Vulture Capitalism

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t is 2002 and the west African coun­try of Liberia has been driven to eco­nomic ruin. I jbcria's leader, Presideni Charles Taylor, is an alleged war criminal who has bankrupted his coun­try. The nation drowns in foreign debt and owes ,f 3 billion to international banks and governments. That's about 40 times the size of the government's annual budget.

Two thousand miles to the southeast, in the Republic of the Congo, an uneasy peace prevails after a civil war, though rebels still terrorize the countryside. The nation owes more than $5 billion in foreign debt. Across the Atlantic, the middle class has collapsed in Argentina. The government defaults on $81 billion in foreign debt, the largest sovereign-debt default in history.

A small group of Amer­ican investors senses opportunity. One man works on the 35th floor of a skyscraper off Man­hattan's Fifth Avenue. He is a millionaire named Jay Newman, allied with a hedge fund firm called Elliott Management. New­man is a key figure in this unique field of finance deal­ing in obscure foreign debl He pressures governments in crisis to pay him. To him the Congo and Argentina represent opportunities.

Another investor, an eccentric billionaire, has stationed himself in the Caribbean, where he has built a sprawl­ing trading and analysis operation. Kenneth Dart, the reclusive scion of an American manuf act tir­ing family, abandoned his native land 16 years ago to shield his wealth from the government.

These Americans use a highly specialized invest­ment scheme developed over the past 20 years. They run vulture funds.

buying abandoned debt in bedeviled countries at pennies on the dollar. The foreign governments owe the funds just as a man with a mortgage owes his bank. When the vultures decide to strike, they want their money immediately and launch integrated campaigns to get it. It's like a credit card company selling a laid-olfiactory worker's old account to a debt collector, only on a much larger scale.

The most aggressive vulture funds use eveiy legal tool at their disposal— the courts, the press and politicians. When court rulings go against them, they lobby to change the laws. They hire investigators to dig up dirt on foreign leaders. In a way, they run their own foreign policy operation.

Profits in this unique specialty can range from 300 percent to 2,000 percent per deal, according to international insti­tutions. Ihe cost is borne by the world's poorest countries. That may be why the World Bank says vulture financiers are a "threat to debt reduction." The UN calls them "predatory creditors."

The vulture investor world is a small one, made up of smart men who don't necessarily like or trust one another. Few vulture fund managers will talk publicly; some are suspicious of the press, and most have a lawsuit or two

boiling away that they don't want to dis­rupt. But these vultures have learned to collect assets from some of the world's most desperate nations.

Monroxna, Felmuiry 15, 2002: The capi­tal of Liberia hunkered down while the usual ragtag irregulars headed to bat­tle in their pickup trucks. That didn't matter in a New York City courtroom, where vultures prepared for their own battle. Lawyers rep resenting two com­panies filed for an 118 million judgment against the Liberian government. One of those firms was FII International, run by a man named Eric Hermann, a vulture capitalist who lives in New York's Westchester County. "He was reputed in (he 1990s to be the guy who really knew Africa," one friend of Her­mann's tells me. "He got involved in eveiything. He knew a lot of the people in Africa quite well." Hermann's bio says he once had a Fulbright scholarship to work in (he Ivory Coast.

While Liberia was falling apart, Her­mann's company sued in a New York court, demanding $13 million for a debt from 1978. It was a piece of a loan made by Chemical Bank. No lawyer appeared in court on behalf of Liberia.

"Liberia didn't have any representative to show up in New York because they were in a civil war," says one vulture investor. "If you pick on a country like Liberia, they're not going to be able to afford big lawyers."

If you don't show up in court when you are sued, you lose. And so, five months later, in June 2002—as a new rebel offensive began against Liberia's capital—a federal judge signed a default judgment in favor of Hermann's com­pany. FII International could now use the courts to collect, anywhere in the world, any Liberian asset it could find.

Thus does an impoverished nation become a source of revenue. That judg­ment wasn't worth much in 2002. It sat there, dormant, until it could come back to life when Iiberia tried to get back on its feet.

