Legal carte blanche for vulture funds

The 15-year saga of one of the most complex and notorious debt litigations in history has come to a conclusion that legally sanctions predatory hedge funds and endangers the world financial order. It is a glaring reminder of the urgent need for an international debt restructuring mechanism.

Bhumika Muchhala

IN February, Argentina agreed to churn out $4.65 billion from its public coffers to some of the world's largest hedge funds, which represents 75% of the full face value of the discounted bonds the hedge funds had bought just before the country's 2001 debt default and includes principal, interest as well as legal fees and expenses incurred.1

Billionaire Paul E Singer's NML Capital, the leading hedge fund in the litigation, is making a 370% return on its original 2001 purchase of $617 million of distressed Argentine bonds, raking in a total sum of $2.28 billion. Another fund, Bracebridge Capital from Boston, is collecting $950 million on its original principal of $120 million. That amounts to an 800% rate of return.2

Twelve years ago, a group of four hedge funds - NML Capital, Aurelius (a hedge fund run by Mark Brodsky, a former trader at Singer's firm), Davidson Kempner and Bracebridge Capital - declared legal war on Argentina in the United States courts. These 'holdouts', so named for their refusal to participate in Argentina's two debt restructurings after the country had defaulted on $100 billion of debt in 2001, sought billions in bond repayments.

Representing only 8% of the nation's creditors, they aimed for the full face value of highly discounted bonds they had purchased right before the 2001 default. The other 92% of Argentina's creditors had by 2010 accepted a sizeable 'haircut', or discount rate, of 65%. In other words, the vast majority of Argentina's creditors agreed to receive only 35 cents for each dollar of the face value of the restructured bonds.

The infamous judge Thomas P Griesa of the Federal District Court in Manhattan, who has presided over the lengthy legal battle, made two pivotal moves in the past few months. First, on 19 February, he agreed to lift the injunction that legally prevented Argentina from raising new money in bond markets or paying its creditors until it had paid the holdouts. Second, he ordered that payments to the four holdouts have to be made by a deadline of 14 April.

The second command requires Argentina's Congress to approve the repeal of legislation, Ley Cerrojo or the Padlock Law, which prohibited the country from offering superior terms to the holdouts than those given to creditors who participated in earlier restructurings. On 16 March, the lower house of Congress voted 165-86 to repeal the Padlock Law as well as the Sovereign Payment Law. Argentina's Senate now faces a 14 April deadline to repeal the same laws.

The holdout hedge funds are leading examples of what are widely known as vulture funds, the most combative and tenacious creditors globally. By definition, a vulture fund buys securities in distressed investments, such as high-yield bonds in or near default, or equities in or near bankruptcy. They then seek repayment of the full face value together with interest, penalties and legal costs. Vulture funds have the financial prowess to impound or seize assets of the country or company if repayments are not made by the borrower.

For example, in October 2012, NML Capital impounded the Libertad, an Argentine naval vessel with a crew of about 300 on board, in the Ghanaian port of Tema. After months of seizure, the Libertad was released by an international tribunal and returned to Argentina in January 2013. NML Capital also tried to impound other Argentine assets, including a satellite.3

NML Capital used similar strategies to bully the Republic of Congo and Peru into paying their defaulted debt. In the 1990s, NML Capital made a 400% profit on what it originally paid for Peru's distressed bonds, and a 10,000% profit on over $30 million worth of defaulted debt issued by the Republic of Congo, for which it then sued the government for almost $120 million in repayments plus interest. One of the many ways Singer's fund secures political support is through the American Task Force Argentina (ATFA), a lobby group that targets the US Congress to take sides with its litigation cases.

These astounding victories illustrate the brazen business model of vulture funds. They are not merely predatory investors that carry out opportunistic financial market transactions centred on companies and countries on the verge of default. Vulture funds employ their ample financial resources very effectively for litigation, public relations campaigns, buying political influence through donations and bribes, lobbying outfits and media capture, among other tactics. Not only can they bring defaulted countries to their knees through litigation, they subvert the ability of a sovereign country to carry out orderly debt workouts by securing unprecedented legal and financial power spanning courts, markets and industry norms.

