Vulture Fund Founder Singer Helps Back Giuliani Bid (Update1)
By Kambiz Foroohar
Jan. 8 (Bloomberg) — On a sweltering day in September 2006,
almost a year before the collapse of the housing market and the
ensuing credit crunch, Paul Singer, the founder of hedge fund firm
Elliott Associates LP, took the podium at a New York financial
conference to give a speech called “Complexity Made Simple.
The complexity he was talking about was contained in
collateralized debt obligations, or CDOs — packages of debt that
bundle subprime mortgages, bonds and other loans.
Singer, 63, told the 325 money managers who had crowded into
the auditorium that investors who were buying CDOs were making a
serious error. “It is still surprising how many investment fads
have elaborate spindrifts of ethereal logic which, when stripped
away, are really dumb, he said.
Singer urged his audience to shun subprime investments and
buy credit-default swaps — instruments that rise in value as the
risk of default increases — on mortgage-backed securities. “It
was a $100 million gift, says James Grant, editor of financial
newsletter Grants Interest Rate Observer, which had hosted the
conference. “Singer laid out a strategy of how to take advantage
of the CDO mess.
Singer took his own advice. New York-based Elliott
Associates, with $9.8 billion in assets, gained more than 30
percent after fees in 2007 — its best performance ever — on bets
that the housing boom would falter and die. And 2007 was no fluke.
Elliott Associates hasnt had a losing quarter since 1998.
14.7 Percent Return
Since its launch in January 1977, the hedge fund has returned
an average of 14.7 percent a year after fees compared with 12.6
percent for the Standard %26amp; Poors 500 Index. Elliott Associates is
the name of both the firm and the fund; the firm also runs Elliott
International, which makes the same investments and caters to non-
U.S. investors.
“Hes on top of his portfolio, and if youre an investor,
thats what you want, says Ralph DellaCamera, founder of
DellaCamera Capital Management, a New York-based hedge fund firm,
who worked at Elliott for 14 years and left in 1999. “Hes one of
the best fund managers in the business.
Singer is also one of the most controversial. Normally shy of
publicity and cameras — the photo of Singer accompanying this
article is the first he has ever agreed to sit for — Singer put
himself in the limelight in 2007 when he became the top fund-
raiser for presidential candidate and former New York Mayor Rudy
Giuliani.
He made headlines again in September when he was revealed to
be the mystery donor behind a move to change the way presidential
electors are chosen in California — which the Democratic Party
calls an effort to “rig the November 2008 vote in the
Republicans favor.
Distressed Investor
Singers principal investing strategy is to buy distressed
debt at a discount and then demand full payment, going to court to
collect if necessary. He also purchases stock in companies slated
for acquisition and demands a higher price. His techniques have
pitted him against organizations from Cincinnati-based Procter %26amp;
Gamble Co. to the governments of Argentina and the Republic of
Congo.
Singer has repeatedly been labeled a “vulture investor by
the emerging-market countries whose bonds he has bought and by
development organizations such as Oxfam International that back
forgiveness of poor countries debt.
“Elliotts actions are amoral, says David Skeel, a
University of Pennsylvania law professor who specializes in
bankruptcies and emerging-market debt. “Theyve taken a number of
actions designed to make a profit, without worrying about the
potential consequences for the country involved.
Paulson Comment
U.S. Treasury Secretary Henry Paulson, former head of Goldman
Sachs Group Inc., has joined the campaign to forgive poor nations
debt. In testimony last June before the House Financial Services
Committee, Paulson said, “I deplore what the vulture funds are
doing.
Singer says all the name-calling is unfair. First, he says,
the emerging-market debt Elliott holds represents 2 percent of its
assets. And he says he doesnt buy debt from the poorest of the
poor.
“We never had a dispute with a sovereign which could not pay
its debts, he says. “Our disputes have always been with
sovereigns who can pay but refuse to do so.
Singer is an opportunist. Just two days after Pakistani
President Pervez Musharraf declared a state of emergency,
suspended the constitution and disbanded the Supreme Court in
November, Heather McGill, a researcher at Elliott, was looking for
investment opportunities in that country, according to an e-mail
she sent around the globe.
