The governments' man when creditors bay
By Daniel Bases | Reuters – Wed, May 23, 2012Related Content
Sovereign debt lawyer Lee Buchheit …
NEW YORK (Reuters) - If any other European countries were to follow Greece into a debt default, Athens can recommend a lawyer.
Lee Buchheit crafted the restructuring deal that cut Greek debt by 100 billion euros and inflicted huge losses on bondholders in March.
Over the last 30 years, presidents and finance ministers have turned to Buchheit, 61, more than any other lawyer to help call off creditors when their governments run out of money.
His clients love
him because he can help wipe away billions of dollars of debt. His legal
opponents - bond investors, some of them so-called vulture funds - hate
him for the same reason.
In addition to
Greece, the folders stacked on the walls, desks and window sills of
Buchheit's modest corner office in lower Manhattan speak of other tough
cases, such as those won for Iraq and Iceland.
Often, countries that turn to the dapper Buchheit have
run short of money because governments stick with bad decisions for a
long time, with disastrous results.Buchheit wouldn't want to change sides.
"Representing the sovereign in these affairs is just more fun. It is a mixture of politics, finance and law, and theater," he said.
Buchheit recalled
an Asian finance minister - referring to her only as "The Iron Lady" -
resting a hand on his arm as tension mounted at 3 a.m. in a marathon
meeting and saying: "I know you'll get us through this."
"That is the kind of thing you eat up with a spoon," he said.
The academic papers
and books he's published and legal briefs he's filed over the last
three decades fill much of the void where no formal sovereign bankruptcy
law exists.
His opponents say he follows a "scorched earth"
strategy, playing off the position of strength of his government clients
who do not have to answer to a bankruptcy judge.
Buchheit, a senior partner, has helped make Cleary Gottlieb Steen
& Hamilton, a top-20 U.S. firm, the near de facto defender of
governments in financial disputes. Creditors say his legal tactics
trample their rights.
If Greeks back parties that want to tear up the
country's international bailout agreement in a June 17 election - called
after an inconclusive May 6 election - its euro zone membership will be
difficult to maintain, and countries such as Spain and Italy could also
come under siege by markets.The Pittsburgh-born Buchheit, who only recently returned to work after a serious throat ailment, said he expects more European nations to go the way of Greece but declined to comment further.
Investors are
demanding higher returns from euro zone countries struggling with heavy
debt levels or slow growth, such as Portugal, Spain and Italy. The risk
of a second euro zone country being forced to impose a debt restructuring on investors is not at a critical level.
CLAUSE THAT REFRESHES
In Greece, the
biggest sovereign-debt restructuring ever, Buchheit saw a legal loophole
to use a tactic borrowed from 19th century British commercial law - the
collective action clause - that allowed the country's parliament to
change the rules governing its debt retroactively and impose a
settlement.
The collective action clause allows a supermajority of
bondholders voting in favor of a restructuring to make it legally
binding, even for those voting against the measure.Greece's political problems are still far from over.
Buchheit blames euro zone officials, particularly the former leadership of the European Central Bank, for allowing the debt crisis to fester for two years in the first place.
Buchheit has tough words for former ECB president
Jean-Claude Trichet and former executive committee member Lorenzo Bini
Smaghi. Both, he says, aggravated Greece's crisis by delaying a deal to
write off some of the country's debt because they were overwhelmed by a
fear of a market meltdown.The ECB acted "with the mentality of a six-year-old boy who gets it into his head that demons lurk just beyond his bedcovers in a dark bedroom. Panic grows with every hour," Buchheit said.
"I find it hard to
imagine they will now man up to the proposition that they delayed - at
appalling cost to Greece, its creditors and its official sector sponsors
- an essential debt restructuring because they simply failed to
understand the dynamics of the CDS market," Buchheit said, referring to
credit default swaps, which are used by investors to protect themselves
against defaults.
Repeated attempts to contact Trichet were unsuccessful.Bini Smaghi, now a visiting scholar at Harvard's Weatherhead Center for International Affairs, disputed Buchheit's characterization. "Certainly the fact that the operation of renegotiation turned out to be smoother than what was expected does not prove that it would not have been disruptive if it had been done earlier on," he said.
"It was better not to do it two years earlier as this gave the market time to prepare," he said.
The settlement of Greek CDS for $2.89 billion, a fraction of the overall write-off by investors, was orderly.
Many thought a deal
a year earlier was possible. That would have cost private creditors
between 20 and 40 percent on their Greek bonds rather than the "haircut"
of nearly 75 percent they had to take, said Lawrence Goodman, president
of the Center for Financial Stability, a New York-based nonprofit think
tank.
MAP FOR FUTURE DEFAULTS
Buchheit relishes turning a long-standing legal precedent on its head.
He cites among his inspirations the pre-Enlightenment
rationalist philosophy of Spinoza, the 17th century Dutch philosopher
who favored a more science-based approach over the conventional,
God-centered views of the time.
Lawyers working on
bond offerings too often reuse legal contracts that eventually suffer
from "drafting inertia" and fail to challenge existing precedent,
Buchheit said - "unless, every now and again, you get somebody like me
who will come in and say this is madness, we just shouldn't be doing
this."