Jay Newman, a 58-year-old New York investor with a law degree, lives in a town-house in Greenwich Village. Although he lives well, he is not extravagant, and one would hardly know that over the past 20 years the governments of Peru, Paraguay, Poland, Kcuador, Ivory Coast, the Congo and Argentina have all been his victims. (continued an page 175)

Vulture

(continued jrom page 62) "He kind oflikes wearing the black hat," one friend of his says. "lie prefers wearing black." Indeed, sources say Newman usually dresses in black suits, and some attorneys refer to him as "the undertaker." Newman went to Yale, where he met Lewis "Scooter" Iibby, another student. Alter graduating, Newman joined I.ibby at Columbia Uni­versity Law School. By several accounts the two men became friends, and libby contin­ued to do legal work for Newman into the 1990s, before joining Vice President Dick Cheney's White House staff.

In the 1980s and 1990s, world leaders tried to break the endless cycle of debt that stran­gled developing countries. One innovation was the Brady Plan, named after Nicholas Brady, who served as Treasury secretary under presidents Reagan and George II.W. Bush. In an effort sanctioned by the interna­tional community, nations working their way out of debt could negotiate so their old loans would be repackaged. Newman saw oppor­tunity. In the early 1990s he began to buy the debt of impoverished countries and sue in court to collect. Countries, unlike home owners, can't declare bankruptcy; technically a nation will always owe what it borrows. And Newman always demanded payment in full.

Sometimes he looked to Africa, sometimes Latin America, sometimes Eastern Kurope.

Newman called his offshore company Water Street Bank and Trust. He needed deep p<x:kets to back him—rich investors who could fund his aggressive lawsuits and pay for his purchase of obscure old bonds. Those investors, though, wanted their names kept private. That became a problem when he tried to go alter Panama. After the U.S. invasion in 1989, Panama had begun to work its way out of debt accumulated during the regime of General Manuel Noriega. When Newman sued the country to recover lost funds, Pan­ama asked for the names of his Water Street investors. It was a simple enough question, wliich the judge ordered answered. "Their identities were threatened to be exposed," a lawyer who was involved in the case says, "and that enterprise collapsed."

Rather than discJose his backers, Newman folded his company and dropped the lawsuit. "At that point," says a financier, "Jay realized that if he was going to do this as a career he needed to be identified with a firm that wasn't embarrassed to say, 'Yeah, that's us!'" Enter Paul Singer, founder of Elliott Management.

Singer, who would now back Newman, was an important addition. lie is a signifi­cant contributor to right-wing causes and is chairman of the board of the Manhattan Institute, a neoconservative think tank. He

had the money to fund Newman's efforts against third world nations.

Backed by his new financier, Newman resumed his assault on Panama. Elliott Management said there would be no nego­tiations; it wanted to be paid in full. In the end Panama lost to Newman alter all.

The next stop for Newman was Peru, headed at the time by Alberto Fujimori, a corrupt president who ruled with the aid of his feared intelligence chief, Vladimiro Mon-tesinos. The country was participating in the Brady Plan. |ust when it seemed Peru would be able to restructure its debt, Newman—or Elliott Associates, an extremely successful hedge fund of Elliott Management—began to buy Peruvian bonds. It wasn't a huge vol­ume: $20 million at face value, at 55 cents on the dollar. Key for Newman's assault, the timing coincided with Peru's restructuring. As Singer would later testify, Peru would either "pay us in full or be sued."

As he fought in court, Newman had a setback. Mark Cymrot, the lawyer for the gov­ernment of Peru, was developing a defense. New York state law had for years outlawed buying debt solely to sue to collect it. The judge found against Newman and Elliott.

