A Deeper Look

Last June, the Conde Nast's Portfolio magazine printed an in-depth article about vulture funds, profiling a few of the most well-known fund managers. The article explained how the men, Paul Singer, Kenneth Dart and Michael Sheehan, became involved in the business, and also explained why the funds typically have such a bad rap.

Excerpts from the article follow:

Despite what some think, Paul Singer is not the devil, and the only horns he has are for navigating midtown traffic. An aggressively low-profile 63-year-old billionaire and supporter of conservative causes, Singer is a bespectacled, gray-bearded man who shies away from being photographed but has rarely ducked controversy. Singer’s main claim to notoriety is Elliott Associates, a $10 billion New York-based hedge fund he founded in 1977. It is Elliott’s affiliation with Kensington International, a so-called vulture fund (which represents about 1 percent of the hedge fund’s total business), that has led many to claim that Singer has bright red skin, a very long tongue, and a forked tail. He’s part of a new generation of investors—the vultures—who buy up the defaulted debt of developing countries on the cheap, then sue to recover 10 or 15 times what they paid for the notes. It’s a very good business, if you don’t mind being attacked by Congress, mauled in the press, and treated as a pariah by the do-gooders leading the global anti­poverty movement...

[Michael] Sheehan spent a significant part of his career running a nonprofit organization that helped poor countries find creative ways to reduce their debt. In the 1990s, his group arranged debt-for-equity swaps, through which a country could convert its liabilities into partnerships for forestry projects, orphanages, programs to treat such diseases as river blindness, and HIV-AIDS education. Sheehan estimates that he raised about $40 million in Africa, Asia, and Latin America between 1992 and 1996.

Then, in 1999, Sheehan parlayed his expertise into an opportunity to make big money. He found out about an obscure 20-year-old loan that Romania had made to Zambia, which used the money to purchase $15 million worth of Romanian-made tractors, trucks, and police vehicles. (“It was a bad deal for us,” says David Ndopu, a top official in the Zambian Ministry of Finance. “The police vehicles broke down after six months and just sat around in parking lots.”) Zambia had been trying to negotiate with Romania for a partial forgiveness, but talks broke off in early 1999. That’s when Donegal stepped in. Its representatives persuaded Romania to sell them the debt at a deep discount—$3.3 million.

In Lusaka, Zambia’s dilapidated capital, I stop by the office of David Ndopu, who has closely followed the Donegal case. Faced with the aggressive pursuit and seizure of its assets, the Zambian government transferred $15 million—1 percent of its annual budget—to Donegal from a British bank account in October. “It was very painful,” Ndopu says. But it is hard to see how Zambia’s increased financial burden is going to make things worse for the average Zambian. Musonda Kapena, who runs a humanitarian-aid agency in the countryside north of Lusaka, tells me that so little money is reaching rural Zambia—where most of the population lives—that $15 million more would hardly make a difference. In August 2006, as schools were desperately trying to obtain a few more pieces of chalk for their blackboards, Zambia paid $7 million for its president, Levy Mwanawasa (who is still in power), to lease an Italian-­made twin-turbine AB-139 Agusta helicopter.

Vultures and their defenders say that’s the kind of government expenditure their lawsuits can expose. Kensington’s lawyers dug up persuasive evidence of presidential profligacy in Congo to bolster their claim that vultures serve an important role. While these sorts of arguments don’t necessarily relate to the debt debate, they help the vultures’ case. Among the damning details in the Kensington case: During a United Nations conference in 2006, Congolese president Denis Sassou Nguesso and his entourage ran up a $100,000 bill at Manhattan’s Waldorf-Astoria hotel. The room-service bill for Sassou Nguesso alone came to $20,000 and included many bottles of the finest champagne. Kensington’s investigators also unearthed credit-card bills of one of the president’s sons, who ran the state oil company, showing large purchases at Christian Dior, Gucci, and Louis Vuitton. Even in Congo, some nongovernmental organizations have reluctantly embraced the vultures as the only forces capable of effecting change in the country.

The "lesser of two evils" concept is an interesting one...how sad that these countries are in such a despicable financial state of affairs that getting sued for their debt is actually helpful!