Mitt Romney's hedge fund kingmaker
March 26, 2012: 5:00 AM ET
Elite money manager Paul Singer is a passionate defender of the 1% and a rising Republican power broker. He's determined to put a candidate who shares his views back in the White House.
By Michelle Celarier, contributor
FORTUNE -- As he gears up for the final stretch in the marathon that is the Republican nomination campaign, Mitt Romney has no shortage of eminent financiers to call on -- for advice or money. Billionaire hedge fund titans such as Julian Robertson of Tiger Management, Louis Bacon of Moore Capital, and John Paulson of Paulson & Co. have all lined up behind the front-runner. Steve Schwarzman, the co-founder of private equity giant Blackstone (BX), recently held a high-level fundraiser for Romney at his Park Avenue apartment. Romney's old friends at Bain Capital, the buyout firm he co-founded in 1984, have also been generous in their support. But perhaps none of Romney's Wall Street supporters will be more crucial to the candidate's success, or have more influence on his thinking, than Paul Singer.
Singer is the founder of a $19 billion hedge fund called Elliott Management. And he has a well-earned reputation as one of the smartest and toughest money managers in the business. Over the past 35 years Singer, 67, has produced an extraordinary 14% average annual return after fees, nearly double the price appreciation of the S&P 500 (SPX). He's achieved that record in large part by buying the debt of bankrupt companies and nations -- a strategy that has earned him considerable opprobrium in some circles. His firm, which is engaged in a costly, protracted legal war with Argentina over its defaulted sovereign debt, is so influential that fear of its tactics helped shape the current Greek debt restructuring. Among the sophisticated investors who have placed their confidence in Singer is Mitt Romney himself. According to Romney's financial disclosures, the trust managing his more than $200 million fortune has at least $1 million invested with Elliott.
In recent years Singer has emerged as a quiet force in the Republican Party. He's one of a handful of moneymen who have given $1 million to the Romney super PAC "Restore the Future," which so far has raised $37 million and spent some $34 million. Singer has also donated more than $220,000 to 31 Republicans in national races across the country since Barack Obama became President. Over the past three years he has given nearly $2 million to Republicans in local races in states as far-flung as Florida, Michigan, California, and Texas. But his value goes far beyond his own deep pockets. Singer is known as a major Republican "bundler," with a large network of rich donors ready to follow his lead. "All the candidates come to pick his brain," says one party insider.
Many in the East Coast elite wing of the party also view Singer as an intellectual with the tenacious spirit necessary to help them turn back the clock on regulation and resist higher taxes on the wealthy. "Paul Singer is a philosopher-king type of person," says Anthony Scaramucci, the Skybridge Capital managing partner who, as Mitt Romney's finance co-chair, worked hard to get Singer to swing his support behind his candidate. Singer signed on with Romney after his first choice, New Jersey governor Chris Christie, said he would not run.
In the role of would-be kingmaker, Singer has his own agenda -- specifically, gaining official support to win his battle with Argentina over the more than $2 billion he says the country owes his firm. He also opposes portions of the Dodd-Frank Act, the financial regulation that grew out of the 2008 crash, which could crimp his business. More broadly, Singer worries that the Fed's monetary policies will lead to "very serious inflation" and believes that entitlement reform is desperately needed. The alternative is grim, according to Singer. "America and Europe are actually, on present course, headed for mass poverty and degradation of freedom," he warned in a recent letter to investors. The battle for the White House, in his eyes, is truly a fight to save the country.
With his trim white beard, wire-rimmed spectacles, and erudite demeanor, Singer could pass for a college professor. Friends say he has a wry sense of humor and a penchant for delving into arcane details when offering his policy prescriptions or financial analysis. Like many of his hedge fund peers, Singer prefers to discuss political strategy behind closed doors. "He's not a big bombastic guy," says Scaramucci. "He saves his commentary for very close one-on-one conversations." Singer declines most requests for interviews. (And did so for this article.) But he has become a regular speaker at industry events. He also chairs the Manhattan Institute for Policy Research in New York City. The conservative think tank has provided the intellectual ballast for many Republican policies, including the police tactics of New York mayor Rudolph Giuliani -- whom Singer initially backed in the 2008 presidential campaign -- and the current attacks on public sector unions.
Running Elliott and playing politics take up most of his time. But Singer is also an accomplished musician, who began studying classical piano at age 10 and later gravitated toward rock and roll. His favorite band is Led Zeppelin, and he once jammed on stage with Meat Loaf. Divorced since 1996, he has a home near Aspen, Colo., and lives on New York City's Upper West Side in the Beresford, a luxury apartment building on Central Park West built just before the stock market crash of 1929 that has been home to such stars as comedian Jerry Seinfeld and actress Glenn Close.
Singer grew up in Tenafly, N.J., just across the Hudson River from New York City, one of three children of a Manhattan pharmacist and a homemaker. After majoring in psychology at the University of Rochester, he earned a JD from Harvard Law School. In 1974, Singer landed a job as an attorney in the real estate division of the investment bank Donaldson Lufkin & Jenrette. Three years later he left to launch Elliott Associates with $1.3 million from friends and family. (Elliott is Singer's middle name.) Losses from his first forays into the stock market drilled into Singer a risk aversion that still guides his investing today. For example, he rarely uses leverage to juice returns. "He thinks about what could go wrong rather than what could go right," says a longtime investor.
