Friday, October 16, 2009

More on Vulture Funds

Hey all - for those who were asking, here is more on Vulture Funds. Unfortunately, many do not take the issue seriously enough, or think that it is some sort of scheme that African countries are making up to gain more aid. I think that I am going to be able to use Vulture Funds as a huge part of my thesis, maybe even my hypothesis, so I am really excited to be immersed in the work going on right now.

October 16th, 2009

Is Russ Feingold joining the war on vulture funds?

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Posted by: Felix Salmon

Tags: law, vulture funds

Remember the silly war on vulture funds being waged in the UK and, in the US, by Congresswoman Maxine Waters? Well, I have good news and bad news. The bad news is that it’s making its way into the US Senate: Russ Feingold, the chairman of the Subcommittee on African Affairs, is thinking of introducing legislation of his own. The good news is that his staffers are reaching out to people like me, and seem genuinely interested in trying to understand the issues and the potential negative consequences of any legislation.

I just had a pretty long conversation with three of Feingold’s staffers on this subject, and they were asking if there was any way that they might be able to introduce a bill which curtailed some of the most egregious actions of vulture funds while not going as far as the Waters bill. I told them that the short answer is no: debt markets would react very badly to any attempt to prevent or impede trading debt instruments in the secondary market. And what’s more, none of these bills would make the problem of developing-country debt go away: it would simply keep that debt in the hands of original creditors, who might well start employing more vulture-like tactics to get their money back if they were prevented from selling their claims.

Feingold is commendably concerned about the fate of small African countries, who might be in the position of receiving hundreds of millions of dollars of debt relief from the US government, only to find that freed-up cashflow suddenly eyed by greedy vultures. And he doesn’t want hedge-fund types receiving any part of the money that Congress apportions to developing-country debt relief. I’m sympathetic. But the fact is that vulture funds have been having a dreadful time of it recently, and are losing cases much more frequently than they’re winning them. The total amount of money that’s at issue here is minuscule, compared to the enormous effect that it could have on the capital markets as a whole. The whole issue of vulture funds looks very much like a solution in search of a problem.

I told Feingold’s staffers that they should be sure to talk to a range of developing countries about their legislation — not just the poorest countries whose debt would be directly effected, but also richer countries who might see their credit spreads widen if Congress started messing about with the enforceability of sovereign debt obligations. Even the poorest countries aspire to tapping private capital in future, and might be very wary of legislation along these lines.

More generally, it might behoove market participants and industry groups to start talking seriously to Feingold’s office on this subject, especially if they can put together some hard data on just how much money we’re talking about here. It certainly makes sense to try to quantify the scale of the problem before putting a huge amount of effort, not to mention enormous knock-on consequences in the market, into some kind of solution.

Wednesday, October 7, 2009

Internship Update

So I am in my 4th week here at Jubilee USA. It has been a strange adjustment to go from a corporate desk to one of a non-for-profit. Our computers are in desperate need of an IT review, but there is no IT person. Aside from the obvious $ problems, the job is fantastic. I am learning so much about things that are really important to me, as well as information that will greatly aid my thesis.
My direct supervisor, Julia and I often head up to the Hill and meet with Congressional Staffers to advocate (lobby without the salary) for The Stop Vulture Funds Bill H.R. 2932. Please read this explanation:

Vulture fund’ is a name given to a company that seeks to make profit by buying up debt in default on the secondary market for pennies on the dollar, then trying to recover up to ten times the purchase price, often by suing impoverished countries in U.S. or European courts.

Some vulture funds target failing companies, but Africa Action, Jubilee USA Network and TransAfrica Forum are focused on those that target the sovereign debts of impoverished countries.

These vulture fund companies tend to be quite secretive, and many of them are based in tax havens such as the British Virgin Islands. Some are owned by large, often U.S.-based, financial institutions such as hedge funds. In other cases, there is limited or no information on who owns them. Often subsidiary companies are set up by these larger hedge funds simply to pursue one debt, then shut down after winning those assets.

I really like that I get to work on something that is truly an issue I can get behind as well as something that can make a difference in people's lives.