Hedge Fund as Pirate, Seizes Argentine Navy Ship

Earlier this week hedge fund Elliott Associates seized the ARA Libertad, a tall ship from the Argentine Navy in a Ghanean harbor, as partial payment for unpaid sovereign debt dating back to 2001.

I love this story, because I’ve got some history with both sides of this dispute.

Argentina’s debt default, of course, is why I ceased selling emerging market bonds at the end of December 2001, and became a mortgage bond salesman.  At the time, Argentina’s was the largest sovereign default in history, capping a financial train wreck we had watched develop for the entire previous year.  My emerging markets desk at Goldman shrunk from 13 salespeople to 3 salespeople in the few short weeks following Argentina’s default.  I moved from a bi-lingual, exciting dream job to pursue my passion for devising weapons of mass financial destruction for AIG.

More interestingly, Elliott is a former client of mine, and they’ve been doing this kind of unpaid debt enforcement thing successfully for a long time.  In the Fall of 2000, Elliott successfully and single-handedly threw the Peruvian government into temporary sovereign default, for similarly failing to make good on its defaulted debt obligations owned by Elliott.

The lead-up to that Peruvian event, like this week’s seizure of a tall ship in Ghana, also took years in the development.  The Harvard Law School case study is available here.[1]

To win the Peru situation, Elliott first had to overcome and overturn on appeal a century old law – called the Champerty Doctrine – that forbade New York lawyers from purchasing debt for the purpose of initiating a lawsuit.[2]  Since Elliott, as a distressed debt investor, does purchase debt obligations that it knows will involve litigation, it needed to prove that the Champerty Doctrine did not apply.  Instead, Elliott made the courts agree that it had purchased a valid Peruvian debt, and the lawsuit was merely the enforcement of the valid debt.

Next, Elliott managed to force bond payment servicers, first Chase Bank and later the bond-payment system Euroclear, to withhold payment on all Peruvian bonds, if the Elliott-owned debts remained unpaid.  Elliott got the New York and Belgian courts to recognize that it’s illegal to treat holders of equal-status debt unequally.

This forced Peru into default on its September 7, 2000 bond payments, despite the fact that Peru had the willingness and ability to pay all its bonds – at least all those bonds not owned by Elliott.

Elliott’s timing was also impeccable, in the sense that Peru’s strongman President, Alberto Fujimori, faced a political crisis at home that same week with a corruption scandal involving his closest ally, and Fujimori would flee the country by November 2000.  After about a week of political and financial squirming under the forced default, Fujimori’s government found the $50 million or so it owed Elliott and the problem was solved.

The seizure of the Tall Ship in Ghana this week is just another sign that Argentina will pay, one way or another, on the debt it owes Elliott.  The hedge fund reportedly owns $1.6 Billion in unpaid, unrestructured Argentine debt dating back to the 2001 sovereign debt default.

Obviously though, this story of the seized Argentine Navy ship raises as many questions as it answers.

  1. Will the 200 sailors reportedly aboard the ARA Libertad ever be able to hold their head up in a port town again after they got overwhelmed and seized by a nerdy hedge fund?  I mean, how does that happen?
  2. Will Elliott Associates’ Paul Singer challenge John Devaney’s Positive Carry to a real-life game of Battleship?
  3. Can the ARA Libertad offer Elliott’s outside investors the ultimate offshore vehicle?
  4. Is it true Johnny Depp will play Paul Singer in the movie?

[1] You can tell from the narrative that Elliott acts with extreme patience and careful, dogged determination.  As a betting man, I am sure they’ll get paid by Argentina in the end.  In the meantime, they’ve got that cool ship!

[2] The original idea of Champerty was that lawyers might try to generate unwarranted legal fees through the trick of purchasing debt and initiating litigation.  It was not meant to prevent the enforcement of valid debts, although Peru successfully argued the application of Champerty for a while, before losing on appeal.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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