Vulture Funds
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Tell Congress: Hold Hearings on Vulture Funds
Send a message of encouragement to House Judiciary Chairman John Conyers (D-Mich), who is planning to hold hearings on Vulture Funds
In order to address the needs of their people, many developing countries first have to escape the burden of unjust and unsustainable debt. But even when they succeed in negotiating debt relief plans, developing countries can still fall prey to unscrupulous investors who buy old debt at huge discounts, then use the legal system to demand payment at up to 200% over the original value of the debt.
ActionAid calls on the United States and other governments to regulate the “Vulture Funds” set up by hedge funds, financed by private investors, and to allow poor countries to pursue negotiated, sustainable paths out of debt. Send a message of encouragement to House Judiciary Chairman John Conyers (D-Mich), who is planning to hold hearings on Vulture Funds.
Vulture Funds
In the early 1980s, rising interest rates and huge loans - many of which had been taken on by corrupt dictators in earlier years, but were left to the democratic governments that succeeded them - conspired to produce a Debt Crisis for dozens of countries across the global south. Ever since, developing countries’ governments and civil society advocates like ActionAid have been demanding measures to relieve those unsustainable debts and allow poor countries to invest scarce resources in guaranteeing the rights of their own people.
But even the modest debt relief measures that have been achieved are threatened by the emergence of Vulture Funds, a dimension of hedge fund operations which prey upon indebted developing countries. Investors in Vulture Funds buy up sovereign debt from developing countries just as those countries qualify for debt-relief. The unscrupulous investors then pursue legal loopholes to sue impoverished countries for far more than they paid for the debt.
The business plan for a Vulture Fund follows a simple and very profitable formula:
- First, gather information on countries that have qualified for debt relief. Such debt may have been discounted to reduce the country’s burden, or the country may have qualified for 100% debt write-down from the World Bank or International Monetary Fund (IMF).
- Second, buy up this favorably-priced sovereign debt.
- Then send your legal counsel into American, British or French court systems to litigate aggressively for the impoverished government to pay you up to 200% what you paid for the debt you recently acquired.
- Finally, celebrate your amazing profits and tell your investors about them, before repeating the cycle.
The problem of Vulture Funds gained international attention in April 2007, when Britain’s High Court ruled against the government of Zambia and ordered it to pay $42 million to Donegal, a hedge fund whose Vulture Fund operation had bought debt from Zambia for only $4 million.
The ruling was so controversial that several governments planned to raise the issue at the June 2007 Group of Eight (G-8) Summit in Germany, but the US Treasury Department apparently blocked the discussion. Representative Gwen Moore (D-Wis.) shared her concern about this with US Treasury Secretary Henry Paulson, and pressed him to change US laws allowing such high payouts for debt acquired at lower cost, and to exercise leadership for the other G8 countries to follow suit. Secretary Paulson responded that he would not know how to change the law.
ActionAid believes that for developing countries to maximize their capacity to apply their scarce resources to urgent development priorities, Vulture Funds and other forms of financial exploitation require more oversight, regulation and legal action to shut them down., That’s why we’re urging our partners to encourage Representative John Conyers (D-Mich.) to hold hearings on Vulture Funds in the House Judiciary Committee. When Rep. Conyers learned about the Donegal ruling and the activity behind it, he personally spoke to President Bush and urged him to do something to stop Vulture Funds. Now Rep. Conyers is considering bringing the matter to the Judiciary Committee.
ActionAid sees three reasons why such hearings would be important:
- There is not enough information about Vulture Funds in the public domain:
Hedge funds, which house Vulture Fund operations, are investment pools that are among the least transparent entities in the deregulated global financial system. Unlike mutual funds, which are not legally allowed to engage in short-selling (a tool that generates earnings for investors when security prices fall below a certain level), hedge funds can employ the investing tools they chose, including leverage (investing borrowed money for which they cannot provide collateral), the use of derivatives like options and futures, and short sales.
Hedge funds like Donegal are financed by private investors and are subject to little or no regulatory scrutiny. Their CEOs often have close associations with politicians and political campaigns. While British Prime Minister Gordon Brown has denounced hedge funds’ Vulture Fund activity, US Treasury Secretary Henry Paulson said in testimony to Congress that Vulture Funds have the law on their side. ActionAid believes that a hearing before the House Judiciary Committee will generate more information on the public record about Vulture Funds and legal remedies to end their profiteering. - Vulture Funds threaten efforts to fight global poverty: Hedge funds are now lobbying the IMF directly to get targeted countries into debt relief programs such as the HIPC (Heavily Indebted Poor Countries) Initiative. Their efforts are not aimed at helping countries get free of the stranglehold of debt, but rather at getting countries qualified for debt relief so as to generate revenue streams for Vulture Funds. Once countries qualify for debt forgiveness and better terms are negotiated to reduce the dollar amount of debt, Vulture Funds buy the sovereign debt at the new, cheaper price. Then they take advantage of legal loopholes in the court systems to sue poor countries for exorbitant payments. Impoverished countries such as Zambia are sitting ducks for the “business model” vulture funds use. ActionAid calls for hearings to discuss measures to end this practice.
- Vulture Funds violate the rights and obligations of developing countries: Hearings provide a transparent opportunity to look deeper at the vulnerability of debt-ridden countries to financial arbitrage and to identify ways to close the legal loopholes that enable this predatory behavior. Exposure to Vulture Funds blocks developing country governments from speaking openly about their debt problems or identifying the parties who hold their debt: such disclosure effectively generates a client list for Vulture Funds, revealing to them which countries are most vulnerable and also who they should approach to close the next deal. ActionAid demands economic justice and respect for the rights of developing countries to manage their debt in ways most conducive to fulfilling their obligations to their people—not to foreign investors.
Join ActionAid in encouraging Congress to hold hearings on Vulture Funds.
