Buenos Aires, Argentina.
The birds & the funds
Vulture birds recycle dead animal carcasses, thus protecting healthy animals from the dangers of decomposition. As ugly as they may look, nature welcomes vulture birds.
Instead, vulture funds (VF) prey viciously upon injured economies that the world badly needs alive and growing, while hurting dozens and dozens of millions of real human beings and their future generations. “Real hurt, real people” Judge T. Griesa announced without batting an eyelash (Bloomberg News, 22 July, 2014) *1 Ref.
Obviously enough, common sense points to the illegality of VFs. As a matter of fact, Anglo-Saxon countries had banned the vulture business long ago through the “Champerty Doctrine”.
Ever since UK’s Gordon Brown coined the term, vulture funds add insult to injury by pushing default business no matter the appalling consequences for financial markets and the countries they harass and prey upon. VFs have never lent a cent to anyone nor supplied any liquidity to speak of through their tiny,‘strategic investments’.
“Me-too” bondholders are a mix of individual and institutional investors from around the world who decide not to accept the terms of the resulting restructuring process of a defaulted sovereign but at the same time do not take any legal action against such country right off the bat. They just sit tight and wait it out till someone else in a similar position does sue and eventually gets a favorable ruling. “Me Toos”are a very patient breed of vulture funds of sorts…less eager, but just as mean.
In the case of Argentina, the “me toos” have been waiting for many years for someone else to take legal action, namely NML Capital – Elliott and Aurelius Management… and win. Once that Wall Street judge Thomas Poole Griesa ruled in their favor to the tune of USD $1.6 billion, the “me toos” now merrily jump in and claim their fair share of the spoils.
Easy does it, see ?
Just sit tight and see the light…
Vulture Funds readily buy very small quantities of “bad debt” at dirt cheap prices from desperate defaulted (or ready to default) bond-holders. In the case of Argentina, VFs represent less than 1% of creditors.
Thereinafter they wait out for hold-in creditors to help the imperiled country to recover by accepting a steep haircut — because otherwise they wouldn’t collect a penny either. In the case of Argentina, the latter were 92.4%.
As years later the country prey recovers thanks to the effort of the hold-in creditors and the country itself, VFs pounce in on their target with rogue judicial support claiming 100 cents on a dollar they never lent, plus sky-high vulture-style expenses… and the kitchen sink.
They also hedge themselves with CDSs (Credit Default Swaps) which in Argentina’s case, curiously enough, have been already collected additionally to whatever they end up negotiating for their defaulted bonds. So they’d get paid twice. As explained hereinafter, VFs also entice “me toos” amongst Argentina’s other hold-out creditors (7%) to join the party.
This misbegotten business model (for want of a better term) is un-ethical, non-productive, anti-capitalistic and even ineffective (eventually) for vulture funds.
” If Argentina were a bankrupt US corporation, there would be no vultures”.
(B.Herman, The Globalist, 5 August 2014)**2 ReF.
So ‘recalcitrant’ creditors which torpedo highly beneficial and overwhelmingly accepted (92.4%) re-structured sovereign debt solutions shouldn’t exist either.
US judges to the rescue
Wall Street Judge T. Griesa, the Second Circuit Appeals Court, and the Supreme Court of Justice of the United States (SCOTUS) have turned into active required associates of the VF business model through unprecedented ‘vulture friendly’ rulings against Argentina… while the US Solicitor General, and the US Attorney General idly sit by the sidelines.
From now on, the US judiciary can overwrite decisions from any sovereign state and/or international organization as the potent injunctions in case are unbelievably ‘on-your-face’ extraterritorial.
Also, the US has become a clearing house for vulture funds’ full discovery (precise information) of Argentina’s attachable (seizable) assets worldwide so that VFs don’t waste time, money and energy finding that out.
Justice Ruth Bader Ginsburg fully dissented with her SCOTUS colleagues on this ‘exorbitant’ decision making “financial service providers worldwide sovereign debt enforcement agents” (TS Öncü and J. Vilches, EPW, January, 2015) **3 Ref. This includes clearing corporations, operators and systems, depositaries, settlement, transfer and trustee paying agents, etc.
In the case of Argentina, the US judiciary have shamefully allowed themselves to be hijacked by a sub-set of smooth financial operators, with no ‘Champerty Doctrine’ considerations whereby both in England and the US (Section 489) to purchase debt with the intent of litigating was considered a crime.**4 Ref
‘Free riders’ join the party
“Me Toos” salivate seeing Argentina now stuck with the mother of all class action problems by having to include each and every one of its 2001 default hold-out creditors into an agreement.