The legal victory of vulture funds incentivises other financial actors to employ the same exploitative tactics, while providing them with extra resources to invest in future litigation, campaigns and lobbying. This is a problem not just for nations in debt crises that are hoping to restructure their debts, but for democracy itself. With such exorbitant amounts of funds at their disposal, vulture funds can corrupt, without breaking the law, political and financial systems anywhere.

Debt campaigners are urgently calling for anti-vulture fund laws and bankruptcy procedures to stop the disgraceful profiting from pushing already indebted countries into even deeper economic recession. Civil society groups have long stressed that the international financial community has to respect the balance between sovereign domestic development priorities and external financial debt restructuring. They are concerned that indebted countries across the world, many of which are facing protracted debt burdens due to the lingering effects of the global financial crisis and recently collapsed commodity prices, are now left in a weaker position as vulture funds are further empowered to block necessary debt reductions.

Griesa's rulings legally sanction vulture funds

One of the most critical elements of the legal victory for vulture funds is Judge Griesa's 2012 ruling on the pari passu clause embedded in debt contracts, which enforces equal treatment to all creditors regardless of whether they have held out or cooperated in past debt restructurings.4 In other words, Griesa ordered that everyone gets zero repayment until the hedge funds get exactly what they want. This matters because Argentina had reached agreement with the vast majority (92%) of its creditors in deals struck in 2005 and 2010.

The central debate between restructured bondholders and holdout (hedge fund) bondholders was at the heart of the debt trial. NML Capital argued that getting paid in full, plus interest, was more than fair, because the holdout plaintiffs spent millions litigating while the holders of swap bonds were getting regular payments. The exchange bondholders countered that there was nothing fair about raking in as much as a 1,500% return on debt bought for pennies on the dollar, or about seizing foreign assets for that matter.

The attorney for the Exchange Bondholder Group, David Boies, argued against preferential treatment for the holdout creditors, saying that it was 'inequitable' for the holdout creditors to get multiple amounts of the face value of their debt. Boies said that the jurors should prevent a second loss for exchange bondholders when they had already taken a haircut. He stressed that 'the right to payment for legitimate creditors should not be taken away when losses have already been internalised'.

The irony, observes Anna Gelpern, a law professor at Georgetown University, is that the pari passu legal principle invoked by the hedge funds to get paid in tandem with other bondholders is defined as equal treatment. But by holding out, funds like NML Capital and Aurelius guaranteed that they were paid far more for their bonds than restructured creditors.5

The second ruling by Judge Griesa that sets an ominous legal precedent for coercing debt-laden countries in the future was the stipulation penalising financial institutions doing business with Argentina. This ruling targeted the Bank of New York, which administered Argentina's payments to restructured bondholders. If the Bank of New York continued to facilitate these payments without Argentina simultaneously paying the holdouts, Griesa would hold the bank in contempt of court. This made it virtually impossible for Argentina to transfer money to the restructured creditors, prompting the country to default yet again in 2014.

Griesa's injunction over the Bank of New York is a new tool that has laid the foundations for future investors to contest the debt obligations of other countries, and experts on debt litigation warn that it will be used again. Gelpern highlighted that this tool is a kind of financial boycott that would allow creditors to enforce equal payment in other instances. It also creates a fundamental problem of moral hazard in which this type of behaviour is incentivised by the law itself.

The business model of a vulture fund

Speculative hedge funds engaging in vulture fund-style behaviour have a highly sophisticated business model that upholds their sweeping profits, legal capture, political lobbying and financing and seizure of foreign assets. The undisputed leader of vulture funds is Paul E Singer, manager of Elliott Management Corporation, of which NML Capital is a subsidiary. With a net worth of $2.2 billion (and counting), Singer's wealth stems from the management of over $27 billion in high-risk transactions. Singer founded his fund in 1977, and it has returned over 14% annually since then.