But Elliott went to the statehouse. If buy­ing debt to sue was against New York state law, Elliott would change the law. The firm launched a campaign in Albany, and Peni hired

a lobbyist to counteract it. "These guys ¦went to change New York law to essentially elimi­nate Peru's defense," says one lawyer. "We got engaged in a pretty rigorous lobbying effort." The law remained the same, but Elliott appealed the judge's verdict and won, forc­ing Peru to pay the firm nearly $58 million. Klliott had spent just $11.4 million to buy the debt. That's just a taste of how profit­able vulture capitalism can be.

While Klliott and Newman were plotting their futures, a mysterious businessman was perfect­ing a grander vei'sion of vulture capitalism. I Ie was Kenneth Dart, heir to the Dart fortune. Dart Container Corporation, based in Mich­igan, is the world's largest manufacturer of disposable drinking cups and containers.

No one likes to pay taxes, but Dart hated paying taxes so much he gave up his country to avoid it. kf.nnfth dart forsmus r.s. for bkuze was the headline in the The Wall Street Journal in March 1994. For a time lie was a billionaire nomad with a 220-foot yacht. He bought citi­zenship in Belize before settling in the Cayman Islands, where he became a citizen.

Some say Dart, not Newman, was the true pioneer of vulture capitalism. "Dart estab­lished this notion," one financier tells me, "that you could stand outside the deal as he did. He ended up with an enormous settlement with Brazil and made out famously on it."

In 1993, when Brazil was restructuring more than $30 billion in debt, Dart bought about $1.4 billion worth at a fraction of face value. He ended up with four percent of the country's debt. Instead of accepting Bra­zil's partial payment, Dart sued, demanding full payment. Though he disliked paying U.S. taxes, Dart wasn't reluctant to use U.S.

courts. His lawyers chose the federal court on Pearl Street in lower Manhattan. Eventu­ally the Brazilians paid. Dart is said to have pocketed $600 million.

On Grand Cayman, Dart has built a new town, called Camana Bay, a few miles from the actual capital. 1 he locals call it Dartville or Dart Village. In fact, sometimes they call the entire Caymans the Cay Dart. Dart even tried to move the seat of the Grand Cayman government to Camana Bay, away from his­toric George Town. His office says it offered the government free land if it would move. In the end, the government declined.

Meanwhile, the vultures were circling. New­man began to add large-scale political action and PR attacks to his operations. One target was the Republic of the Congo, sometimes called Congo-Brazzaville. This nation had huge oil fields and was finally coming out of a civil war. By 1997 the Republic of the Congo was one of the world's most heavily indebted nations. Newman bought paper that most people would have thought use­less. He found a $13 million loan from 1983 that had been made to help the country build a highway. With eight per­cent interest over 20 years, the debt was worth $57 million to Newman. He also bought a 20-year-old bond for $4.8 mil­lion. It is unclear what that $4.8 million was supposed to buy, but the Congo had agreed to pay eight percent interest on it as well. With compounding, the bond was now worth $22 million. Newman cobbled together $100 million in judgments and went to courts in the U.K. and the U.S. to have judges affirm them. Congolese debt was trading for seven to 10 cents on the

dollar at the time, so it didn't cost Newman much. But it would cost the Republic of the Congo: $1(X) million was roughly 10 percent of the country's 2002 annual budget.

Newman used his scraps of paper to go after the Congo in court in Switzerland, Bel­gium, France, the U.K., the U.S. and Hong Kong. With his pursuit of the Congolese government, Newman attained heroic sta­tus among vultures. "He's got these people around him who are kind of groupies," a friend of his explains. "They are like his aco­lytes," another man says.

Newman tried to freeze, attach or seize anything lx-longing to the government of the Congo. The government tried to keep a step ahead of him, allegedly resorting to fraud or straw owners to keep its oil revenue out of the vultures' talons.

The vultures set up an intelligence oper­ation to gather information and pursue allegations of corruption against the Congo. Newman supposedly set up an operation in London to conduct private investigations.

One vulture fund investor described the cloak-and-dagger operations. "Think Casablanca," he said. He told me an "infor­mation bazaar" tried to dig up dirt on the leaders of Congo-Brazzaville, and former CIA station chiefs cooperated. "They're all former spooks," he told me. "Senior guys, station chiefs."