“… (now) each of the remaining creditors has effective veto power over the potential settlement, and every incentive to hold out for 100 cents on the dollar. In fact, if Argentina settles with some creditors for less than 100 cents, the remaining holdouts could simply replicate the NML lawsuit the next day. Anything less than full participation opens up the entire debt stock to NML-style ambush, and does not get Argentina or any of its creditors the certainty they need.” (A. Gelpern, CreditSlips.org, 30 June, 2014) **5 Ref.
“Me Toos” sit tight to see the light
In the case of Argentina, ‘Me-Toos” have also truly benefitted from their day in (judge Griesa’s) court.
The octogenarian, health-impaired Wall Street judge has just ordered Argentina to pay more than 500 “Me-Too” holders of defaulted debt at the same time as restructured creditors. The Griesa ‘real-hurt-real-people’ ruling has now pushed the total bill for holdout funds to USD $7 billion, following a previous order to pay NML Capital – Elliott and Aurelius Management USD $1.6 billion, including interest.
As highly permeable judge Griesa now acknowledges for all creditors of Argentina the same terms as the ‘vulture’ funds, Argentina will be asked to pay between US$15 billion and US$17 billion.
Not all the ‘me-too’ bondholders have exposed their faces though. The cunning Wall Street judge has adopted the strategy to have them show up gradually so as not to make his deceitful, aberrant ruling obvious.** 6 Ref
VF ‘must-get’ prices
Q.: why do Vulture Funds require such exorbitant price on the Argentine 2001 restructured bonds that they actually bought for pennies on the dollar ?
A.: their business model requires to ‘invest’ tons of money in ‘other expenses’ that well-meant people (and the US judiciary for that matter) would not be proud to write home about… without any social function of capital in this Vulture Fund world of cabaret ‘investments’.
The VF ‘hounding costs’
Obviously, it is impossible to access verifiable data on VFs cost structure.
Only educated guesstimates and reasoned speculation allow to shed some light on this matter.
Other hidden costs might still arise after closer scrutiny.
Yet, the message is clear: the compensation claimed by vulture funds includes (a) the FACE VALUE price (b) CDS hedging costs (c) MANY hundreds of seizures attempts worldwide (d) a finely tuned and handsomely funded lobby apparatus (e) overblown overhead (f) NY legal fees and ‘special expenses’ plus (g) non-accrued rolled over punitory interests all along.**7 Ref.
Accordingly, VFs claim USD $ 800 million on a USD $ 50 million original ‘vulture investment’ ON FULLY DEFAULTED BONDS meaning 1600% profits.
Beyond the un-ethical nature of this non-productive ‘business model’ there is an 800 lb. gorilla watching the scene: In this century, Argentina just won’t have that kind of money. It’s arithmetically impossible.
Taking “Me Toos” in consideration, we are talking dozens and dozens of billions of dollars FOR AN ECONOMY THAT CANNOT BEAR SUCH BURDEN WITHOUT EVEN GETTING INTO THE MORAL LOW GROUND OF VULTURE FUND ACTIVITY**8 Ref.
Let alone if the above corresponds to utterly un-enforceable contracts such as sovereign debt bonds which, by definition, payment of which is strictly voluntary. This is not an opinion, it’s lack of internationally accepted law…and it’s also history. There is no shortage of examples, including very recent large ones, such as Germany post WW2.
In a nutshell, Argentina does not have and will not have the foreign reserves to pay for anything other than (basically) hold-in compensation and only if and when agricultural commodities maintain or increase their current price and the barrel of oil maintains or decreases its current price.
The US Constitution (Article I, Section 8, Clause 4) foresees bankruptcy for a reason.
Countries are no exception and their sheer size makes things worse, not better.
Jorge Vilches is a financial op-ed columnist based in Buenos Aires, Argentina. He can be reached at: email@example.com
**1 Ref: Judge Griesa ”real hurt, people hurt”
( Herman B., “Country Bankruptcies and the Shackles of U.S. Law. Argentina and beyond: Is there an effective global solution for country bankruptcies?”, The Globalist, 5 August 2014)
(*** Ref.Martin Wolf re vulture birds vis-á-vis Vulture Funds (see M. Wolf, FT, 2 September, 2014)
**3 Ref. T.S.Öncü and J. Vilches, EPW, January, 2015)
**4 Ref Champerty Doctrine : http://www.pagina12.com.ar/diario/economia/2-249631-2014-06-28.html
** 5 Ref: Prof. Anna Gelpern, world’s top-tier and undisputed authority on sovereign debt restructuring)*
** 7 Ref: Educated ‘guesstimate’ for VF cost structure
“A federal judge ruled that Argentina had to pay the vulture funds $1.3 billion, including interest. This figure has meanwhile grown to $1.5 billion.
