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Congress to Outlaw Indiana Pension Funds

posted by Stephen Lubben

Not really, of course. But Felix Salmon does have an important new post about how, in the sovereign debt context, Congress is honestly considering preventing purchasers of distressed sovereign debt from collecting the full face amount of the debt. It is aimed at the "vulture funds" who buy distressed debt and then engage in aggressive collection tactics, often against countries that really have better uses for their money than defending lawsuits.

This is the sovereign equivalent of the Indiana Funds, who bought their Chrysler claims at a mere fraction of face value and then proceeded to make a fuss in the chapter 11 case. Indeed, they continue to do so, as their petition for cert. is still pending before the Supreme Court.

Vulture investors, foreign and domestic, can be a pain in the . . .  as we saw in the Chrysler case. But Congress' proposed legislation is a really bad idea. First of all, I don't know of you confine it to the sovereign debt context. They say they can do so, but is that going to pass with courts? Certainly if it applies to outstanding debt, there is a retroactivity/due process, takings, and perhaps even equal protection problem (why are some creditors subject to the act, but not others?).

And does Congress really want to kill the distressed debt market? Does this mean that whenever bond debt trades at below face value it implicitly trades without enforcement rights? That will do wonders for the high-yield market.  How much will you pay me for my unenforceable Ford bonds?

Paying transferred claims at full face value has been the law since at least Hamilton's first Report on Public Credit. I'd pause a bit before overruling a founding father, especially one who remains the one clearly good Treasury Secretary we've had.


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seems like making the sovereign debt market less liquid (or completely solid) will only make it that much more expensive for countries to borrow.

I'm not sure who is being naive here. There is no bankruptcy for sovereigns--hence enormous free-rider problems that exist in no other context. The only reason sovereigns restructure debt is future access to credit markets. Vultures hinder restructuring efforts.
Binding transferees to the restructuring effort while allowing original holders to assert the full value of their claim could do a good job of ensuring sovereign workouts, which are in everybody's interests. The devil is in the detail, but the basic idea is tenable.

This will surely crush any chance such countries have at access to private loans in the future other than perhaps from partners in joint ventures.
I don't see how this can be done retroactively. It is at best a taking of the right to full payment, and the intellectually honest thing would be to simply call it that and pay out the value which presumably is the purchase price.

A better solution is to eliminate the 100% requirement for debt restructuring / forgivness as to future issues. This might be done for sovereigns by contract without statutory reform -- maybe there is a nonUS law that allows this that they can select - but the 100% requirment of the trust indenture act could also be eliminated for all kinds of issuers, not just sovereigns.

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