Looking at Pakistan
“We are trying to better gauge the situation in Pakistan and
are interested in building our network of consultants on the
ground there, McGill wrote. As of mid-December, Elliott hadnt
bought any Pakistani debt and wasnt pursuing investments in that
country, a spokesman said.
Singer says he invests in defaulted and distressed debt
because he can be more certain of a good return for his investors
than he could by playing the stock and bond markets.
“My job is to make sure we are protected from the
predictable and the unpredictable, Singer says, speaking from a
conference room in Elliott Associates New York offices, located
on the 36th floor of a building across Fifth Avenue from the Crown
Building, with sweeping views of Central Park.
Nothing was more predictable, in Singers view, than the
collapse of the market for mortgage-backed bonds. “One powerful
measure of attractiveness of a trade is when there is the
potential to make outsized gains for very little risk, he says.
`Extraordinary Mispricing
As early as 2005, it was plain to him that the investment-
grade ratings many CDOs carried bore no relation to the danger of
default, Singer says as he leafs through a sheaf of charts and
analysis prepared on the subject by his staff. “What we found was
an extraordinary level of mispricing of risk, he says. “The
ratings of the securities were extremely erroneous.
Elliott, which employs 175 people in New York, London, Tokyo
and Hong Kong, took a close look at the mortgages contained in
some of the CDOs being marketed to pension funds and other
institutional investors. CDOs are divided into slices, or
tranches, with each tranche carrying its own risk of default.
Elliott found that a 4 percent decline in house prices over
two years would be likely to wipe out 84 percent of the principal
of a typical CDO. A 7 percent decline could destroy its value
completely.
Elliott shorted the ABX index, the benchmark for mortgage-
backed assets, and bet against the CDOs held by big banks,
including Citigroup Inc. and JPMorgan Chase %26amp; Co., by buying
credit default swaps tied to their debt.
Betting Against Subprime
“Never seen anything like it in 30 years, Singer says.
“Financial institutions did not check, and the rating agencies
let them down.
Losses from the falling value of subprime mortgage assets may
reach $400 billion worldwide, Deutsche Bank AG analyst Michael
Mayo said in a note to investors in November. Moodys Investors
Service, the second-largest ratings company, downgraded more than
$60 billion of mortgage-linked CDOs in October and November, and
has $174 billion under review. Singers success at exploiting
those losses helped increase his assets under management by more
than $5 billion in three years, to $9.8 billion in December.
With his thinning silver hair, white beard and the blue
cardigan he sports for a rare interview, Singer resembles a
literature professor. Friends say he is polite and soft-spoken.
Yet his funds investment style often involves hostile
confrontation and years of litigation. “We like situations where
we can sit around a table and negotiate, he says. “We like to
control our own destiny.
Profiting from Bankruptcy
As of December, Singer had already moved beyond the housing
crisis to what he sees as the next phase of the U.S. addiction to
easy credit — corporate bankruptcies. He expects a wave of
company failures in 2008 and 09 and is ready to take advantage by
buying up the companies debt at a discount. “Our primary goal is
to find bankruptcy situations where our ability to control or
influence the process is the driver of value, Singer says.
“Thats our favorite.
Investors in Singers fund say hes seldom wrong about an
investment. “Hes able to take very complicated scenarios and
find a way of making them pay, says Donald Sussman, owner of St.
Thomas, Virgin Islands-based hedge fund firm Trust Asset
Management, which manages $3 billion. “Hes one of the five to 10
best investors in our generation.
Sussman once shared a midtown Manhattan office with Singer
and was an early investor in his fund.
Harvard Law Grad
Singer grew up in the New York metropolitan area — he wont
say exactly where — and his father owned a pharmacy on the west
side of Manhattan. After graduating from the University of
Rochester with a degree in psychology, Singer attended Harvard Law
School in Cambridge, Massachusetts, and then worked for four years
at two corporate law firms in New York.
In 1974, he joined investment bank Donaldson, Lufkin %26amp;
Jenrette Inc. as an attorney in its real estate unit. Three years
later, he set up Elliott Associates, with $1.3 million from
friends and family. Elliott is Singers middle name.
For the first 10 years of Elliotts existence, Singer mostly
did convertible arbitrage, a hedge fund strategy in which he
bought convertible bonds — securities that can be exchanged for
company shares — while selling short the underlying stocks.
