Suppose that you and your friends decide one day to buy some bonds issued by the highly-renowned Solvay Student Review – bonds that, by the way, do not exist but let us suppose they do for the purpose of this exercise. Some time later, the Solvay Student Review (SSR) experiences serious economic and financial problems to the extent that it finally goes bankrupt. As a result, it appears that you and your friends will not receive much of your money back, just like other Solvay Student Review bondholders. However, as the latter start losing their nerve and sell their bonds, you and your friends keep calm, take a deep breath and start buying more Solvay Student Review bonds at a discounted price.
Then, a few years go by until the Solvay Student Review comes up with a proposal for you and the other bondholders: the SSR is ready to swap your bonds for new ones valued at around sixty-five percent less than the older ones. Whereas the majority of bondholders accept the deal as they see it as an opportunity to recover at least some of their money back, you and your friends, enthused by some abstract sense of justice and fairness, refuse the deal and decide to go for the full repayment. As years go by, you sue the Solvay Student Review in court, fighting for your cause with the utmost conviction.
Ten years after the SSR’s bankruptcy, your relentless crusade finally bears fruit as an American judge rules that the Solvay Student Review will have to satisfy its commitment to all of its creditors, without discriminating against any of them. At this point in the story, you know that the Solvay Student Review, which has recovered from its past crisis, has the cash to make the full repayment but that it does not want to do so because it prefers to keep the money for other purposes. Nonetheless, thanks to your legal victory, the Solvay Student Review now has only two options at its disposal: to pay you and the other bondholders or go bankrupt…again. You know that the two options are likely to be disastrous for the company and will lead to several adverse consequences such as cuts in staff, a fall in revenues and austerity which would put a serious strain on the magazine’s future activities. Also, it appears that the Solvay Student Review does not want another bankruptcy.
What would you and your friends do? Have mercy on us, the team of the Solvay Student Review, or continue to ask for full repayment? Please think about it for a second… Now, if you have chosen for the first option, we would like to thank you. If, on the other hand, you have opted for the second option because you think that you are within your rights (or just because you think that the team of the Solvay Student Review are morons), well, we disapprove of your choice but unfortunately, we have no legal grounds to make you change your mind.
Now, replace the three words “Solvay Student Review” with “Argentina”, a country of more than 40 million people, and you get a glance of what Mr. Paul Singer, head of Elliott Management, and other hedge fund managers went through in order to bring the country to its knees in the summer of 2014. Plus: now you are the bad guy.
However, some people might disagree with you being depicted as the bad guy. Instead, you might be an idealist, a man or woman of values who fights for what he or she thinks is ethically and morally right – in other words not the kind of ruthless financial shark that is only interested in money. After all, in this case, you are the upstanding defender of the rights of poor neglected creditors as the latter, like debtors, also have rights. If someone owes money to someone else and has the means to meet his commitment, why should he not pay? Don’t you think that the same rules should apply to governments as well as companies and individuals? You, like Mr. Paul Singer and other “vulture funds” are just trying to seek justice,.
But here is why this argument is flawed. A healthy and successful relationship between creditors and borrowers should be based on mutual interest and should never be based solely on one party seeking to extort profit from the other. Creditors should make a profit and thrive along with their debtors and not at their cost. Mr. Singer and his company did not abide by these basic principles from the outset as their “vulture fund” strategy consisted of deliberately looking for bad government debt, buying the bonds cheaply and suing these governments for full repayment.
This strategy is actually the core business of these kinds of funds and what they make a living from. For example, Elliott Management succeeded in suing Peru in 1995 and Congo-Brazzaville in 2002-2003, so Argentina was not their first attempt. Put simply, this deliberate strategy is not what we would normally expect from a sound debtor-creditor relatioship.
What Mr. Paul Singer and his friends did to Argentina thus has nothing to do with some hypothetical pursuit of justice. Far from being an idealistic or noble cause, their strategy was one motivated by simple greed and nothing much else.
DAVOS/SWITZERLAND, 23JAN13 – Paul Singer, Principal, Elliott Management, USA is seen during the session ‘The Global Financial Context – Reinforcing Critical Systems’ at the Annual Meeting 2013 of the World Economic Forum in Davos, Switzerland, January 23, 2013.
Copyright by World Economic Forum.
swiss-image.ch/Photo Remy Steinegger