We’ve been following the story of the hedge funds who bought up distressed Greek debt at a discount and plan to make a killing on it. The only obstacle to this is the inconvenient fact that Greece made a deal to give haircuts on the debt. So the hedgies are blocking that deal, figuring they can get paid off at par if they just wait long enough, since nobody wants to risk a default event. And even if Greece defaults, they can collect credit default swaps and make money either way. In response, the Greek Prime Minister, Lucas Papademos, threatened to change Greek law to cut the creditor take. The hedge funds would lose their leverage and have to take a lower percentage than they expected, although they’d make up some with the CDS. But they’re not content with this, so in one of the more incredible examples of chutzpah, they plan to sue. In human rights court, of all places.
Hedge funds have been known to use hardball tactics to make money. Now they have come up with a new one: suing Greece in a human rights court to make good on its bond payments.
The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece’s debts.
The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank, which is the largest institutional holder of Greek bonds with 50 billion euros or so.
Legal experts suggest that the investors may have a case because if Greece changes the terms of its bonds so that investors receive less than they are owed, that could be viewed as a property rights violation — and in Europe, property rights are human rights.
I’ll leave the understanding of European property rights law to the experts. The understanding of the disgusting nature of this tactic I can handle. The hedge funds swooped in late, but the banks or other investors that made these loan deals did so knowing full well that they risked a default. That’s true of any loan. There are two sides to every deal. The hedge funds, in fact, took their deal knowing that Greece was on the precipice of default. They’ve just decided to be raging assholes, and threaten to blow up the world if they don’t get paid back. So the idea that hedge funds have an inalienable human right to make this profit is one of the most egregious things I’ve seen in a long time.
There’s no guarantee they would be successful, of course, and the process would take years, so the opportunity costs come into play, rather than just taking their haircut and moving on to the next deal. I think this little nugget buried in the story tells you how these hedge funds operate.
It is not just the legal cudgel that investors are threatening to use. Some hedge funds have discussed among themselves the possibility of demanding a side payment, as they describe it, as a price Europe and Greece must pay if the two want the funds to participate in the agreement.
How is that anything but protection money? As in, pay us off and we won’t blow up your currency union.




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Where is the outrage about this among the Greek politicians, or is that news being suppressed? This is unbelievable (but then so much is these days).
Many thanks, David.
Vampire Capitalism. More powerful now then after their supposed ‘collapse’ in 2008
At least the extortion is out for all to see.
We’ll see if money is more important than people.
My money is on the money being treated in a better manner than the people.
The whole point of this action by the hedge funds is to prove the “haircuts” are involuntary, thereby triggering the CDS protection they purchased. The “haircuts” will still occur but the financial institutions who sold the CDS will have to pay out, as they should. I don’t know why anyone would have any problem with this. Not allowing collection of the CDS protection is the equivalent of an insurance company retroactively canceling a homeowner policy after a house has burned down and a claim filed.
So Greece, you have a nice and famous Parthenon. It would be s shame if anything happened to it. Greeks, I know some people, that can protect you, for a small side payment. It is a dangerous world with Al Qaeda having invisibilty cloaks and freaking lazer beams on their heads.
Lie down with dogs, get up covered with dogshit. That aside, I believe mjocaj has it right at #4.
Banks have no margin set aside to payout for CDS a big payout like Greece might be big enough to require another bank bailout plus if Greece defaults every country’s borrowing costs will go up.
Just how is a debt default case a human rights course case?
Do hedgefunds really want human rights cases to get more power? How many hedgefunds are invested in companies that commit human rights abuses? How many hedgefunds are invested in Apple Computers for example the workers there certainly have a human rights case.
Wait if the hedgefunds say the matter is in court do they have to report the debt of the Greek haircuts on their books? If they don’t then they can claim they made a profit every year they don’t have to report the losses on their books.
Nobody invests in a hedgefund that has lost money the hedge funds have every reason to delay reporting losses for as long as possible then.
“Banks have no margin set aside to payout for CDS”: That is the whole problem. If an auto insurer sold insurance policies it could not honor it would be considered fraud.
“a big payout like Greece might be big enough to require another bank bailout”: The previous bank bailouts were not “required”. They were a political choice.
