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12.06.2012 08:00 Age: 4 yrs
Category: Press Hits
In Albany, Obscure Bill Rattles Wall Street and Argentina
THE WALL STREET JOURNAL
June 12, 2012
By Jacob Gershman
ALBANY, N.Y. - Hedge fund manager Paul Singer appears to have fallen short in his effort to pass a state law aimed at bolstering his firm's long-running effort to collect on Argentina's unpaid debt.
The Elliott Management founder has been pushing for passage of a bill that would ensure that his firm can pursue post-court judgment claims against Argentina and other foreign states, increasing pressure on the country to settle.
But the bill's chances in the Assembly faded Tuesday when it failed to make it out of chamber's judiciary committee. Supporters of the measure said their outlook was grim, while opponents said they were staying cautious. "We won't really until the session ends. This is Albany," said a lobbyist working against the measure.
The bill would tinker with an obscure doctrine of civil practice that would apply in circumstances beyond the Elliott-Argentina dispute, setting off alarms in the city's banking and legal industries. They fear the New York state Legislature's intervention would scare off borrowers from doing business in the state.
The New York State Bar Association, New York Bankers Association and the Securities Industry and Financial Markets Association united against Elliott on the measure.
The legislation appears tailor-made to resolve a dispute that goes back seven years, in the wake of Argentina defaulting on $80 billion of debt in 2001. Argentina has resisted Elliott's demands to pay back its defaulted debt in full, but Elliott has won five judgments totaling $1.6 billion. The firm is pursuing another several hundred million dollars in pending suits.
"It certainly is unusual for a state legislature to pass a statute solely for the purpose of resolving a preexisting commercial dispute. Usually, it makes a lot more sense for courts to decide disputes based on the law that existed at the time of the transaction," said Professor Ronald Mann, a Columbia Law School professor specializing in commercial finance.
Elliott argued that it was asking Albany to affirm existing case law, which holds that when a debtor evades a court judgment, the creditors don't lose their rights to enforce their contracts.
Cleary Gottlieb, the Manhattan-based law firm that represents Argentina and other sovereign borrowers, had urged lawmakers to block the measure.
Mr. Singer's push in Albany has been a touchy issue for the city's major commercial banks with their overlapping financial interests. The same banking industry that underwrites, sells, administers and safeguards foreign securities also services hedge funds as prime brokers.
Elliott can yank away its money from a bank that interferes with this legislation in Albany. It's a huge incentive for major clients, like Barclays, Citibank and J.P. Morgan, to stick to the sidelines.
That's produced an odd dynamic: While the bankers association sought to kill the bill, the trade group's largest members stayed neutral. One exception is the Bank of New York Mellon, the exchange agent for Argentina's 2005 debt swap.
"The banks' suggestion that the bill would harm New York as a financial center is ludicrous and a mere cover for their cynical effort to help Argentina evade its creditors," said an Elliott spokesman.
Mr. Singer has retained two Albany lobbying firms, including one of the main lobbyists who worked to help get same-sex marriage passed in the Republican Senate.
The path became trickier for Elliott on Friday, when an alliance of religious groups that supports debt relief for developing nations, Jubilee USA Network, entered the fray by issuing a mass alert about the bill. It said the proposed law could be wielded in poorer regions and "litigate poor countries into submission."
Elliott, in court papers, says Argentina has $47 billion in foreign currency reserves. "You can't label Argentina a poor country," said the bill's Assembly sponsor, Aravella Simotas, a commercial litigator from Queens.
"I'm very concerned about how this bill will affect us nationwide and worldwide as a business center," said Herman D. Farrell, Jr., a Manhattan Democrat who leads the Assembly's Ways and Means Committee.
A spokesman for Gov. Andrew Cuomo said the office was reviewing the legislation.
In 2005, Argentina settled with other creditors, who accepted a bond exchange paying under 30 cents on the dollar. Opting to stay in court, Elliott rejected the restructuring deal, demanding that Argentina pay all of its obligations. Meanwhile, creditors who bought the new bonds collected $2.4 billion in interest payments in December and are due another $1.8 billion this year, according to court papers. Elliott, and other hold-out creditors, hasn't seen a penny.
Until recently, Elliott's pursuit of Argentina's debt wound up in dead ends. The firm made a bid for $105 million in central bank assets held by the Federal Reserve Bank of New York. The New York Fed, backed up by the U.S. Treasury Department, refused to release the cash. And a federal appeals court last year ruled against Elliott.
The firm's long-game strategy, though, has the potential to pay off. Elliott shifted tactics, alleging that when Argentina started paying the exchange bondholders, the country breached its contractual promise to treat all of the creditors equally. It's a similar argument it wielded against Peru more than a decade ago.
A federal district judge earlier this year sided with Elliott, in a ruling that Argentina appealed to the Second Circuit. A victory there by Argentina's creditors could mark a turning point in the litigation. Trustees that collect and distribute Argentina's principal and interest payments, like Bank of New York, would be required to freeze transactions that don't comply with the court order. Ignoring a court order is a far dicier proposition for an American financial firm than it is for a sovereign nation.
That's where the Albany bill was supposed to come into play.
Argentina has signaled that it would attempt to block Elliott by claiming that the contractual dispute was rendered irrelevant by the final judgments, which were silent on the issue of equal treatment.
By stating explicitly that a final judgment doesn't dissolve other lingering contractual claims the proposed legislation amounts to a pre-emptive strike against Argentina.
Mr. Singer isn't a stranger to the stormy seas of New York politics. A year ago, he was among those leading the charge to legalize same-sex marriage in the state. At the encouragement of Gov. Andrew Cuomo, Mr. Singer, who has a gay son, helped finance the movement's lobbying campaign and donated hundreds of thousands of dollars to Senate Republicans. Many credit him with tipping the balance toward passage.