Down By Law: Vulture Funds Feeding on the Dispossessed

[Starfury]

This is an excellent article by Chris Floyd (Empire Burlesque) on vulture funds, the truly despicable practice of feeding off the misery of the poor, and ties them to domestic political trends. I recommend reading the entire blog entry.

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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.

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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.

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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.

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http://www.chris-floyd.com/index.php?option=com_content&task=view&id=1069&Itemid=135