Investors using this technique make money if the convertible is
mispriced relative to the stock. The fund had better than 10
percent returns for eight of its first 10 years, including four
with gains of more than 20 percent.
Running from Risk
Then came the 1987 stock market crash. Even though the fund
made money that year, convertible bonds didnt perform well,
Singer says. His conviction that traditional stock and bond
investing involved too much risk was bolstered by the 1991-92
recession.
Elliott gradually shifted to its current strategy of
investing mostly in bankrupt companies and sovereign debt. During
the past decade, Elliott has profited from buying the bonds of a
series of troubled companies, including Trans World Airlines Inc.,
telecom companies MCI Inc. and WorldCom Inc. and Enron Corp.
In a federal court case involving Owens-Corning Co. — a
building materials company driven into bankruptcy by asbestos
lawsuits — Singer succeeded in his effort to have a federal judge
removed from the case for conflict of interest.
Elliott Associates is closed to new investors; the fund firm
doesnt even have a marketing department. Until 2007, Singer was
little known outside the investing community — and he prefers it
that way. That January, though, his name suddenly surfaced in
connection with Giuliani.
Giuliani Money Man
The New York Daily News obtained a leaked 140-page strategy
memo produced by the Giuliani campaign. Singer, described as the
“Republican George Soros, was listed as heading the campaigns
efforts to raise cash from hedge funds and playing a key role in
luring other backers. In the campaign hierarchy, Singer was
eastern regional finance chairman.
Months later, the News archcompetitor, the New York Post,
was less kind in a story about Singers foreign ventures. Its July
30 headline: “Rudys Vulture $$ Man: Profits off Poor.
Singer should have been prepared to take some hits, says
Scott Reed, campaign manager for former Senator Bob Dole, the
Republican candidate for president in 1996. “When youre fund
raising for the front-runner, youre in the NFL, he says.
“Youve got to put on your helmet and pads because its rough out
there.
The Giuliani campaign has since cut back on Singers role. By
August, he was no longer regional finance chair. Giuliani
spokeswoman Maria Comella says hes now a senior policy adviser;
she refused to answer other questions about his role in the
campaign.
Giuliani couldnt be contacted for comment.
Biggest Rudy Donors
Singer and employees of Elliott Associates remain the biggest
donors to Giuliani; they gave at least $228,000 in the first nine
months of 2007, according to the Federal Election Commission.
Elliott Asset Management, one of Singers private companies, also
leased jets to the Giuliani campaign, according to FEC documents.
“I support Rudy Giulianis candidacy because he is a strong,
proven leader who turned around New York City after decades of
mismanagement and decline, Singer says.
Singer is a longtime Republican activist. In the 2004
presidential campaign, he was one of George W. Bushs
“pioneers, meaning that he raised at least $100,000. He gave a
total of $2.2 million to Republican causes, including $1.5 million
to the Progress for America Voter Fund, a private group that
sponsored ads opposing the candidacy of Democrat John Kerry. He
also gave at least $5,000 to Swift Boat Veterans and POWs for
Truth, a group of veterans that Democrats accused of smearing
Kerry by questioning his Vietnam War record.
California Initiative
Singer was also the secret backer of a controversial move to
change how California distributes its Electoral College votes. In
July 2007, a group called Californians for Equal Representation
(CER) filed papers with the state attorney general calling for a
voter referendum that would mandate that the 55 votes be awarded
according to Congressional district results. Today, California and
every other state except Maine and Nebraska have a winner-take-all
system.
“This is an attempt to rig the election, Democratic
consultant Chris Lehane said after the initiative was launched.
The measure would hand the GOP nominee 20 elec-toral votes from
safe Republican districts, he says — the equivalent of a state
the size of Ohio.
The initiative, headed by Sacramento, California-based lawyer
Thomas Hiltachk, needed 730,000 signatures by the end of November
to get on the ballot. It failed to do so, despite a $175,000 cash
infusion from a hitherto-unknown Missouri-based group called Take
Initiative America.
`Credibility Matters
The groups leaders refused to disclose where the money came
from. On Sept. 27, Hiltachk and Kevin Eckery, a spokesman for CER,
quit in protest. “Credibility matters, Eckery said in a
statement. “Theres no reason to be cute when it comes to
reporting campaign contributions.