His success is rooted in his ability to locate the most distressed assets, buy them up on the cheap and then efficiently leverage international court systems, boardroom tactics and devious financial engineering to extract as much value as possible from those assets. In the aftermath of the 2007-08 global financial crisis, Singer quickly deployed his own resources to establish real estate offices in London, Hong Kong and Tokyo to finance equity and debt investments in skyscrapers, distressed properties, hotels and so on. Singer has also used strategies in foreign sovereign debt, corporate breakups, improving operational efficiency and real estate.6 The key elements in his manoeuvrings are opportunity, aggressiveness and the ample financial resources at his disposal. Online magazines and literature in finance and investment speak of Singer as an exemplar of how to take advantage of opportunities through a shrewd and calculated hyper-vigilance on market volatility and crisis events.

Singer's vulture fund legacy has left its imprint in Peru and the Republic of Congo. At the cusp of Peru's debt restructuring in 1996, Singer's hedge fund bought $20.7 million worth of old loans to the country, paying only $11.4 million. Singer immediately rejected Peru's restructuring and sued the country in a New York court for the original value of the loans plus interest, winning a $58 million settlement with a $47 million profit, making a return of 400%. Peru couldn't pay the hefty sum and instead prioritised repaying creditors who had cooperated in debt restructuring. Singer retaliated through the same strategy of litigating-debtor-country-into-submission that he has imposed on Argentina. He obtained a judicial order to restrain Peru from repaying anyone else, propelling the country back towards default.

In the Republic of Congo, Singer's Elliott Associates used a subsidiary called Kensington International based in the Cayman Islands to buy $30 million worth of defaulted debt issued by the country for only $1.8 million. Elliott Associates then sued the Congolese government, using courts in the United Kingdom, for almost $120 million in repayments plus interest, at a profit of 10,000%. The Congolese government couldn't pay up and interest accrued at an exorbitant rate of $22,008.23 per day. The Republic of Congo's per capita GDP at the time averaged around $800 and the country had approximately $9 billion of foreign debt for a population of fewer than four million people. Singer and Kensington relentlessly chased Congolese assets in courts around the world. In 2005, a UK judge let Singer intercept and expropriate $39 million in Congolese oil sales to a Swiss firm, enabling him to make a 2,000% profit.

Vulture funds essentially exploit the financial system thoroughly, acquiring distressed debt in secondary markets at discount rates and then multiplying profits at the expense of populations that bear the unjust burden of their nation's debt. Their actions, underpinned by their sheer disregard for the consequences for the country and people involved, have been called ethically repugnant and amoral.

Criticisms against vulture funds have been voiced from officials across the world. In a statement to the US Congress in 2007, George W Bush's Treasury Secretary said, 'I deplore what the vulture funds are doing.' Former British Prime Minister Gordon Brown accused vulture funds of 'perversity', calling them 'morally outrageous'. The World Bank itself estimates that vulture funds have sued a third of countries receiving debt relief, and even the International Monetary Fund (IMF) has expressed serious concern about the wide systemic implications of the vulture fund litigation against Argentina for sovereign debt restructuring.

The man who invented vulture funds

Singer, a self-described libertarian conservative with a single-minded belief in the rule of law, is a singular power broker in the US Republican Party financial world. In 2015, he lavished a purported $2.3 million on Republican candidates, more than anyone else on Wall Street. This makes his hedge fund one of the largest sources of political donations in the country. He is a foreign policy hawk with strong pro-Israel ties. In April 2015, he donated to Senator Marco Rubio's presidential campaign, and in 2008, he put his weight behind former New York Mayor Rudy Giuliani's failed bid for the White House.7

When a vote on the legalisation of gay marriage in New York state was on the verge of defeat in 2012, Singer, an avid supporter of gay marriage after his son came out as gay some years ago, donated at least $3 million to the Human Rights Campaign (HRC) in Washington for their programmes on LGBT rights in developing countries. Gay rights campaigners spoke out against HRC for accepting Singer's money, saying it sent a message to governments in the developing world that US organisations condone the unjust suffering of entire populations to promote LGBT rights.8 

Singer finances various Republican politicians and a conservative think-tank called the Manhattan Institute to fend off scrutiny and guard his business model from disruption. For example, in 2009 a bill to curtail vulture funds' profiteering was introduced in the US Congress. To counter any such movement in financial policy, Singer called on his think-tank to counter the threat. In response to criticisms, Singer chafes at the term 'vulture fund'. To him, not paying creditors often speaks to a wider government corruption and a violation of the rule of law likely to be harming citizens even more than bondholders. His staunch fiscal conservatism justifies his sheer disregard for the moral hazard his actions pose to national financial stability and the necessity of orderly debt restructuring in that regard.