Over a year before
Athens hired him in July 2011, Buchheit sketched out his game plan for
Greece in articles co-written with Duke Law School professor G. Mitu
Gulati. Those pieces helped shape arguments among European policymakers.
"Various people from the official sector said, Look, we
all know what has to happen, but somebody's got to tell them. So Mitu
and I gave it a little patina of academia, you know - put it up on an
academic website," he said. "It was a little unusual."
They upended legal
precedent by highlighting the unique situation whereby 90 percent of
Greece's debt stock was governed by Greek law and hence could be changed
by parliament to include the collective action clause. In February this
year, that is what the Greek parliament did.
The retroactive use
of the clause was unprecedented. It accelerated for Greece the plan
that all eurozone countries would need to include collective action clauses by June 2013. This change sets out clearer rules for how any future defaults could be handled.
Buchheit argued this meant Europe had already "crossed the Rubicon."
"The question is,
Is it an intolerable precedent?" he said. "The official sector knew that
retroactive legislative change to local law bonds was a thermonuclear
weapon," he said, hoping history will judge it the "mildest, most mature
and moderate use of that weapon."
"JAMMING" THE VULTURES
Buchheit, with
legal degrees from the University of Pennsylvania and Cambridge
University, years ago found collective action clauses buried in a
Harvard University microfiche library, tracing them to their inception
in 19th century England. Cleary first used them in 2003 for sovereign
bond covenants governing Mexican and Uruguayan debt under New York law.
Their use has
mushroomed. One Wall Street firm, which provided proprietary data in
exchange for anonymity, said 83 percent, or $334.8 billion, of
outstanding foreign sovereign bonds as of early 2012 issued under New
York law include collective action clauses. By 2019 just $29 billion in
sovereign debt won't be covered by a collective action clause.
"Lee has had a
great influence on the process. He's smart and articulate. While he may
not be in on the front line of all the deals transactionally all the
time, his arguments and influence are there. But keep in mind he is
always representing his client. And I think he's very good at that,"
said Mike Chamberlin, executive director of EMTA, which represents the
emerging markets trading and investment community.
Among the folders
in Buchheit's office is one labeled "VULTURES." It refers to investors
who specialize in buying distressed debt and often end up battling
Buchheit and Cleary in courts around the world for payment on the bonds
they have bought, often at pennies on the dollar.
There's no love lost.
"Yeah, they hate my guts," Buchheit said.
The sting of the
Greece write-down and particularly the way Buchheit engineered it has
served to harden those positions. Some investors fear the increased use
of collective action clauses has tipped the debt restructuring game in
favor of governments over investors forever.
Elliott Management Corp, the $19.2 billion distressed
debt specialist hedge fund, says the use of the collective action clause
is just another tool sovereigns use that will hurt the market.
"Recovery values on
restructured sovereign debt are going to be lower as a result of
continuing efforts to decimate investor protections," a senior Elliott
executive told Reuters.
Buchheit says investors should applaud collective action clauses for enshrining their rights to vote on deals.
"The sovereign
compelled to restructure its debt today may be an investment grade
borrower down the road in a couple of years," said Buchheit.
That's cold comfort to investors who see millions of dollars in bond holdings "restructured" away."I'm usually across the table and find Lee workable, but you have to call it what it is. These guys are very good at jamming creditors," said one emerging market fund manager.
"That is why I am
so supportive of a group like Elliott out there. As scorched earth as
Lee gets, you have got Elliott pushing back. If it weren't for Elliott
we wouldn't have (anything)," the fund manager said.
And, due in part to Elliott, it's not all victory laps for Buchheit and Cleary.
In one case, Cleary
was sanctioned by U.S. Federal Judge Loretta Preska for obstruction in a
2004 case where it represented the Republic of Congo against an Elliott
affiliate. She said Cleary showed "a willingness to operate in the
murky area between zealous advocacy and improper conduct, and here it
crossed the line." Buchheit was not involved in the case, which Congo
lost.
Elliott and other
investors are in a decade-long fight with the Republic of Argentina, a
Cleary client, seeking repayment on defaulted sovereign debt. Argentina,
as a result, has been blocked from international capital markets.
Elliott has won, but not collected, $1.6 billion in final judgments,
including post-judgment interest as of January 2011.
Buchheit says he is
excluded from the case because he represented at one point one of
Argentina's largest creditors, the Styrofoam cup mogul Kenneth Dart.
He disputes the
position of plaintiffs who demand the original value of debt they bought
often for just pennies on the dollar. When things go wrong for a
country like Greece, markets devalue the holdings long before
restructuring negotiations start.
"Take with a grain
of sodium chloride a guy who says to you: ‘I bought a bond for 7 cents
yesterday. God dammit, I believe in the sanctity of contract, don't you?
Don't you think I should be paid 100?'" Buchheit said.
"Now come on, you
buy it for 7 cents, there's a risk to it. You are betting on the
recovery value, you are not betting on the sanctity of contract."
(Reporting by Daniel Bases; Editing by Burton Frierson, William Schomberg, Claudia Parsons, and Prudence Crowther)
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