15 February 2007

Vulture Funds? More like vermin funds

I am not particularly acquainted with the world of high finance. Until I watched a Newsnight report last night I had not heard of Vulture Funds To be honest I wish I hadn’t. Some news items revolt even this jaded soul – this was one of them.

A Vulture Fund is a financial organisation that specialises in buying securities in “distressed environments”, such as equities that are near bankruptcy. Companies are not their only target: they also buy up public debt at very low prices. Then seek to recoup the whole of the original debt plus interest. They are not averse to suing governments in order to freeze their assets. International courts have at times prevented countries from paying to other debtors because one of these funds had requested an embargo.

Today a high court judge in London will rule whether a vulture fund can extract more than $40m from Zambia for a debt which it bought for less than $4m. Martin Kalunga-Banda, Zambian presidential adviser and a consultant to Oxfam told Newsnight, "That $40m is equal to the value of all the debt relief we received last year."

Caroline Pearce from the Jubilee Debt campaign told Newsnight last night. "Profiteering doesn't get any more cynical than this. Zambia has been planning to spend the money released from debt cancellation on much-needed nurses, teachers and infrastructure: this is what debt cancellation is intended for not to line the pockets of businessmen based in rich countries."

Debt Advisory International (DAI) manages a number of vulture funds which buy up the debts of highly indebted poor countries cheaply and then sue for the original value of the debt plus interest. Zambia. In 1979 the Romanian government lent Zambia money to buy Romanian tractors. Zambia was unable to keep up the payments and in 1999 Romania and Zambia negotiated to liquidate the debt for $3m. Before the deal could be finalised one of DAI's vulture funds stepped in and bought the debt from Romania for less than $4m. They are now suing the Zambian government for the original debt plus interest which they calculate at over $40m and they expect to win.

Five years ago Gordon Brown told the United Nations that the vulture funds were perverse and immoral: "We particularly condemn the perversity where Vulture Funds purchase debt at a reduced price and make a profit from suing the debtor country to recover the full amount owed - a morally outrageous outcome". But the vulture funds are still operating.

DAI is not alone. In 1986 Paul Singer’s firm Elliot Asociates paid $11m for some discounted Peruvian debt and then threatened to bankrupt the country unless they paid $58m. They got their $58m. The company is now suing the Republic of the Congo (Congo Brazzaville) for $400m for a debt they bought for $10m.

Back in Britain the Zambian case has seen much legal discussion about allegations of bribery. The Zambian legal team - led by William Blair QC - Tony Blair's brother, has argued that a $2m bribe was offered to the former Zambian President to make it easier for the vulture funds to claim their money. They showed the court an email disclosed in the Zambia case saying that a payment to the "President's favourite charity" had allowed them to do a more favourable deal. ".
The Jubilee Debt Campaign told Newsnight that they are calling on Gordon Brown to turn his moral outrage about vulture funds into action if he becomes Prime Minister and change the law to make the Zambian case the last to appear in a British court.

Vermin seems to be more appropriate a description than vulture for these people.

UPDATE: Tony Barclay, the CEO of Development Alternatives inc has left a comment on this blogy seeking to distance the work of his company from those of Debt Advisory International. Click here for further details.


Steve Bates said...

Vultures? vermin? vampires seems appropriate to me. I had never heard of these funds, either. They remind me, on a larger scale, of "dead janitor" insurance policies which some corporations take out on their lowest-level employees, so that the corp. benefits, not the employee's family. But vulture funds are dead janitor policies writ large, so that whole nations suffer. How repulsive!

jams o donnell said...

Dead janitor? again preying if indirectly on the most vulnerable of their employees. How nice, I don;t think

elasticwaistbandlady said...

Wal-Mart and several other large companies have had these shameful practices exposed. They bank on the general statistics of working class enjoying a shorter life span due to poor health care and health maintenance. I worked with a lady that lost her husband in a car accident. She was infuriated when it was revealed that Wal-Mart collected on his death. That was years ago, and I don't think that she had any legal recourse in the matter.

jams o donnell said...

I think this is one of those things which is perfectly legal but morally reprehensible. It angers me that firms will collect on the deaths of theur most lowly and vulnerable workers. I suppose from their perspective it offsets any benefits paid to the person's family - not that it would be very much I suppose.

Giacomo said...

Fascinating in-depth article on the direct human consequences of vulture funds in poor African nations