparatus, a man who had direct entrée to the White House before his current turn in prison stripes took him out of Beltway circulation.

And Donegal, like all vulture funds, preys on poor nations that are undergoing restructuring or forgiveness of debt. They pluck off small chunks of outstanding debt here and there – the Zambia case stemmed from Donegal's purchase of a 1979 loan from then-Communist Romania to Zambia to buy tractors – then, through the vagaries of financial law, they can hold up major debt relief until they reap vast profits from their miniscule share. Debtor nations are thus blackmailed into settling with the vultures in order to clear the way for large-scale initiatives like the G8 measures to take effect.

But Donegal's squeeze play on Zambia is actually rather mild compared to the operations of one of the giants in the field, a pioneer in global vulturing: Elliott Associates L.P., a New York-based hedge fund established by Paul Singer. In addition to managing $6 billion in assets for Elliott, Singer doubles as a major moneybags for the Republican Party. As Greg Palast reported last month on BBC's Newsnight, Singer has been George W. Bush's biggest donor in New York City – no mean feat among the Wall Street kingpins of whom Bush said in 2000: "Some people call you the elites; I call you my base." Singer has given Bush and the Republicans more than $1.7 million since that disputed 2000 race – and is now a top fundraiser for GOP presidential candidate Rudy Giuliani, promising to raise $15 million to put all of America on "Giuliani Time," as Palast reports.

Currently, Singer is hoping to litigate a $10 million purchase of Congo-Brazzaville debt into a $400 million payday – a magnificent profit to be wrung from the populace of yet another of the poorest nations on earth. And this latter point – the real targets of vulture funds – should be kept in mind For although it's true that the debts of these distressed nations are often run up by corrupt regimes – often in collusion with the lofty financial institutions of the civilized world, or with governments of the "developed" nations seeking political advantages for themselves or financial gain for their cronies – it is the ordinary people who pay the price when these bad debts come due.

But it was Singer's assault on Peru in 2000, with its hardball tactics of legally sanctioned extortion, that has proven to be the classic of the genre, clearing the path for a flock of vultures to swoop down from the financial heights and feed on the carcasses of ruined economies.

Singer put a new twist on an old piece of legal boilerplate – the "pari passu" clause – that had been part of debt instruments for more than a century, as Charles D. Schmerler notes in the New York Law Journal. The clause essentially means that all creditors of the debtor nation must be treated equally. When Peru, which had been devastated by the financial crises that shook global markets in the 1990s, struck a deal with governmental and private creditors that would allow it to manage some $3.7 billion in reduced debts, Singer – who had bought $20 million of Peruvian debt for $11 million on the secondary markets – refused to go along. Under pari passu, Singer said, it didn't matter that the other creditors were willing to restructure Peru's debt; he was their equal (despite the minor chunk he owned), and so his needs must also be met. After losing one round, he found friendly courts in America and Belgium that agreed and declared that Peru's debt relief program could not go through until Singer was paid – not just the $20 million he had purchased at knock-down prices, but an extra $38 million in capitalized interest as well. What's more, Peru's assets were frozen until the vulture got his feed. The country was unable to pay its other creditors under the $3.7 billion restructuring, and was thus in danger of defaulting on the new deal, which would have had catastrophic effects.

Peru fought the case but could make no headway against the multibillion-dollar deep pockets of Elliott Associates. Finally, just before defaulting, it bowed to main force and paid Singer the full $58 million. (The strongarm boodle arrived in Singer's coffers on October 7, 2000 – just in time for the home stretch of Bush's presidential run and the successful machinations that followed his second-place finish.) What's more, as Schmerler notes, the Elliott rulings have destabilized the entire structure of international debt relief, giving vultures a new weapon to hijack major restructuring programs and shake down cash-strapped debtors.

II. Broken Mercy

But let's be clear about one thing. What the vultures are doing is legal. They are building on two decades of precedents in which Western courts have "all but abandoned the protections against liability previously afforded sovereign (nations)," as Schmerler writes. "The debate now centers firmly on issues of enforcement."

And here we see financial law echoing long-running trends in foreign policy and domestic governance: first, the steady erosion of the idea of national sovereignty in the face of bristling official doctrines of military "pre-emption," then the equally relentless encroachment on individual liberties – personal sovereignty – in the Anglo-American "homelands." In these areas too, the debate centers firmly on "enforcement": What country do we strike next? Which freedom should we curtail now? Are there any limits to the powers of the "unitary executive" to spy and torture and jail indefinitely as he sees fit? The rise of the vultures is of a piece with this growing institutional bias toward authoritarianism and punishment. The quality of mercy is increasingly strained, often to the breaking point.

Taking advantage of this draconian zeitgeist, the vultures operate profitably in the moral murk that shrouds the system of international debt. As noted, the debts accrued by poor nations are often the result of foolish or venal choices by despots (and a willing lack of due diligence by lenders). But it is hard to prove that a given debt is, technically, an "odious debt" – financial obligations "knowingly contracted without the consent of a population and without benefit to it," as New York attorney Jeff King told me. Odious debts are more narrowly defined than vulture funds. But with the standard practice of "developed" governments pushing arms deals and cozy arrangements for cronies on corrupt or unstable Third World regimes, the line marking off "odious debt" is vague indeed.

"Vulture funds may be morally odious, but the debts they enforce are not necessarily odious debts," said King, a research fellow at the Center for International Sustainable Development Law. "For example, the original debts in the Donegal case were meant for the purchase of agricultural machinery from Romania for the use of Zambia, a seeming benefit. Zambia later defaulted on that debt, and Romania sold it to Donegal."

Ironically, Donegal stepped in to buy the debt just before Zambia itself was about to redeem it. The original 1979 debt had a face value of $15 million; Romania had agreed to accept $3 million for it in 1999. Then Donegal intervened, offering approximately $3.3 million for the debt. In last week's court hearing, Zambia – whose case, in a further irony, was argued by Tony Blair's older brother, William – charged that "Donegal's local agent had bribed civil servants to pass the debt to Donegal rather than allowing Zambia to pay it off at a heavily discounted rate to Romania," the FT reports. But the court ultimately rejected the bribery charges.

"Thus the debt generated legally by Donegal was itself not necessarily odious in the technical sense," King said. "The moral outrage generated by this case is that Donegal seeks to realize an enormous profit at the expense of Zambia's desperate population."

That indeed is the crux of the matter: the disparity between the legality of vulture funds and the immorality of their pernicious effects on the world's most vulnerable people. It is this brutal disparity that teaches the dispossessed of the world the true meaning of the fine words that flow from the mouths of the powerful. "Blowback" doesn't always come from the launching of reckless wars or other high-profile depredations; it can also come from the sight of one's child dying of a preventable disease, while the guardians of civilization reward predators armed with the rule of law.

blog comments powered by Disqus