At first blush, Lee Buchheit does not look like a scourge of hedge funds and eviscerator-in-chief of creditor rights. But the doyen of sovereign debt restructurings is on a campaign to fundamentally transform the relationship between countries and their lenders.
Mr Buchheit, a senior partner at law firm Cleary Gottlieb, is the man virtually every country in financial distress calls when a restructuring beckons. Over the past three decades his clients have included Russia, Mexico, the Philippines, Iraq, Iceland and more recently Greece, where he orchestrated the biggest restructuring in history.
Although he has occasionally worked on the side of creditors – most notably playing a supporting role in Kenneth Dart’s lawsuit against Brazil in 1994 – Mr Buchheit says it is simply “more fun” to work on the side of governments. “There’s a lot of theatre and politics, both domestic and international.”
However, his client roster has often brought him into conflict with a host of investors, banks and, in particular, hedge funds.
Foes accuse him of gutting the rights of creditors, threatening the very fabric of the financial system and relishing Pyrrhic legal battles above reaching amicable settlements that they argue would be more beneficial to his clients.
“Lee is admired by many and detested by some . . . Some think he’s the devil incarnate,” says Whitney Debevoise, partner at Arnold & Porter, a former US executive director at the World Bank and Brazil’s lead counsel in the 1994 case.
Mr Buchheit has a file named “vultures”, in which he collects titbits of information on his nemeses – primarily one particularly aggressive hedge fund called Elliott Management, which made its name suing countries – but insists he harbours no animosity.
“The system has problems and they’re taking advantage of it,” he says. “It’s hard to be too moralistic about it.”
Indeed, there are few hints of the dangerous zealot his critics portray. The Pittsburgh-born, Cambridge-educated lawyer has a disarming demeanour and a measured drawl, peppering his anecdotes with quotations that betray his major in philosophy, financed by the US army’s reserve officer training corps. His favourite thinker is Spinoza.
But Mr Buchheit’s status as the alleged arch-enemy of bondholders has been burnished by his recent crusade to codify better protection for financially stricken governments.
The International Monetary Fund first proposed a Sovereign Debt Restructuring Mechanism – a kind of bankruptcy court for countries – after Argentina’s calamitous default in 2001. But it was firmly shot down by the US.
It has since been considered a pipe dream, but over the past year Mr Buchheit has championed a partial resurrection of the idea in speeches, papers and discreet meetings with policy makers and officials on both sides of the Atlantic.
“You don’t want to eviscerate creditor rights to the point where people won’t lend to countries, but you have to be able to impose a loss on creditors,” he argues.
“If countries go nuclear it is destabilising – it’s in effect theft – but sovereigns should be able to get the debt relief they need.”
Lee is admired by many and detested by some . . . Some think he’s the devil incarnate
- Whitney Debevoise, partner at Arnold & Porter
Mr Buchheit’s enthusiasm for a statutory fix is not without some irony, as he is closely associated with helping pioneer a contractual alternative to the stillborn SDRM: “collective action clauses” that are embedded in bonds and loans to force a majority creditor agreement on to a minority and thus defeat any recalcitrant “holdouts”.
CACs have since become ubiquitous in emerging markets and are now making inroads in the developed world, thanks again to Mr Buchheit. At his instigation Greece retroactively fitted CACs on to its domestic debts and used them to force losses on Athens’ creditors.
The ploy triggered howls of indignation from creditors, but the eurozone has now mandated that all members should begin to include the clauses in their sovereign bonds.
Mr Buchheit is still a fan of CACs, but is aware of their limitations. Gallingly, some hedge funds have been repaid in full by Greece after amassing blocking stakes in a series of international bonds. Ironically, among the holdouts was his old client Mr Dart, who walked away with a small fortune.
Mr Buchheit argues that this, coupled by a series of recent victories for Argentina’s hedge fund creditors, led by Elliott, could embolden holdouts in the future. He is, therefore, in favour of revisiting aspects of an SDRM, enshrined in the IMF’s articles or the European Stability Mechanism – an alternative he has promoted recently.
Some observers have quietly suggested that Mr Buchheit’s enthusiasm for an SDRM revival is linked to a recent bout of serious illness and subsequent desire to leave a revolutionised legal landscape as his legacy.
It is an accusation he shrugs off. “I’m not building a legacy. Not at all. This whole thing will go on a long time after I’m gone. A full SDRM will remain a remote prospect,” he says. Indeed, the IMF recently said it was considering making changes to how it deals with stricken countries, but is shying away from revisiting its old project.
Nonetheless, Mr Buchheit detects rising interest in the subject and predicts that a more “minimalist” system, that perhaps just expands the list of government assets immune from holdout seizure, could emerge by the end of the year. “Everyone wants to see what they can do to defang the holdouts,” he says.