Argentina and America – of Vulture Funds and Justice. Part 2
Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.
Argentina defaulted on its debts. It borrowed money, said it would pay it all back, signed contracts binding it to that promise and then reneged. It forced its creditors to agree to get back only a few cents out of each dollar they had lent it. Argentina simply said, ‘that is all we are going to pay. Accept or get nothing at all’. The creditors, the bond holders, agreed. Except of course for the stealthily circling Vultures who bided their time.
Surely, despite the sordid stink of what was done to Argentina, how she came to default, on another level Argentina has also done wrong to those who lent to it and must therefore pay? Well on one level sure. But before we wag a moralizing finger lets take a step back. Borrowing and then not paying back, defaulting, is not a crime against God and Nature known only to the dregs of statist madmen. Companies default. They take on debts, sign contracts to pay it all back and then default on their creditors. When they do it is often due to mis-management, stupidity, greed and even fraud. Whatever moral case we might think Argentina has to answer it is not peculiar to them or to the bloated and corrupt governments which loom large in the minds of fervent Libertarians.
Lets take a recent example, Chrysler . In 2007 Chrysler had revenue of $49 billion. That makes it larger than many nations. It defaulted. The company had knowingly, not forced to by IMF inquisitors, but of its own free-market will, taken on debts that it could not pay. Did statues bleed, or horses give birth to monsters? Did the very heavens cry out at the crime? No they didn’t. It’s business. Just business.
What Chryser did do was use the sheer size of its possible default to force its creditors to accept cents on the dollar on what they were owed. Sound familiar? And the US government itself weighed in on their side to force the creditors to accept. Why? Because, they said, it would be best for the nation. And then the critical bit, (From “The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and other Legal Fauna” Duke University School of Law)
And what are some of those debtor-friendly provisions of Chapter 11?
Pari Passu
The key to the Elliot Associates case against Argentina, the point of law used by them and ruled in favour of by Judge Griesa, and one of the levers that can be and has been used to attack nations, is what is known in law as Pari Passu – to treat equally.
I do not intend here to deal with the argument over whether nations need to borrow at all. I have some thoughts on this subject but they are for another article. All I wish to note here is that it is an odd thing, perhaps a legacy of the time when princes borrowed gold and silver from merchants, that nations who do not have to borrow, given that they can print instead, should chose to borrow. What is not at all odd is that holders of private wealth and creators of private credit, should be delighted to lend to them. Why is this not odd? Because nations are very large borrowers and, most of the time, very good payers.
The only down-side to an otherwise wonderful trade is that IF a nation should decide to default – how can a private creditor take an entire nation to court? The answer for centuries was they couldn’t. The old, English Common Law of Champerty prevented it.
Champerty is -
Champerty said you cannot buy up a nation’s debt, when you know that nation has or soon will default, for the express purpose of then suing the nation. Champerty says the nation and its creditors are the only interested parties and thus they alone must be left to work it out for themselves. And since most of the lenders were the largest banks and other nations who generally had long term and lucrative relations with the debtor nations, the lenders would generally feel obliged to swallow the losses. And that reality ‘tended’ to give the lenders some pause for prudent thought when it came to how much they lent and to whom....
Read more... Argentina and America – of Vulture Funds and Justice. Part 2
Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.
Argentina defaulted on its debts. It borrowed money, said it would pay it all back, signed contracts binding it to that promise and then reneged. It forced its creditors to agree to get back only a few cents out of each dollar they had lent it. Argentina simply said, ‘that is all we are going to pay. Accept or get nothing at all’. The creditors, the bond holders, agreed. Except of course for the stealthily circling Vultures who bided their time.
Surely, despite the sordid stink of what was done to Argentina, how she came to default, on another level Argentina has also done wrong to those who lent to it and must therefore pay? Well on one level sure. But before we wag a moralizing finger lets take a step back. Borrowing and then not paying back, defaulting, is not a crime against God and Nature known only to the dregs of statist madmen. Companies default. They take on debts, sign contracts to pay it all back and then default on their creditors. When they do it is often due to mis-management, stupidity, greed and even fraud. Whatever moral case we might think Argentina has to answer it is not peculiar to them or to the bloated and corrupt governments which loom large in the minds of fervent Libertarians.