The next day, Singer said he was the donor. “I contributed
to Take Initiative America because I believe in proportional
voting in the Electoral College, Singer said in answer to an e-
mailed question. In October, the Democratic Party filed a
complaint with the FEC charging Singer with a violation of the
campaign finance law that limits donations to particular
candidates.
They contend the initiative originated in the Giuliani camp,
which Giulianis spokeswoman denies. Singer denies any wrongdoing.
“It looks like Singers involvement killed the initiative, Reed
says.
Minority Rights
Singer isnt shy about going head-to-head with his
adversaries — in politics or in business. “We dont see many
people willing to stand up for their shareholder or bondholder
rights, Singer says. “If you dont defend your rights, what do
you have?
He has joined activist investor Carl Icahn in several
ventures, most recently by taking a 5.4 million-share stake in
Motorola Inc. and demanding a management shakeup. On Nov. 30,
Motorola CEO Ed Zander agreed to step down. Motorola shares closed
at 15 Jan. 7, down 6 percent since Zanders decision.
For 30 years, Icahn, 72, has been buying stakes in companies,
including Phillips Petroleum Co., Time Warner Inc. and Viacom
Inc., and then agitating for change.
Singer has taken legal action to squeeze profits out of
organizations as diverse as European phone service providers Colt
Telecom Group SA and Telecom Italia SpA, P%26amp;G and the governments
of Peru, Argentina and the Republic of Congo.
“He expects people to keep their word, says Kenneth
Buckfire, managing director of Miller Buckfire %26amp; Co., a New York-
based investment bank that has worked alongside Elliott in
restructuring bankrupt companies. “When he thinks hes being
treated unfairly, he is extremely aggressive.
Hair Care Fight
Elliott took on Cincinnati-based P%26amp;G in 2003, after the
worlds biggest consumer products company bid for Wella AG, a
German hair care products company. P%26amp;G offered the founding family
and Wella management, which held all of the voting stock, 92.50
euros ($133.40) a share, or $6.9 billion, to acquire the company.
The offer was 42 percent more than the 65 euros offered to
holders of nonvoting, preferred shares. Elliott bought 10 percent
of Wellas preferred shares after the announcement. “I looked at
it, and I said, I dont think they can do that, Singer says.
Elliott was soon joined by New York-based hedge funds Paulson
%26amp; Co. and Perry Capital LLC in opposing the deal. Deka Investment,
Germanys second-largest fund manager, also came on board. After
Germanys financial services regulator, BaFin, approved P%26amp;Gs
takeover of Wella, Elliott sued BaFin to stop the merger, arguing
that the regulator had failed to protect all shareholders.
A Win against P%26amp;G
German trial and appeals courts both upheld BaFin. Still, to
prevent new litigation, P%26amp;G eventually raised its offer to
nonvoting shareholders to 80 euros, and Singer and the others took
the deal, according to German business magazine Wirtschaftswoche.
Neither Singer nor P%26amp;G would confirm the number.
Elliotts activism can backfire. That happened in the case of
London-based Colt Telecom. Colts shares took a battering in the
aftermath of the dot-com meltdown, falling 99 percent from their
peak in March 2000 to 28 pence in October 2002. Its bonds were
trading at about half of their face value.
In 2002, Highberry Ltd., a Cayman Islands-based subsidiary of
Elliott Associates, acquired 75 million pounds ($117 million at
the time) of the telecoms bonds at a discount. Then, in October
of that year, Highberry demanded full payment, even though the
bonds were not due to mature until 2006. When Colt refused,
Highberry sued to put the company into bankruptcy and get a court-
appointed administrator to run it.
A Loss in London
Colt was neither bankrupt nor in default on any of its bonds
or loans. It had almost 1 billion pounds in cash and a market
capitalization of 550 million pounds. Yet in Londons High Court,
Highberry argued that Colt, like other telecom startups, was
losing so much money it was likely to face bankruptcy in three to
five years.
In December 2002, Judge Robert Jacob threw the case out,
issuing a sharp rebuke to Highberry. “There is not, and never has
been, any substance whatever in this petition, Jacob said. “It
should never have been launched. The purpose was very clear from
the outset — cash for Highberry. After he lost in court, Singer
sold out his position. “We were surprised at the approach of the
court, Singer says. “It was not a happy episode.
