Lee Buchheit: The man behind Greece's debt restructuring
By Daniel Bases
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.
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.
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."
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."
[Reuters] |
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