A Short History of Vultures

By Saskia Sassen – August 3, 2014

Foreign Policy

When Argentina defaulted on its debt for the second time in 13 years this week, the financial world was shocked, both by the default itself and, perhaps even more so, by the fact that a small minority of debt holders was willing to torpedo Argentina’s debt restructuring. But while the fight between Buenos Aires and its creditors may be in the headlines now, it’s not a new story. It began 18 years ago with a perversion of international law in a New York City court and a then-obscure hedge fund that was called a vulture.

One firm in particular deserves the blame for Argentina’s current situation — or kudos for its innovation, depending on how you look at it. In 1977, Paul Singer founded the hedge fund Elliott Associates L.P. with $1.3 million from friends and family. For nearly two decades, the firm grew by investing in various equities markets. But in 1995 Elliott Associates transformed from just another New York City hedge fund to a pioneer in the world of international finance. And today, 19 years later, the newest iteration of the same fund has played a crucial role in bringing Argentina to default.

In October 1995, Elliott Associates L.P. purchased approximately $28.7 million of Panamanian sovereign debt for the discounted price of $17.5 million. The banks holding those bonds, a group that included heavy hitters like Citi and Credit Suisse, had given up on repayment from Panama. To cut their losses they sold their holdings to Elliott.

When Panama’s government asked for a restructuring of its foreign debt in 1995, the vast majority of its bondholders agreed. Not Elliott. In July 1996, Elliott Associates, represented by one of the world’s most high-profile securities law firms, filed a lawsuit against Panama in a New York district court seeking full repayment of the original $28.7 million — plus interest and fees. The case made its way from a district court in Manhattan to the New York State Supreme Court, which sided with Elliott. Panama’s government had to pay the firm over $57 million, with an additional $14 million going to other creditors.

It was a groundbreaking moment in the modern history of finance. By taking the case to a New York district court, Elliott broke with long-standing international law and custom, according to which sovereign governments are not sued in regular courts meant to deal with questions internal to a nation state. Further, the presiding judge accepted the case — another break with custom. It set the stage for two decades of such cases, including Argentina’s default this week.

When Elliott’s case against Panama upended established international norms about how to negotiate sovereign default, journalists and researchers didn’t pay much attention. But Wall Street did. Following Elliott’s victory, other funds emerged trying the same strategy. Dart Container Corp and EM Ltd., both linked to Kenneth Dart, one of the most famous names in the world of vulture funds. NML Capital, a Cayman Islands-based fund associated with Elliott also got into the game. Gramercy Advisors, a Greenwich, Connecticut-based firmfocused on Ecuadorian and Russian debt.

As these firms emerged, so did a new moniker: vulture funds. The name may sound disparaging, but it was not invented by Argentina or other debtors. Wall Street’s older firms came up with the name. They could find a profit out of slim pickings.

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