Lets take a recent example, Chrysler . In 2007 Chrysler had revenue of $49 billion. That makes it larger than many nations. It defaulted. The company had knowingly, not forced to by IMF inquisitors, but of its own free-market will, taken on debts that it could not pay. Did statues bleed, or horses give birth to monsters? Did the very heavens cry out at the crime? No they didn’t. It’s business. Just business.
What Chryser did do was use the sheer size of its possible default to force its creditors to accept cents on the dollar on what they were owed. Sound familiar? And the US government itself weighed in on their side to force the creditors to accept. Why? Because, they said, it would be best for the nation. And then the critical bit, (From “The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and other Legal Fauna” Duke University School of Law)
Once Chrysler negotiated the terms of a sale with the majority of its creditors, it entered bankruptcy with a prepackaged petition, and, shortly thereafter, a new Chrysler entity emerged from the process as a going concern, no longer burdened by billions of dollars of debt.A ‘going concern’ because it was now no longer crippled by an unpayable weight of debt. That is what Argentina had hoped to do.
Although a minority of creditors challenged the Chrysler sale as a draconian invalidation of their contract rights, those efforts failed under the debtor-friendly rules of Chapter 11.So, for private companies the free-market has debtor-friendly Chapter 11. But not for nations? What Crysler did the Law upheld even as it pursued Argentina for doing the same thing.
And what are some of those debtor-friendly provisions of Chapter 11?
Once a private company or individual enters bankruptcy, debt service and litigation against the debtor is automatically stayed pending the completion of a mandatory restructuring plan. Bankruptcy rules also allow for a post-insolvency market for “superpriority” (debtor-in-possession) financing, which the debtor can access to jump start its reorganization.So why is this a good ‘free-market’ idea for companies but not for nations? Why should something of the like not be available to nations? There is no good reason – excpet one. Suing nations is lucrative AND it is part, I believe of a far broader wresting of power from nations states in favour of ‘The Market’. An ideological desire to elevate private over sovereign power. Or to put it another way to reduce nations to actors within a global market framework instead of markets and companies required being required to act within a framework of soveriegn, nation state power. The question is what levers can ‘free market’ ideologues use to force this change?
Pari Passu
The key to the Elliot Associates case against Argentina, the point of law used by them and ruled in favour of by Judge Griesa, and one of the levers that can be and has been used to attack nations, is what is known in law as Pari Passu – to treat equally.
I do not intend here to deal with the argument over whether nations need to borrow at all. I have some thoughts on this subject but they are for another article. All I wish to note here is that it is an odd thing, perhaps a legacy of the time when princes borrowed gold and silver from merchants, that nations who do not have to borrow, given that they can print instead, should chose to borrow. What is not at all odd is that holders of private wealth and creators of private credit, should be delighted to lend to them. Why is this not odd? Because nations are very large borrowers and, most of the time, very good payers.
The only down-side to an otherwise wonderful trade is that IF a nation should decide to default – how can a private creditor take an entire nation to court? The answer for centuries was they couldn’t. The old, English Common Law of Champerty prevented it.
Champerty is -
an English common-law doctrine that precluded the purchase of debt with the intent and purpose to sue upon it. (P.49)A clear law which makes the very notion of a vulture fund impossible. At this point it is worth taking a moment to remind ourselves that the the laws which codify what we mean by debt: who must pay what to whom under what conditions are not natural laws. Debt and its laws do not spring from the fabric of reality like Gravity. Debt and its laws are human conventions that is all. We can see it one way or we can see it another.
Champerty said you cannot buy up a nation’s debt, when you know that nation has or soon will default, for the express purpose of then suing the nation. Champerty says the nation and its creditors are the only interested parties and thus they alone must be left to work it out for themselves. And since most of the lenders were the largest banks and other nations who generally had long term and lucrative relations with the debtor nations, the lenders would generally feel obliged to swallow the losses. And that reality ‘tended’ to give the lenders some pause for prudent thought when it came to how much they lent and to whom....
Read more... Argentina and America – of Vulture Funds and Justice. Part 2
No comments:
Post a Comment