Johann Hari has a critical piece on “vulture funds” at The Independent that is sure to be polarising:

“Would you ever march up to a destitute African who is shivering with Aids and demand he “pay back” tens of thousands of pounds he didn’t borrow – with interest? I only ask because this is in effect happening, here, in British and American courts, time after time. Some of the richest people in the world are making profit margins of 500 per cent by shaking money out of the poorest people in the world – for debt they did not incur.

Here’s how it works. In the mid-1990s, a Republican businessman called Paul Singer invented a new type of hedge fund, quickly dubbed a “vulture fund.” They buy debts racked up years ago by the poorest countries on earth, almost always when they were run by kleptocratic dictators, before most of the current population was born. They buy it for small sums – as little as 10 per cent of its paper value – from the original holder and then take the poor country to court in Britain or the US to demand 100 per cent of the debt is repaid immediately, plus interest built up over years, and court costs.”

My Comment

I’ve been interested in these lucrative public-private philanthropic ventures for some time. “Doing good” has become the avenue for “doing well.” This is touted by some people as the “markets working for people.” But the markets work for…and against..people all on their own. They don’t need the bells and whistles of public philanthropy added.

And when philanthropy been added, as my earlier post on Jeffrey Levitt indicates, it’s usually been added for an ulterior motive. Thus Hari’s activism against vulture funds.

Having made that point, I have a few problems of my own with Hari’s post that I’ll come back later.

First, here’s a response from the object of Hari’s criticism –  one Michael Sheehan, the founder of Debt Advisory International (DAI) (which manages several vulture funds) and a Republican donor to George Bush’s campaigns.  Sheehan’s letter is cited by Felix Salmon at his Reuter’s blog. The crux is at the end:

“At the end of the day, then, the anti-vulture legislation will accomplish exactly the opposite of what it set out to do. It will have increased the debt burden of all HIPC countries, increased the cost of credit for all HIPC countries, increased the barriers to foreign direct investment for all HIPC countries and increased the amount that will be demanded from the OECD countries in support of aid budgets for all HIPC countries. There won’t be any savings. The costs will be in the billions and will be annual costs you won’t get rid of.
You will, of course, in the process have increased the power and leverage of the development set, but then that was the intention all along, wasn’t it.”

There’s more on Sheehan and the creator of the concept – Paul Singer – in this piece, which also sheds some light on just how influential vulture funds are:

“Debt Advisory International are very generous to their lobbyists in Washington. They have been paying $240,000 a year to the lobby firm Greenberg Traurig – although recently they jumped ship to another firm after Greenberg Traurig’s top lobbyist was put in jail.

Paul Singer has more direct political connections. He was the biggest donor to George Bush and the Republican cause in New York City – giving $1.7m since Bush started his first presidential campaign.”

Many of the debt purchases are also corrupt, as this BBC piece indicates:

“The Zambian deal with Donegal for instance involved an official in former President Frederick Chiluba’s administration who was later found – along with the president – to have stolen £23m from Zambia.”

From Third World Traveler come further details:

“The debt, originally owed to Romania for agricultural machinery and services, was accrued during the cold war. The amount claimed by Donegal was far more than Zambia is due to receive this year in debt relief – as agreed at the G8 meeting in Gleneagles in 2005. It is equivalent to more than six months of Zambia’s health budget.

Since qualifying for debt relief, Zambia has introduced free primary rural healthcare and announced plans to employ 4,500 teachers and hundreds of nurses. But one in three children in Zambia still does not go to primary school, nearly 80% do not receive secondary education and the average income is barely $1 a day. Donegal International’s claim threatens to undermine Zambia’s plans for poverty reduction.”

My Comment:

The vulture funds are, of course, behaving unconscionably. But moral outrage after the fact is less effective in stopping such things as not providing the incentives that entice unscrupulous people in the first place.

And these incentives are usually put in place by the state…in this case, by the global financial organizations, the IMF and World Bank, which were behind the economic policies that turned the once relatively prosperous country of Zambia into a basket-case, where half the population is malnourished.

So yes, the vulture funds are predators – but their predation is secondary and far smaller than the predation of the scavengers of the first order – the global managers whose “aid” has a strange way of devastating its recipients...