Their operator was proud of what he'd accomplished in gathering information about Congolese corruption, but he mar­veled at the cost of digging up the dirt. "This piece of information, $50,000." He held out one hand as he said it. "This piece of infor­mation, $100,000." He held out the other hand. "I get uncomfortable, because if you want that kind of money, if it's that valuable, I can't get anywhere near it."

Things seemed to get personal between Newman and the president of the Republic of the Congo, Denis Sassou Nguesso. New­man and his investigators tried to prove that Nguesso was a wastrel who lived luxuriously instead of paying oil'his old debts. And they were right. Newman's men obtained the hotel bills for Nguesso's visit to the United Nations. The Congo-Brazzaville delegation spent $295,000 for an eight-night stay at the Palace Hotel.

The news generated headlines. In a Feb­ruary 2006 London Times article, Newman got in a snappy quote. Debt relief might be okay in some countries, he said, but in other cases, where there was corruption—like in the Q>ngo—"the right answers are politi­cal sanctions and, when warranted, criminal prosecutions." At the same time, an oil-shore subsidiary of Elliott filed a lawsuit that charged the Congo with racketeering. The subsidiary said the national oil company was diverting money "into the pockets of pow­erful Congolese public officials wliile at the same time protecting both the oil and oil rev­enues from seizure by legitimate creditors."

As usual, the timing of Newman's attack was critical. Debt relief was finally becom­ing a cause celebre. The nation was Hying to get into an international program called the Heavily Indebted Poor Countries Ini­tiative, which uses the resources of the IMF, the World Bank and other agencies to bring together creditors to forgive debt. Newman,

it seems, hoped to stop the Congo from get­ting into the program. One neoconservative consultant Elliott hired was Ken Adelman, who may be remembered for his prediction that attacking Iraq would be a "cakewalk." I called Adelman to ask him about Elliott and what he had done on behalf of the vul­tures. "It's all very fuzzy to me," he said. "I gave some advice to them about the history of the Congo."

There was a positive development for the vultures. As the Iraq war spun out of control, President George Bush installed Deputy Secretary of Defense Paul Wol­fowitz as president of the World Bank. Wolfowitz—onetime mentor to Scooter Iibby—proved to be a formidable ally for the vultures in their Congo venture. One of his efforts as World Bank president was to attempt to foil Congo-Brazzaville's efforts to relieve debt. He was convinced by the vulture funds' allegations of corrup­tion and opposed the World Bank's experts and economists, who had already approved the country's bid for debt relief. Global Witness, a government watchdog based in London, had received embarrassing information about the Congo from Elliott, and much of that information reached the World Bank. A spokesman for Elliott denies that Newman "engaged" or "approached" the president of the World Bank.

Wolfowitz tells piayboy in an e-mail that "I never heard of Jay Newman until you asked about him." Wolfowitz says he and his staff were aware that vultures were generating information about corruption. "Members of my staff at the World Bank may well have met with Newman, with oth­ers from Elliott Associates or with other private sector entities," he claims. How ever Newman's information got to Wol­fowitz, it got to him. The information the World Bank had about corruption in the Congo was the same intelligence uncovered by Newman's people at Elliott.

In the end, none of it mattered to New­man, because he won anyway. The Republic of the Congo paid up. The country settled with most of the aggressive vulture funds at 55 cents on the dollar, but Newman and his financier at Elliott scored better than the others. Apparently by agreeing to stop providing reporters with negative infor­mation about the ruling family, Newman is said to have collected about $90 million from the Congo. He had paid less than $20 million for the old debt. His biggest cost may have been for lawyers, private eyes and lobbyists.

While the Republic of the Congo was "in play"—as the vultures call it—Liberia was trying to make a comeback. As it did, an investor named Hans Humes watched. Humes, head of Greylock Capital, spent much of his childhood in Africa. He's a self-described political liberal who advo­cates for debt relief. While his firm is sometimes aggressive, it more often tries to negotiate. "People recognize that I'm basically a bleeding heart, but I'm also practical," he says. "Our business runs and is based on maintaining good relationships with countries."

