Thursday, February 12, 2009

Vultures and the Obama Rescue Package

The New York Times is predicting the return of the vulture investors with the passing of President Obama's rescue package. But no one is quite sure.

I've written extensively on vulture funds who invest/buy distressed debt. (The link here will lead you to at least another six posts and papers.)

Vultures want to buy debt cheaply enough that they can sell it on for a gain of a few points. The question is: Is the current debt available so toxic that it's radioactive? So there is a waiting game. Because if it is terribly toxic, the price should be much lower.

One such vulture, Howard S. Marks, is sitting on a fund of $55 billion. But as the NYT says, "He and other potential investors are wary of the risk in this case." Moreover, "Even for the vultures, the risks — political as well as financial — seem daunting. Some worry about being seen as profiteers who benefit at taxpayers’ expense, even though the economy could get worse unless they swoop in."

Yet, "If the vultures do alight, their rewards could be enormous. Funds specializing in distressed investments earned annual returns of more than 30 percent in the early 1990s as the economy pulled out of recession."

They fear being damned if they do and damned if they don't. Now there is discussion about the government putting "a floor under their potential losses."

Nevertheless, vulture funds are back and it won't be too long before they crop in the UK and elsewhere. Indeed Business Week says they're already here. As they say in New Orleans--and it's almost Mardi Gras--laissez les bons temps roulez!
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