Singers notoriety is global. Hes bought defaulted debt from
a half dozen countries (he wont say exactly how many) and
demanded full payment. In March 1996, Elliott Associates purchased
for $11 million about $20.7 million of the debt of two Peruvian
banks, Banco Nacion and Banco Popular del Peru. Peruvian President
Alberto Fujimori was at the time in the midst of negotiations to
exchange the countrys old debt for new Brady bonds. Singer
refused to sign on to the settlement with other creditors.
Four Years of Lawsuits
Instead, he spent the next four years suing Peru, first in
the U.S. and then in Canada, Germany, Luxembourg, Belgium and the
U.K. In June 2000, a U.S. District Court in New York gave Elliott
Associates authority to seize Peruvian commercial assets.
Three months later, the hedge fund won a court order in
Brussels preventing Euroclear Plc, a clearing house for
internationally traded securities, from paying $80 million to
Perus creditors. Faced with the threat of default, Peru gave up
and in October 2000 agreed to pay Singer $58 million in principal
and interest — giving him a 400 percent profit.
“Elliott is very determined, says Mark Cymrot, a partner
at Baker Hostetler, the law firm that defended the Latin American
nation. “They are more persistent and original than other
vultures.
Kirchner Gets Tough
Singer has fought the same battle in Argentina and lost. That
South American country defaulted on $82 billion in dollar-
denominated debt and devalued its currency in 2002. “The
situation here in 2002 was one of total collapse, says Jorge
Todesca, former deputy economy minister. “It wasnt just an
economic collapse but a political and social one as well.
A Singer company, NML Capital Ltd., bought at least $182
million of the debt for 15-30 cents on the dollar. Talks with
investors didnt even begin until 2005, when Argentine President
Nestor Kirchner offered 30 cents on the dollar to buy back the
bonds.
The Argentine government — now led by Kirchners wife,
Cristina — never raised its offer. In fact, in 2005, the
legislature passed a law forbidding it from doing so.
Some 70 percent of the countrys bond creditors have settled.
Singer and others are holding out. Singer won a judgment for $284
million in the U.S. in 2006. That has prevented the Argentine
government from issuing new global bonds, lest Singer go to court
to seize interest payments. It also means Singers return on his
investment, for now, is zero.
Buying Congo Debt
Singers battle with the Republic of Congo — a country of
3.9 million people adjacent to the much larger Democratic Republic
of Congo — has been even more contentious. In the late 1990s,
Elliott Associates, through another of its subsidiaries, Cayman
Islands-based Kensington International Inc., bought $30 million of
defaulted Congolese debt at a significant discount, according to
legal documents filed by the Congolese government.
Kensington has since chased Congolese assets in courts around
the world, arguing that Congo is fully capable of paying its debts
from oil sales. Kensington scored $39 million in November 2005
when the U.K.s High Court ruled that Glencore International AG,
the worlds largest commodity trader, should pay the company for
two consignments of Congolese oil rather than pay a Congolese
government-controlled company.
Congolese President Denis Sassou-Nguesso has fought back.
Hes spent an estimated $5 million hiring Washington lobbying
firms to fight Singer, according to Chlopak, Leonard, Schechter %26amp;
Associates Inc., Congos Washington public relations firm. The
countrys law firm is the prestigious Trout Cacheris. Supporters
of Congo argue that Singer is undermining a United Nations-backed
effort to lift the burden of debt from the worlds poorest
countries.
Jubilee USA
Neil Watkins, national coordinator of Washington-based
Jubilee USA Network, an alliance of organizations that campaigns
for debt relief in developing countries, says even if theres
rampant corruption in a country, that doesnt justify Singers
lawsuits.
“There are countries where the governments are not
accountable to their people, Watkins says. “I dont think its
better for the money to go to some guy on Wall Street.
Singer says theres no reason to let debtor nations such as
Congo off the hook. “These are countries where the leaders are
comfortable and there is poverty, Singer says. “If somebody
sits down and talks to you, then you make a deal. If not, you get
a judgment.
That kind of cool calculation was at work once again in mid-
December, as Singer contemplated how to take further advantage of
the collapse of subprime loans and CDOs. He wouldnt comment on
how hes doing so except to say, “Its the opportunity of a
lifetime.