His Park Avenue trading room has seven desks with Bloomberg terminals. This is where old foreign debts are bought and sold. One of the traders pulled up Afri­can bonds on the terminal and showed their prices, running his fingers down the list: "Ghana, Gabon, Nigeria, Congo-Braz/.aville, Seychelles."

Humes has been in the sovereign debt business since the 1980s. He sometimes helps organize creditors, as he did in Iibe-ria's case. In one way, the country looked like a success story. President Taylor was on trial in the Special Court for Sierra Leone in The Hague. A new president was in office. There was hope in the air. Iibe-ria had joined the Heavily Indebted Poor Countries Initiative.

Nathaniel Barnes was, until recently, Iibe-ria's ambassador to the U.S. He tells me Iiberia knows it must repay its debts. "We were aggressively engaging our creditors," he says, "and saying, 'Let's talk. Let's find a reasonable solution to this issue.'"

Many investors, like Humes, participated willingly. "Frankly, the Liberia deal was fine," Humes says. "Relieve the debt bur­den on Liberia and it opens up potential for a decent period of growth."

'The U.S. government wrote oil'almost $400 million in debt, and the Bush White House announced its support of the negotia­tions by private creditors. It was hard to find anyone who disapproved of the effort to give Iiberia a new lease on economic life.

Even some vultures stayed away. "For me, to go after Liberia, let's just say it isn't my cup of tea," one man tells inc. "It has really, truly been decimated by civil war, a catas­trophe. They are trying to pull themselves out of it." Wolfowitz doesn't think people in a country like Liberia "should have to pay for the debts of their ruthless leaders, which were not used to benefit them and were even used to oppress them."

Liberia seemed safe. But vulture inves­tor Eric Hermann had that 2002 judgment from a New York court against Liberia, from back when the country couldn't hire a lawyer. Hermann's company had trans­ferred the judgment to another company in 2007. The company that took over was Ilamsah International, a mysterious firm based in the British Virgin Islands. It's hard to know who actually controls Ilam­sah. The lawyer who apparently handled the transfer, Dennis Ilranitzky of the law firm Dechert, also represented Jay New­man. In 2009, just months after the world thought Liberia had solved its problems, Ilamsah and another firm, Wall Capital, went to court in London to affirm that old judgment against Iiberia. People were outraged. Humes says he can't be positive who the men behind the offshore funds really are, but he suspects he knows. "They were at the table," he says. "They were part of the negotiations. Their concerns were addressed. The deal was crafted to respond to their interests. When it came down to it, they took the part that had judgments on it and moved to the U.K. to enforce it."

Hamsah hasn't collected against Iiberia yet, but the damage is done. "They are hold­ing up a billion dollars of aid to Liberia,"

Humes says. "There is no way they can jus­tify it. They can't defend what they did."

"You can't pay pennies on the dollar for an obligation and then expect to collect 100 percent for it," says Barnes. "To me that's just morally wrong." Liberia, emerging from war, did its best to play by the rules yet ended up under assault. Barnes says he's not surprised that the identity of those who control the offshore companies remains a secret. "The whole nature of what they are doing is immoral," he says.

Vulture capitalists believe they are a force for good. One I spoke with is unapologetic. His main regret is that he can't talk publicly for legal reasons. "Some would say, 'Conic on, dude, you're a vulture, a predator,'" he says.

"I have no problem sleeping at night with what I do." The vul­tures shed sunlight on corrupt regimes, he tells me, and cites Con go-Brazzaville as one such exam­ple. "They can't pay these claims because they're stealing the money," he says. "No one has done more than the vulture funds to document and prove the theft that everyone knows is going on. We're the only ones who have the financial means, motivation and sophistication to unravel incred­ibly sophisticated schemes."