Grave implications and the way forward

The implications of the vulture funds' legal victory over Argentina are grim and manifold. The Geneva-based development think-tank South Centre offers the following analysis of the implications.9

First, the massive financial gains for the holdout hedge funds as well as the legal sanctioning by the US court in the Argentina litigation will undeniably empower other hedge funds and larger creditors to follow suit. According to the South Centre, this could lead to the birth of more 'baby NMLs'. The current niche of vulture funds could become a much more crowded market. NML Capital's aggressive tactics, from having recourse to the courts to the seizing of a national ship, could inspire creditors to become more combative and uncompromising in the future. This would make creditor cooperation increasingly difficult.

Second, in future debt restructurings, the creditors may first investigate whether there are big institutional creditors with financial and legal power also involved in the same case. This would result in a 'me too' possibility, rather than deciding whether or not to cooperate in the debt restructuring based on their own financial situation. This will most likely result in a delayed and disorderly debt workout and undermine the objective to quickly rescue the financially distressed government and restore debt sustainability.

Third, it is highly likely that these hedge funds would aggresively scope out the weak links in sovereign bond contracts beyond just the pari passu clause. The enormous influence of the hedge funds, their legal tactics and demonstrated tenacity have led to efforts to strengthen contractual clauses to reduce chances of holding out in debt restructurings and rushing to the courts. Strengthening contracts involves tightening the language of the collective action clause (CAC), the pari passu clause as well as strengthening sovereign immunity. However, there are other boilerplate and general clauses which could be subject to innovative interpretations.

Fourth, the impact of the powerful 2012 pari passu injunction may linger on. Whether the conditional lifting of the injunction granted by Judge Griesa would make the injunction disappear for good remains to be seen. The injunction prevents Argentina from servicing its bonds until it settles with the holdouts, and is a powerful financial weapon. It favours the holdouts if the borrower does not have close to infinite financial resources to fight lengthy legal battles. If holdouts can still use this court injunction as recourse, borrowers' chances of winning the legal battle would be significantly diminished. Newly revised CAC and pari passu clauses will take a long time to phase in, depending on the maturity of the bonds. Considering this reality, the outstanding bonds without improved language on CACs and pari passu pose a serious ongoing threat to debt restructuring. With the slow recovery from the global financial crisis and low commodity prices, some developing countries are facing debt sustainability challenges, making them eventual easy targets for litigation-oriented hedge funds.

The spectre of vulture funds started descending on Greece in 2012, as financial investors amassed fortunes on distressed Greek debt. For vulture funds, a debt crisis 'as big as Greece's is mouth-watering'.10 They have since been scheming for the best ways to pursue strategies against Greece by purchasing foreign-law Greek bonds, because creditors holding bonds governed by Greek law were forced by a majority to accept significant haircuts.

Given the above constraints and dangers, what are the ways forward for timely and orderly debt restructuring?

The central problem is that hedge fund activity is entirely within the rule of law. These funds have every right to purchase bonds in the secondary market, and buying them at a fraction of their face value is not a crime. However, the business model of specialising in purchasing hugely undervalued bonds for the purpose of resorting to litigation and other means to force debt-distressed governments to pay the full face value is not ethical. It creates moral hazard and systemic instability and amasses profits at the expense of ordinary taxpayers as well as the sovereign state. Academics and institutions have used name-and-shame strategies in hopes that the hedge funds would give in. But this has not had much impact.

However, a number of approaches may be worth considering for the purpose of reducing the likelihood of recurrence of Argentina-style litigation.

