Opinion

Felix Salmon

Is Russ Feingold joining the war on vulture funds?

By Felix Salmon
October 16, 2009

Remember the silly war on vulture funds being waged in the UK and, in the US, by Congresswoman Maxine Waters? Well, I have good news and bad news. The bad news is that it’s making its way into the US Senate: Russ Feingold, the chairman of the Subcommittee on African Affairs, is thinking of introducing legislation of his own. The good news is that his staffers are reaching out to people like me, and seem genuinely interested in trying to understand the issues and the potential negative consequences of any legislation.

I just had a pretty long conversation with three of Feingold’s staffers on this subject, and they were asking if there was any way that they might be able to introduce a bill which curtailed some of the most egregious actions of vulture funds while not going as far as the Waters bill. I told them that the short answer is no: debt markets would react very badly to any attempt to prevent or impede trading debt instruments in the secondary market. And what’s more, none of these bills would make the problem of developing-country debt go away: it would simply keep that debt in the hands of original creditors, who might well start employing more vulture-like tactics to get their money back if they were prevented from selling their claims.

Feingold is commendably concerned about the fate of small African countries, who might be in the position of receiving hundreds of millions of dollars of debt relief from the US government, only to find that freed-up cashflow suddenly eyed by greedy vultures. And he doesn’t want hedge-fund types receiving any part of the money that Congress apportions to developing-country debt relief. I’m sympathetic. But the fact is that vulture funds have been having a dreadful time of it recently, and are losing cases much more frequently than they’re winning them. The total amount of money that’s at issue here is minuscule, compared to the enormous effect that it could have on the capital markets as a whole. The whole issue of vulture funds looks very much like a solution in search of a problem.

I told Feingold’s staffers that they should be sure to talk to a range of developing countries about their legislation — not just the poorest countries whose debt would be directly effected, but also richer countries who might see their credit spreads widen if Congress started messing about with the enforceability of sovereign debt obligations. Even the poorest countries aspire to tapping private capital in future, and might be very wary of legislation along these lines.

More generally, it might behoove market participants and industry groups to start talking seriously to Feingold’s office on this subject, especially if they can put together some hard data on just how much money we’re talking about here. It certainly makes sense to try to quantify the scale of the problem before putting a huge amount of effort, not to mention enormous knock-on consequences in the market, into some kind of solution.

Comments
3 comments so far | RSS Comments RSS

Russ Feingold is the worst kind of politician.

Posted by Dogma | Report as abusive
 

They might aspire, but should they actually take credit from people that calculate their risk based on the country will pay back no matter what because US guns back me so i am first in line, that is before those starving kids…

Posted by urgs | Report as abusive
 

Africa faces huge challenges:

1. It is split between Muslim and Christian (the latter sub equatorial)
2. Diseases such as malaria and drug trafficking
3. Rebels and warlords
4. Arms trade and Land mines
5. Corruption and Productivity
6. A ‘split’ African Union
7. Superpowers trying to get their claws on minerals and energy
8. Despots
9. Inconsistent distribution of aid and debt servicing.
10.Droughts.

As callous is it sounds, I agree with ‘urgs’. The IMF, World Bank & Co should manage funding, at present every free dollar should go the US citizens/taxpayers.

Coercive positioning for minerals and energy should take place on a transparent and arms-length basis.

Posted by Casper | Report as abusive
 

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