I ask an activist about the vultures' claims that they are the sole force against corruption. "That's arrogant at best and stupid at worst," says Tamara Claw, a law­yer at TransAfrica Forum, a nonprofit advocacy group based in Washing­ton, D.C. Gaw has

been monitoring vulture funds since 2007, arid she thinks what the vultures are doing is little better than blackmail. "This is a clas­sic case of blaming the victim," she says. "Vulture funds don't expose corruption, they facilitate and exploit it."

Humes laughs at the idea that vultures are a force for good. "The thing is, don't be pompous about it. I mean, you're buy­ing debt at 20 cents on the dollar. You're gambling that if you do enough with these things you can get paid well. You're not doing God's work. None of us are."

In May 2009 a freshman congressman from upstate New York introduced legislation to Congress. Eric Massa's bill—the Judgment Evading Foreign States Accountability

Act—was, according to activists who fol­lowed it, designed to help vulture funds in their latest siege, this time against Argen­tina. Massa said it was introduced to help American investors.

This attack would bring together Newman's and Dart's operations. The vultures' biggest play of all had evolved into a coordinated assault against Argen­tina's government.

Kenneth Dart had bought Argentinean bonds during the crisis in 2001. lie used a U.S. federal court to sue Argentina and soon won a judgment worth $750 million. Meanwhile, Newman still has more than $1 billion in judgments against the Argen­tinean government. Dart is still holding out for full payment.

The Argentina debt issue ended up in

Washington thanks to a group established to get the U.S. government to help vulture funds. Shortly after American Task Force Argentina was founded, in 2006, Jay New­man lashed out at the country. "Argentina has the ability to pay what it owes. It just doesn't want to," he said. "Argentina is like a drug addict. Its drug is money."

The real prize was a new law that would bring political force to bear on their col­lection efforts. Massa had an affinity for Argentina, he said, having lived there as a child. If Massa's bill passed it would have stripped away Aigentina's access to U.S. cap­ital and brought the entire weight of the U.S. financial system to bear on the country.

"The legislation was written by vulture funds to benefit vulture funds," Claw claims. When Massa introduced the bill, Gaw says,

it was easy to recognize where it came from. "We called it the Paul Singer relief act."

The head of the Council on Hemi­spheric Affairs wrote Representative Massa, "Why would you sponsor a bill that mostly benefits a handful of ethically dubi­ous, primarily non-American investors at the expense of the Argentine people? IJke the vultures for whom they are named, they seek only to profit off of Argentina's economic misery."

In March 2010, the law's chances col­lapsed. Massa was involved in a bizarre scandal involving congressional aides and resigned from Congress. Caw opened a bottle of Cardhu single malt scotch, and people from her office gathered around to toast. The Paul Singer relief act was as dead as Massa's career. Or so it seemed.

But Elliott doesn't give up easily. A month after Massa resigned, with the law dead at the fed­eral level, the firm hired lobbyists in Albany to push for a state version of the same law. American Task Force Argentina announced hear­ings before the state banking committee in April 2010, and Newman's lawyer on the issue, Dennis Ilranitzky, testified in front of lawmak­ers. (As outspoken as they might be in front of legislators, Elliott and Newman declined to comment for pi.wboy.)

As for Dart, he may well stay out of the political side. In a statement, his office told playboy that "Dart is not a vul-lure capitalist." lie's still safe in the Cay­man Islands.

Advocates say leg­islation may be the only way to put vul­tures out of business.

In the U.S., Representative Maxine Waters pushed the Stop Vulture Funds Act to out­law certain types of lawsuits. (The vulture funds claim the legislation was drafted by lobbyists for Congo-Brazzaville.) So far the bill hasn't passed. In London, Parliament passed a law to limit the vulture funds' abil­ity to pursue debt in the U.K. But before the law had passed, a U.K. court awarded $20 million to two secretive vulture funds hounding Uberia for 30-year-old loans.

The British law may be a setback for the vultures. But it does not spell the end of business for men like Jay Newman and Ken­neth Dart. Vulture funds can still use courts and politicians elsewhere, wherever they launch their next attack.