The first approach is to reduce incentives for holdout creditors. It is common business practice for goods and services bought at huge discounts in retail stores or online to come with clear stipulations that they are either not refundable or cannot be changed or returned. For example, one does not buy an item at a Christmas sale and then go back to the store demanding a refund of the full original price. Why then is it not lawful to reject the request of the holdout creditors to get paid the full face value of the bonds when they were purchased at a deep discount?

The dilemma is within the content of sovereign bond contracts, which do not explicitly mention that bonds purchased at discount will be redeemed by the state at that same discounted rate rather than at full face value. The issuing state is legally obliged to follow the details in the bond contract.

In the absence of a multilateral legal framework for a sovereign debt restructuring mechanism, reducing incentives may be done through revising the contractual terms for the bonds. When bonds are bought at a steep discount, there should be a contractual clause to limit the margin of returns. This would minimise the likelihood of litigating for 100% repayment. Consideration could be given to adding a clause to bond contracts to the effect that 'in case of a debt restructuring, the bondholders would be paid back no higher than x% of the purchase price of the bond'. This range or specific percentage should allow sufficient profit margin and avoid the possibility of moral hazard of strategic default. In this way, secondary market operations would not be disrupted and incentives for holdout creditors could be diminished.

The second approach is to regulate against the vulture fund business model. Very few countries have even attempted to take what should be a mandatory step to safeguard national economic stability and security. In July 2015, Belgium boldly adopted a law against vulture funds. The legal text aims at limiting the rights of holdout creditors in Belgium. Unsurprisingly, Singer's NML Capital has recently attacked the legitimacy of the Belgian law before the nation's Constitutional Court. However, the socialist member of parliament who proposed the law, Ahmed Laaouej, balked at Singer's move and has gathered other parliamentarians to ask the Belgian government to do all it can to vigorously defend the law against financial predators.11 The hope among many civil society advocates is that Belgium's move will inspire other European Union members to follow suit.

The third approach involves reducing statutory penalty interest rates. For example, the statutory penalty interest rates of some NML Capital bonds deliver 10-15-fold returns to Elliott. These kinds of arrangements give exorbitantly high incentives to holdout bondholders.

The fourth approach seeks to plug the key gap in the international financial architecture, that of an international debt restructuring mechanism or legal framework. There have been repeated efforts to establish an international debt workout regime, pursued by the IMF in 2003 and the United Nations General Assembly in 2015. However, these processes have been effectively and routinely blocked by powerful political resistance in developed countries. The Argentina case once again proves the urgent need for a debt workout mechanism and highlights the ongoing threat to sovereign and global financial stability in its absence.                                                              

Bhumika Muchhala is a researcher with the Third World Network in the area of finance and development.


1.    Alexandra Stevenson and Jonathan Gilbert, 'Argentina Reaches Deal with Hedge Funds Over Debt', New York Times, 29 February 2016,

2.    Patrick Gillespie, 'This fund made an 800% return on Argentina debt', CNN, 2 March 2016,

3.    Bhumika Muchhala, 'Argentina and hedge fund embattled in "debt trial of the century"', Third World Network, 11 March 2013,

4.    Martin Guzman and Joseph E. Stiglitz, 'How Hedge Funds Held Argentina for Ransom', New York Times, 1 April 2016, www.nytimes.


5.    Jonathan Blitzer, 'A Good Week for Vulture Funds', New Yorker, 5 March 2016,


6.    Stephen Foley, 'Paul Singer, the hedge fund holdout', Financial Times, 20 June 2014,

7.    Wikipedia, 'Paul E. Singer',

8.    A Paper Bird, 'HRC and the vulture fund: Making Third World poverty pay for LGBT rights', A Paper Bird: Sex, Rights and the World, 4 November 2013,

9.    Yuefen Li, 'Implications of Argentina's deal with "super holdouts"', South Centre, 5 March 2016,

10. Nick Dearden, 'Greece: Here come the vulture funds', Committee for the Abolition of Third World Debt, 19 May 2012,

11. Pascal Lorent, 'Un fonds vautour attaque la loi belge', Le Soir, 21 March 2016,

*Third World Resurgence No. 307/308, March/April 2016, pp 10-14