Free enterprise at work: the vulture fund.

We have all heard of financial goings on in Russia that turn up some toes in disgust. There is no doubt that huge amounts of wealth have been accrued there by a very limited number of favoured people for no good reason. The wealth was accrued through political favours/gifts on a huge scale. Everyone blames Putin, and while I feel he has hardly shone in cleaning this mess up, I still put the majority of the blame on Yeltsin. Nevertheless, there are many who seem to think that is a sign of the general immorality of Russians. That could not happen in the West. If you think that, think again. A recent item on the Huffington Post introduces the reader to the vulture fund.

A vulture fund is one that picks up for hardly anything some debt-ridden entity that everyone else has written off, and perforce, they get it for very little. The vulture part comes from the fact they are feeding off what is generally recognized as expired. You may think that is fair enough; they are taking a huge risk, and they get them cheap because they are worth essentially nothing. If that were all there is to it, I would agree wholeheartedly, but it is not. What these funds do is to buy the scrip up extremely cheaply, and then spend very large amounts of money to make the scrip valuable, in which case they sell at a huge profit. Nothing wrong with that if the money was spent on the entity, to sort it out, stop aberrant behaviour, etc. An example of such virtuous vulturing is what Steve Jobs did for Apple. Apple was heading for disaster at an astonishing rate before he returned, and with considerable effort he turned the carcass into one of the most valuable companies in the world. That is great.

But that is not what I am referring to. The bad vultures do not spend their money on making the entity work well again. They spend their money on influencing the decisions that will be made as to its future, and in particular to bailouts. So when a bailout comes, the vultures pass go and bank a huge profit by selling. The bailouts tend to be direct gifts to the vultures.

How well this will work will depend on the nature of the asset. If the asset is inherently healthy, they may present publicity that disses it, which may lead the market to get out of the asset, and their short position rolls in the loot. This particular method presents an interesting position for me, because I am currently writing a thriller type of novel in which something similar happens, and here I read an article that shows what I was thinking actually is happening. (Except my method of “dissing” is a bit more criminal. If you are writing a thriller, there is no point in everybody being legal.) So much for my imagining that you can be original when the objective is to gather loot. I an afraid I must consign myself to the barely amateur class.

Now, suppose the vultures somehow access an asset, directly or indirectly, that the public does not want to die, such as something related to health that in the end cannot be left to rot? The vultures then lobby for political action to prevent death, and then, for the politicians to come out of it without egg on face, they have the debts cleared, to the fund, of course. Paid for by, you guessed, the tax payer. At least that is the plan. According to that article, billions in profits have been made. The pressure will vary, but the key element in most such transactions is they would not work unless the government helped them.

Also of interest is the fact that hedge funds and their like appear to get special tax privileges. This has the effect of giving them a huge advantage over others who might compete with them, which raises two questions. The first is, why the special privileges? What do they do for society that is so valuable? Sucking up money and making a few very very rich is not an adequate answer for me. The second question is, how did they get these tremendous tax advantages? Now, surely you do not suspect this to have arisen as a consequence of political lobbying do you? That would be, well, up there with what you are accusing Putin of doing, and that could not happen in the West, could it?

Of course the hedge funds do not always get their own way. The article cited has an interesting few sentences on the Puerto Rican debt issue. Now Puerto Rico is a US territory, so you might think that being a territory of the richest country on the planet might mean a good infrastructure. The article cites the Eleanor Roosevelt Elementary School, a good solid US name, in which the electricity supply is such that they cannot run two computers at the same time and there are no lights when it rains. You don’t want to hear about the major trauma centre. Nevertheless, some hedge funds will probably take a bath. Why? What has happened is that two groups of hedge funds have apparently taken opposite bets, and thanks to all the lobbying and counter-lobbying, nothing is happening. The situation for the Puerto Ricans is not helped by the fact that the issue is tied down by a Constitutional argument in the Republican majority Congress. Paul Ryan apparently wants to help Puerto Rico, on the basis that Article IV of the Constitution stipulates Congress has power “to dispose of and make all needful rules and regulations respecting the territory.” Those on the right argue the financial problems are their own, and, moreover, what is “the territory”? They argue there is nothing in the Constitution that specifies Puerto Rico, so don’t do anything. Presumably the argument is, leave it to the market, i.e. the hedge funds, and all will be, if not well, at least elsewhere.

This is a clear reason why you cannot leave everything to the market: too much power gets concentrated in few hands, and those few hands have only one objective: to make more money. That does not mean Communism is the answer. What it does mean is the government ought to act as a counter balance and stop excessive misuse of money.