There are hedge funds operating in every market where underhand amoral spivs can turn a profit. One of the most profitable and (you guessed it) ethically questionable is the market for so-called “distressed assets”.
A distressed asset is a security or other property that has a sharply reduced value as a result of real or potential losses created by an excess of risk to its future or current value – such as where there is a high risk of default. Imagine that you buy a corporate bond in an Argentinian company for £1,000 which will mature in five years time (i.e. you will get your £1,000 back) plus each year you will receive interest of 10% or £100 – sounds like a reasonable investment right? Now imagine that it is not a company but the Argentinian government that is borrowing the money; that must be an even safer bet… except it isn’t.
Argentina has defaulted on its sovereign debt several times in the last 20 years and the day after you invest it announces it won’t be paying back all that it has borrowed. Instead it offers to pay you £100. Your £1,000 bond is now worth 10% of the price you paid and, like you, it is extremely distressed.
You may be desperate to sell your bond but, of course, buyers are thin on the ground and after a few weeks of desperation a smooth talking second-hand car salesman arrives at your front door and makes you an offer. To your surprise he is willing to give you, subject to certain legal conditions, £110 for the bond that you know is now worth only £100 – in market parlance, you bite his arm off.
Our dodgy salesman now owns an asset that is difficult to sell and may well decrease even further in value but unbeknownst to you he has approached all the other bondholders and now owns a major stake which gives him legal as well as market influence. In fact, the salesman now has so much influence he can force Argentina into default on all of its debts and ask courts around the world to seize their sovereign assets and sell them to repay 100% of the outstanding debt to our anti-hero the car salesman.
So having paid £110 to you, the salesman has received the full £1,000 from the sale of Argentina’s assets whilst also forcing the country to default on all of its other debts which sets-off a sequence of events that usually ends with massive unemployment, deep and lengthy recession and a visit from the IMF. It’s not for nothing that these types of hedge funds are also known as vulture funds.
One such hedge fund is called Elliott Management and it is run by the amoral billionaire Paul Singer who has been in an ongoing financial war with Argentina for years. Here’s only one of the many despicable things that Singer has done in his quest to make a quick buck from the economic corpse of a sovereign nation…
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