Can you make an ethical case for vulture funds?
Yes, say the investors who buy up the debt of the world's poorest countries. Jim Armitage examines their argument
Jim Armitage is the City editor of The Independent and London Evening Standard group of newspapers. He has been a reporter and editor for more than 20 years and was recently shortlisted for the Press Gazette financial journalist of the year and The Society of Editors financial journalist of the year awards. He contributes news, investigative reports and comment to the Independent titles plus a daily column in the Evening Standard.
Wednesday 25 June 2014
So, Paul Singer, king of the "vulture capitalists" targeting Argentina and its president, Cristina Fernandez de Kirchner, is one of the prime movers in American gay rights. Who would have thought it?
The man who owes many of his billions of dollars to the ruthless pursuit of getting paid in full for the debts of crippled countries and companies, who leads the charge of wealthy tycoons funding the Republican right and chairs one of the most powerful right-wing think tanks in the US, does indeed have a liberal – he would no doubt say "libertarian" – side to him.
While it took his son's coming out to make him see the light, Mr Singer has been a key funder of the gay-marriage lobby in the US.
His money, and his corralling of other big donors to the cause, was seen as a key reason New York state's gay-marriage lobby came back from the brink of failure three years ago to swing enough votes to bring in equal-rights legislation.
He's talked about the issue on many a global platform too, and applauded Ted Olson, the super lawyer who successfully helped defeat California's anti-gay marriage law in the Supreme Court.
Mr Olson's skills went down so well with Mr Singer that he is representing the vulture funder's NML subsidiary in its epic fight against the government of Argentina, demanding – with growing success – to get paid in full for the bonds it bought for a pittance after the country defaulted in 2001.
Critics see him, and his protégé at Aurelius Capital Management, Mark "The Terminator" Brodsky, as devils incarnate: immoral creatures seeking to profit from the distress of some of the world's poorest countries. The former Prime Minister, Gordon Brown, once called their tactics "morally outrageous".
But Messrs Singer, Brodsky and co. say that they behave entirely morally.
They are, they claim, merely enforcing the rule of law. Parking the fact that the tactics are more Judge Dredd than Judge Judy, their arguments deserve a hearing against the backdrop of the well-PRd attacks from debt-forgiveness NGOs – even if you disregard them post-haste.
The vultures argue that, were it not for the threat of relentless and unflinching court room battles, tinpot dictators, kleptocrats and plain old irresponsible populist leaders have nothing to prevent them racking up huge debts, wasting (or stealing) the money, and then disappearing off into the distance.
That is the point the vultures are making now about Argentina, just as they did more than a decade ago when funds including a subsidiary of Singer's prosecuted through the courts the people of Congo-Brazzaville.
Mr Singer's Kensington International division bought $30m (£18m) of Congolese sovereign debt in the 1990s allegedly for less than $20m then spent years attempting to get it paid back in full, pursuing through the courts state-owned companies of the Republic of the Congo and their investors. Subsequently, Kensington was awarded $100m in the UK High Court.
Peter Grossman, who led another hedge fund that bought into the debt of the neighbouring Democratic Republic of Congo (DRC), made a clear argument about the good funds like his were doing, declaring in 2011 that he "wasn't beating up on the Congo but collecting on a legitimate debt".
He argued that his strategy was about emphasising good governance and transparency by state officials, uncovering corruption and demanding accountability. Particularly in countries like the DRC, rich in minerals.
Responding to fierce criticism in a BBC documentary, he claimed: "Should governments choose to properly manage these resources, it will mean considerably more money for education, health care and development programmes, and for resolving their legal obligations fairly, responsibly and transparently."
He highlighted his firm's "groundbreaking anti-corruption work", claiming its investigations have uncovered misappropriated assets worth many more times what it had sought and received in its claims.
But such claims do not wash with critics, who say impoverished countries spend many millions of dollars fighting the vultures, and that such battles make it extremely difficult for the likes of the World Bank to negotiate debt-forgiveness deals. They also scare off potential new investors, who fear the vultures will hunt them down through the courts as well.
However, the vulture funds' arguments go down well with Mr Singer's friends on the Republican right. The Tea Party-supporting website ConservativeHQ has applauded Mr Brodsky's attacks on Argentina, praising its clear-headed pursuit of bad governments run by what it described as "vulture politicians".
Similar moral arguments for and against the vultures exist within their attacks on bankrupt corporations. When the Tribune newspaper group got into serious financial difficulties, Mr Brodsky's Aurelius Capital Management piled in to buy up its debt at a bargain-basement price, willing to sue, if necessary, to get it paid back at a big profit.
Once again, he argued that he was simply attempting to force executives to behave according to the constitution, writing to Tribune's other creditors: "We at Aurelius believe in the rule of law. We believe wrongdoers should be held accountable rather than rewarded; and we have decided to make a stand."
He even went on to quote from the philosopher Edmund Burke: "The only thing necessary for the triumph of evil is for good men to do nothing."
All this lofty prose was in defence of his demand that creditors should be paid some of the money shareholders in Tribune received when they sold it to a 2007 takeover funded by so much debt that the company was unable to afford the repayments.
Its moral argument was that the original buyout was responsible for the collapse of a once-great organisation, and those who it claimed irresponsibly profited from it should be made to pay. Again, the fact that Aurelius would be receiving many tens of millions of dollars more than it paid for the bankrupt company's debt would be merely a happy by-product.
Meanwhile, as with restructuring countries' debt, these attacks on bankrupt corporations make it extremely difficult to restructure corporate debt, too. In some cases, such as the US car industry, it has been taxpayers' bailout funds that have ended up going to the vultures.
But don't expect tears from Mr Brodsky. As the sign-off on his emails reputedly states, quoting from Aurelius, the great Roman philosopher-emperor after whom he named his fund: "If expecting nothing and fearing nothing, you are content to act with nature and to speak with heroic honesty, then you will live well. And no power on earth can stop you."
The Argentinians never stood a chance.
He started Elliott Management to focus on "distressed debt", buying bonds in troubled companies at a discount.
A former bankruptcy lawyer, he has fought debt battles against the restructuring of big companies around the world through his Aurelius fund.
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