Your video on the ruling against Argentina was interesting because it passed moral judgment on hedge funds who buy bad debt in the hope that they can collect more money than they paid for that debt when they bought it.
I don't know all the details and motivations of the actors who are maneuvering to either not pay the loans or to make some "unreasonable" profit from their investment in the debt, but most of these things do not involve innocent people on either side. However,
Let’s assume you borrow $100 from a bank.
And then you mismanage your finances or something happens and you cannot meet the schedule for repaying the bank, and the bank agrees to settle the debt if you will repay $35.
That means that the bank has lost $65 of its depositors’ money.
Those depositors have to be repaid by the bank or else the bank itself could default, go bankrupt, and leave all of its investors or depositors with monetary losses just because you did not pay back all of the money they had loaned to you through the bank. That would be the equivalent of the people who had invested their money with the bank giving you a gift.
Of course, there is the fallback for the bank that the national government or whoever will insure them against certain types of losses, but if the any government is covering the risk then it means the government (in the case of Argentina, this means either the International Monetary Fund or other national governments which also are the ones who fund the IMF) are printing more money to cover your bad debt. You know what the effect of this is:
· Inflation downstream due to the increase of money in circulation.
· Encouraging you and others to borrow money and then default on paying it back. Creating a vicious circle.
Now, suppose that your bank had not held onto your loan, but sold it upstream to a larger bank or a hedge fund. That larger bank or hedge fund has now made an investment in your loan using money that their customers entrusted to them. Money does not come from “nowhere.”
Whoever owns your debt when you default is still going to lose money if you do not pay it back—and their depositors or their government or whoever insures the bank against such losses are going to have to absorb the loss because you did not honor the contract that you signed when you borrowed the money.
So—who is exploiting the system more—You who borrowed the money, and either through mismanagement or misfortune did not pay it back? Or whoever is left holding your debt when you default on it?
Whether it is the hometown bank or a Wall Street bank or a hedge fund, they only loaned you the money or bought the note in the expectation that you would repay what you took.
Of course, their profit on the loan would be limited to the interest that you originally agreed to pay if only you had repaid the loan.
In the event it looks as if you will not be able to repay the loan, and your bank or whoever now holds the note does not want to take a total loss on it, perhaps there is somebody else who agrees to take the risk that you will not repay any of the loan, and who buys the loan from whoever holds it at this time for a very small amount of what you owe. Whoever does buy such risky loans is betting that they can eventually recover more money than they invested (which is what you are trying to do if you do not repay any part of the loan). Of course they want to maximize the amount they can recover—If they are in the business of buying bad debt, they lose money on some of them and make money on others—All with the aim of making more money than they lose. Is that any more of a “vulture” behavior than your behavior when you fail to pay back the loan? And especially if you perhaps never borrowed the money with the good faith intent to pay it back?