NML’s share of the bounty, according to government figures, is $832 million from assets it purchased for $48.7 million — representing a return of 1,608 %
+ $ 250 million bought at 20% face value = $ 48.7 million: (#a) Carlos Burgueño, “Los Buitres”, Edhasa 2013)
+ $ 30 million CDS hedging
+ $ 85 million Lobby + ATFA+ seizure attempts worldwide see details below (#b)
+ $ 100 million Total Corporate Overhead x 13 years** (#c) ($ 30 million per year = $ 400 million (approx.) x 25% corresponding Argentina
+ $ 35 million NY legal fees x 13 years ***($ 2 million per year x 13 years + retainer fees) .
USD $ 500 million = TOTAL sum owed.
USD $ 300 million non-accrued + roll-over interests (#d) 13 years on sums originally ‘invested’ = 60%
USD $ 832 million = to be paid for a USD $ 48.7 million original defaulted bond investment = 1608% ‘nominal’ profits
(#a) Carlos Burgueño, “Los Buitres”, Edhasa 2013)
Los buitres compraron títulos públicos en el país fundamentalmente en dos momentos, entre noviembre y diciembre de 2001, pagando un máximo de 30% del valor de los bonos emitidos, y luego de la declaración del default, hasta aproximadamente enero de 2003, a 20% del precio de emisión de esos papeles.
”Volverian a hacerlo por unos pocos dias en febrero y marzo de 2002, pagando precios menores a los de remate. Parecia una operacion incomprensible,..
Esa Argentina del período octubre-noviembre de 2001 era el último país del mundo donde un inversor medianamente serio e informado hubiera puesto un dólar. Sin embargo, hubo operaciones de compra de títulos
públicos nominales por no menos de U$S 3.000 millones nominales.
El registro contable del Banco Central de esas primeras semanas de 2002 hablan de operaciones por U$S 1.000 millones a un valor nominal de un 18% del precio de emisión. Estos fondos superaban ya las tenencias por U$S
8.000 millones nominales, e iban por más…hasta llegar a los USD $ 10 mil millones.
(#a) J.Stiglitz, The Guardian, 7 August, 2014
(#a) S.Sassen, Foreign Policy, 3 August, 2014
(#a) Legal filings indicate that the face value of its Argentine government bonds was around 170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than 1.5 billion, which includes years of unpaid interest.
(#a)“A federal judge ruled that Argentina had to pay the vulture funds $1.3 billion, including interest. This figure has meanwhile grown to $1.5 billion.NML’s share of the bounty, according to government figures, is $832 million from assets it purchased for $48.7 million — representing a return of 1,608 % https://news.vice.com/article/talons-out-argentina-desperately-fighting-vulture-funds-over-debt
(#b) Nine Hundred (900) seizure attempts worldwide ( average of $ 100.000 per attempt )
Including Fragata Libertad (Ghana) + satellites + BCRA + NASA satellites, etc., etc. (abundar)
(#c) 300 salaries, Wall Street offices + Argentina offices + elsewhere, cars, bonuses, trips
(#d) 5% p.a. average rates 2001-2008 + interests roll-over. Total of $ 60% interest = $ 300 million
** 8 Ref ‘Me Toos’
(Ref.: Mara Laudonia, “Los Buitres de la Deuda”, Editorial Biblos 2014)
(Ref.: Axel Kicillof, Minister of the Argentine Economy, 7 January, 2014)
Although the initial demand from NML Capital and Aurelius Capital amounted to US$1.3 billion, a footnote in a letter from Argentina’s lawyer Carmine Bocuzzi to the courts said holdouts have filed 25 lawsuits since mid-June (2014) totalling US$4.7 billion in claims. In full, it is estimated that the roughly 60 cases of “me-too” bondholders before Judge Griesa could involve US$10 billion in claims.
“Dart owns more defaulted Argentine bonds through his fund EM Ltd. than Singer’s fund NML Capital does, with $595 million worth to NML’s $503 million.
“The so-called Gang of Five—the five holdouts at the center of Singer’s legal case: Singer’s NML Capital, Aurelius Capital, Blue Angel Capital, Oliphant, and a small group of retail investors—hold only about a quarter of all the New York bonds held by holdouts. In addition to Dart, there are approximately $2.4 billion worth of bonds out there that are governed by New York law and in the hands of other holdout investors. The minute Argentina settles with Singer’s group and the bondholder payments are allowed to flow through, all the other holdouts will likely rush forward to Judge Thomas Griesa’s court, demanding the same legal rulings and the same terms, which could block the payments again. The default could be cured temporarily, but then Argentina would be right back where it started.
‘Money makes the world go around’ observed the ‘Cabaret’ musical all-time hit.
But the turning the world into a cabaret is not a good idea.
Under strict financial perspective the VF situation can be compared to today’s “shale oil” producers : as they have a humongous debt overhang because of highly negative investments, only $ 100 dollar oil is a viable price.
[ The US Constitution (Article I, Section 8, Clause 4) foresees bankruptcy for a reason ]