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Home Publications Blogs Beat the Press Name Calling at the NYT: Argentina and the Vultures

Name Calling at the NYT: Argentina and the Vultures

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Thursday, 21 August 2014 07:14

For some reason the folks at the NYT business desk are having a hard time understanding what is going on with the dispute over Argentine debt. An article today refers to the hedge funds that have forced Argentina into a second default as "holdout investors." It reports that Argentina refers to them as "vultures."

This hugely obscures the basic facts, which are not really in dispute. The funds that have pressed their suit in U.S. courts against Argentina did not hold its debt at the time of the default in December of 2001. They bought it up later at sharply reduced prices. Since purchasing the debt they have tried to use legal pressure to force Argentina to pay the full face value of the bonds.

This is exactly what "vulture funds" do. That is not a term that was invented by Argentina to denigrate these funds, it is a common term used to describe the type of activities that the Elliott Management Corporation (the lead actor in the lawsuit) is pursuing in this case. As a practical matter, there are almost no "holdout" investors involved in this action. Almost all of the original holders of Argentine debt accepted the terms offered by the government. Most of those who did not accept the terms sold their bonds to investors like Elliott Management.

Comments (13)Add Comment
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written by djb, August 21, 2014 10:40
these hedge funds believe that this tactic will get them more money??

i would assume argentina would just default again
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written by Last Mover, August 21, 2014 12:20

This sounds like a pretty nifty idea. Does this mean Americans can buy stuff like cable/satellite tv and internet service at low bait and switch prices, then pressure government to force providers to provide what they said they would without spending a week talking to a call center in India?

Talk about vultures.
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written by JDM, August 21, 2014 12:25
A better analogy, LM, would be buying fire-damaged cars for scrap at scrap price, then demanding the car manufacturer replace the cars with new ones under warranty.
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written by PeonInChief, August 21, 2014 1:04
I think the best analogy would be the debt collectors who buy old debt from creditors for pennies on the dollar and then sue and/or harass people for the entire amount of the debt.
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written by Robert, August 21, 2014 1:09
When Alexander Hamilton, Revolutionary War hero, esteemed citizen and our first Treasury Secretary did it, no one was calling him a "vulture": Hamiltan was part of a syndicate buying Continental debt for pennies on the dollar- and they worked to enable laws providing for 100% redemption- in gold. If Argentina wanted to get into a moaning contest, why did they issue their bonds subject to New York law?
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written by JDM, August 21, 2014 4:06
That's hardly an analogy, PiC.

Robert, I guess you're right; James Madison didn't call Hamilton a vulture (AFAIK) but I'd think sayng Hamilton was out to defraud veterans of the revolution was much the same.
Secondary markets exist because legal and moral rights are transferable
written by AndrewDover, August 21, 2014 9:59
Name calling simply obscures the reality that the current holders of Argentina's debt have the same legal and moral right as the original holders to hold Argentina to the original agreement.

Dean seems to think that pointing out that the current holders of the hold out securities are not all the original owners makes any difference. Perhaps he can explain -why- he thinks it makes a difference, if in fact he does.

If I buy a house, and I did not contract with the original builder, it is just as much my house as the first owner.
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written by Brett, August 21, 2014 11:59
@djb
these hedge funds believe that this tactic will get them more money??

What they do is take some of this stuff - risky bonds bought for incredibly low prices - and then include it as part of an overall diversified portfolio of assets. Think of it as a more extreme version of having a mix of bonds and stocks in your 401K.

As PeonInChief said, they're also kind of like old debt collectors. They buy the debt for a very low percentage of what it was originally sold at - think 10 cents on the dollar - and then try and recoup the whole amount if possible.

It's technically a good thing, if done right. Most smaller banks and companies don't have the resources to do in-house collections, so if they couldn't sell off the debt they probably wouldn't offer as much in loans.
Moral rights? Whose moral rights?
written by Victor Silverman, August 22, 2014 12:15
Andrew: The legal right is the matter in dispute in the courts, but the moral right is a very different thing.

A better analogy would be: someone seizes your house at gunpoint and forces you to mortgage it. Should you be responsible for the mortgage? Of course not. And any bank that made a loan in those circumstances would be foolish. The people who made loans to military dictatorships acted in the same way--loaning money to an illegitimate entity. They took a risk and lost.

The vulture fund buyers of these bonds presumably knew that they were likely worthless. That is why they only paid pennies on the dollar for them. They gambled that they could find a way to squeeze more money out of the current Argentine government than the other bond holders. Of course, these bonds were issued by a corrupt, incompetent and illegal military dictatorship. The Argentine people morally should not be held responsible for the debts incurred by such a regime.
These are funds that buy up distressed debt at very low prices
written by Dean, August 22, 2014 4:37
Folks, whether or not there is a moral distinction (make your own call), there is a factual distinction between an investor that held a bond since the default and someone who bought it up at a steep discount. The "vulture funds" did the latter. This is what they are called in U.S. financial markets. It is not a term invented by Argentina.

The piece should be able to report the facts, which as I said, no one seriously disputes.
Tragedy of the Commons
written by jonny bakho, August 22, 2014 7:02
This is one more example of greedy bastards making everyone else involved worse off.
NYT's history with the term vulture funds
written by Ben Zipperer, August 22, 2014 8:50
Just a couple of years ago, Landon Thomas wrote a NYT article about Dart Management's successful vulture tactics with Greek debt:

Dart is one of the best known of the so-called vulture funds, which have a track record of buying the distressed bonds of nearly bankrupt countries -- and if they do not get paid, suing the governments for the money. Dart and another big vulture fund, Elliott Associates, perfected that strategy during the various Latin American debt crises in years past.


Rejecting Greek Debt Deal Results In a Hefty Payoff for the Holdouts, May 16, 2012, http://www.nytimes.com/2012/05...-fund.html

In May 2002, the NYT referred to Elliott Associates as a "vulture investor" because of its tactics with Enron debt.

There is a Nov 22, 2007, NYT piece noting that Elliott Associates has been called a vulture fund by both The Times of London and then senior IMF staffer Anne Krueger, with regard to its strategy to force larger repayments on the debt of Peru and the Congo.

The NYT archives contains stories about vulture funds back to at least the mid-1980s.


Moral Rights? What?
written by Eric377, August 22, 2014 12:09
The bonds in question were not defaulted as being onerous debt. The democratic government of Argentina never argued that they were illegitimate in that sense, but rather they were no longer payable. Lots of people are mad at Judge Griesa, but it seems like that special anger reserved for people who are inconveniently right about something that irritates others...like that unreasonable and possibly nasty people do not thereby forfeit contract rights. Argentina issued their debt with faulty provisions for default and negotiating with many parties to restructure those parts of the debt did not change what the contract called for on the
holdout debt. Further, the holdout debt had provisions in US law that said that it was just as good as the restructured debt and had to be paid equally. It is neither Griesa's fault nor problem that that's how Argentina went about selling its debt. Argentina entered into stupid but non-onerous debt agreements.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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