“if Greece defaults every country’s borrowing costs will go up”: Only the borrowing cost of countries at risk of default would go up, as it should. The borrowing costs of Finland, Germany, Norway, etc. would not.
Here in the US, corporations are now people so I guess they are trying to bring that to Europe.
Greece should tell them all to go fuck themselves.
I agree with you partially. I would expect a boatload of people to have a major problem with this being taken to human rights court, but legally it seems valid…at least to the point of showing that the so-called “voluntary” haircuts are quite involuntary.
It woudn’t surprise me if the hedge funds actually expect to win by triggering CDSes, but they should as they are bondholders rather than just speculators who bought CDSes but not the underlying assets. Since they’re actual bondholders rather than just CDS speculators, it’s like trying to collect on car insurance because the car you own got damaged, which you should be able to collect on the insurance you bought on your own asset.
I agree with everything you say.
If the original bailout bonds come due in March how is all this possible? When will investors actually lose money on bonds that default? I thought May was drop dead month?
Strictly speaking credit default swaps aren’t like insurance as there is no requirement to have the assets to cover a CDS, but I would expect their to some settlement greater than the haircut but less than par value. I do see this like insurance in the sense that the funds own the underlying asset.
I think taking this to human rights court is ridiculous too. They should be taking it to whatever civil court adjudicates contract law. The human rights angle is probably just a way to get more publicity.
Is the underlying asset the original bond or the bribed politician who issued the bond knowing they would default.
You are right. The problem is with the lack of regulation that 1.) Does not require the CDS sellers to have reserves to cover losses; and 2.)Allows the purchase of CDS on assets without owning the asset.
All this derivatives crap is bullshit, nothing but smoke and mirrors.
Good. I thought you might take offense at my presentation. Personally, I would love to see the whole corrupt financial system come crashing down so it could be rebuilt on a legitimate foundation. I’m a libertarian so I’m generally averse to government regulation but what exists now is the worst possible system. We’ve got government backstopping of basically unregulated financial institutions. Either we need to get rid of the backstop and let the failed institutions fail or regulate the shit out of them. Actually, I’m gradually coming over to the progressive view of regulation. People whose livelihood is based on skimming off other people’s money can’t be trusted. That goes for the whole financial services industry not just the banks.
Mitt is very proud of these hedge funds free enterprise for them and austerity for all the rest
Sorry folks, these guys are the most over the top vicious capitalist as they come, but they were most likely buying this debt as it was crashing last summer and fall. This is how the game is played, and unfortunately its rigged. They are not vampires for demanding their insurance policy be triggered, considering if you look deeply into the way these cuts are structured, the various European central banks are not writing down nearly as much of the Greek debt they themselves hold. They are demanding it only from the private investors, and the Greek banks themselves, but that’s actually a positive but it takes a second to wrap your head around the latter rather than the former.
When you have junk bonds that put you in a situation where you cannot pay them off unless someone lends you YET ANOTHER tranche of debt, you default. The problem is that breaks the euro and welcome to financial doom. Blaming the hedge funds is just a negative campaign to try to get them to settle while letting this train of fail steam on. The people of Greece are suffering because nobody is willing to do what is correct and default, while the rest of the eurozone pumps money into the system.
If you wanted to talk about vampires, go back years to the first bailouts, then realization that Greece was fudging their economic data. (blame that on who you will) Anyone who has supplied the rope that the various financial forces that be continue to hang the shortsighted Greeks (well I suppose their leaders, but hey that’s what elections there use to be for) should be blamed, long before the various vulture funds that showed up recently.
The joke is on the fiscal leaders of Europe, and any lawsuit calling them out on their inability to follow their own rules I welcome.
Remember the “installed” Prime Minister of Greece was an ECB governor and a “consultant” to Goldman Sachs.
“… So the idea that hedge funds have an inalienable human right to make this profit is one of the most egregious things I’ve seen in a long time…”
well said!
i couldn’t agree more.
Max Keiser says its economic war
The mafia needs a cut?
The greek people might be able to sue for their own purposes. They didn’t agree to any of what is being done to them. Did greeks have a referendum on joining the euro?