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New York lawmakers are launching a new push to curb “vulture fund” lawsuits against defaulting governments and limit how much investors can recover in court for defaulted emerging market bonds.
A bill introduced in Albany on Monday would seek to block certain investors from buying cheap outstanding Treasuries and then getting big payouts through litigation.
“These hedge funds made billions in profits while leaving countries with insurmountable debts and a destabilized economy. . . by changing the law, New York can change the rules by which these hedge funds play,” New York State Senator Liz Krueger and Assemblywoman Jessica González-Rojas, sponsors of the bill, said in a statement.
About half of all bonds issued by emerging market governments are issued under New York state law. These borrowers include Latin American governments such as Argentina, a serial defaulter, as well as Mongolia and Sri Lanka.
The bill is the latest in a series of efforts to rewrite New York’s state debt law. Three bills proposed last year were ultimately not voted on, and an attempt to revive two of them in March ran into furious objections from Wall Street investors who argued the proposed legislation would have a chilling effect on markets.
Investors hailed Monday’s bill as a more tolerable and targeted approach to curbing “holdout” investors who refuse restructuring talks, unlike the March bill, which proposed sweeping changes to debt relief.
The new bill was partly inspired by Argentina’s long battle in New York courts against Paul Singer’s Elliott Management, which resulted in large payouts for the hedge fund many years after the country’s 2001 default.
The new law would expressly allow courts to look into the history and conduct of creditors who bought claims in order to file suit, and would fully restore a legal doctrine known as “champerty” that has traditionally stopped frivolous lawsuits.
The bill would also reduce the penalty rates applied to post-default Treasury bond payments from the 9 percent that have led to huge payouts in the past to the standard rate on one-year U.S. Treasury bills. Currently, it is about 5 percent.
In April, Jay Shambaugh, the US Treasury’s assistant secretary for international affairs, supported such a transition as part of what he called “narrow, targeted updates to prevent market disruption.”
Other lawmakers have proposed a “sovereign debt stability act” that would authorize the establishment of an independent monitor to oversee restructuring talks. It caused an angry reaction on Wall Street due to its perceived dysfunctionality.
Advocates — and investors — say the PRAISE Act has a much better chance of passing because it seeks to distinguish between advocates and traditional creditors involved in restructuring talks.
“We’ve gone through a lot of consultation with the official sector and the investment community — this is aimed at professional advocates and not conventional investors,” said Alice Nascimento, director of campaigns for New York Communities for Change, which supports the new bill.
Institutional investors said the most promising development in the revised bill was a line in the proposal that says it is “not intended for conventional and generally cooperative investors who may occasionally choose to file a lawsuit.”
The revised bill “takes an elegant, precise approach that combines a narrowly defined charity provision with a reduction of interest to the federal statutory rate. The general market should not be affected, while it would substantially increase the risk of doing business by suing sovereigns,” said Gregory Makoff, author of Default: The Landmark Court Battle to Restructure Argentina’s $100 Billion Debt.