That caution has served him well: Since 1977, Elliott has had only two down years -- in 1998 when it lost 7% and in cataclysmic 2008 when it dipped a mere 3% -- and is now the ninth-largest hedge fund in the U.S. Elliott rose 4.2% in 2011, a year in which most hedge funds lost money.
From the early days, Singer focused on distressed assets. He became adept at buying up the debt of bankrupt companies and gained a reputation for strong-arming his way to profit. Recently Singer's firm has been in most of the big post-crash restructurings, including Chrysler and auto parts supplier Delphi. Last year Lehman Brothers' debt was Elliott's biggest position, accounting for more than 10% of the portfolio, or about $2 billion. Elliott has also used its distressed balance sheet analysis to take activist equity stakes in companies such as Novell and Iron Mountain (IRM). The fund has had less success dabbling in Hollywood, financing an independent producer called Relativity Media, a troubled investment it recently began selling off.
In hedge fund circles, the joke about Singer used to be that he was "to the right of Attila the Hun," given his devotion to Republican ideology. But his conservatism doesn't extend to at least one social issue: gay rights. Since 2001, Singer has quietly given $8.6 million to nonprofits to support gay rights. He spent another $1 million bankrolling the successful effort to pass New York's same-sex marriage law last year. One of his sons, Andrew, is a Massachusetts doctor who is gay and was married in that state. (His other son, Gordon, runs the firm's London office.)
In his office on West 57th Street in Manhattan, Singer keeps a stack of about 25 copies of a 1931 book calledThe Economics of Inflation: A Study of Currency Depreciation in Post War Germany by an obscure Italian economist named Costantino Bresciani-Turroni. Singer tracked down the book, which details Germany's spiral into hyperinflation, a few years ago after he saw it mentioned in the footnotes of an academic paper. He considers it the best study he's come across of how easy-money policies can quickly go awry. When Romney dropped by for a visit in November, Singer gave him a copy.
Singer's own analysis became more sought out after he famously warned the G-7 ministers of impending doom in 2007 and survived the crash of 2008 virtually unscathed. Each quarter Singer lays out his political and economic views in a confidential report to his investors that is watermarked and kept under password-protected Internet security. (Disclosure: In 2010, Elliott asked the supreme court of the state of New York to compel ARmagazine, which covers hedge funds, to reveal who had leaked its confidential investment letter to AR. Elliott later withdrew the request. I was editor of AR at the time.)
In the most recent report, dated Jan. 23, 2012, Singer takes on the tax debate that promises to be a defining issue of the presidential race in a lengthy section called "Taxes and the 1%." Singer writes that "income inequality has become a wedge issue." He then quotes a 2007 Treasury Department study on income mobility that shows that "more than half the households in the top 1% were not there nine years earlier."
Folks in this "vilified club" should not be punished by paying more taxes, Singer's argument goes, since there's no way of knowing what their "fair share" of taxes should be or if the 1% will continue to be in that tax bracket for long. The billionaire shows little sympathy for the plight of the 99%. "Resentment is not morally superior to earning money," writes Singer. What is a "moral failing," according to him, is "depreciation in paper money's value."
Even his admirers admit that Singer is, to put it gently, extremely confident in his own opinions. And his writings do little to refute that view. For example, Singer comes close to calling government officials stupid. "It is not exactly that we think they are particularly idiotic," he says, referring to the Federal Reserve. "The problem is that they are in way over their heads."
One of Singer's more familiar bugaboos is Dodd-Frank, which he says "enshrines" too-big-to-fail institutions. Singer favors more transparency and tougher margin requirements for the big banks. He also worries that the newly created Resolution Authority, a government agency designed to wind down failing financial institutions at the lowest cost to the taxpayer, trumps bankruptcy law. As Singer puts it, Dodd-Frank "will diminish the predictability and protections of the rule of law."
The FDIC sees it differently. "Dodd-Frank eliminates the ability of distressed-debt investors to manipulate the bankruptcy process through endless rounds of negotiation and legislation to get a few cents here or there," says Michael Krimminger, the FDIC general counsel. "It clearly spells out the priority structure for paying creditors, along with the way in which they will be paid."
The FDIC hopes the Resolution Authority process can avert a collapse of an institution like Lehman Brothers and the long, contentious bankruptcy process that followed. Elliott was a winner in that battle, which was finally resolved late last year. Elliott profited by buying up both private and public claims across the Lehman capital structure and was on the creditors' committee of the holding company. "They are very hard-nosed, very aggressive, and sometimes inflexible," says Harvey Miller, the Weil Gotshal & Manges partner who was the lead attorney for Lehman. "They just take a position and say, 'That's the way it has to be because we say so.'"
In December a bankruptcy plan was approved that would give bondholders of Lehman's parent company about 21¢ on the dollar. Elliott has not disclosed the average cost of its Lehman stake, but the holding company debt was trading as low as 9¢ on the dollar in early 2009, when Elliott began amassing its position. In mid-March that debt was trading at 28¢; the market evidently expects a larger recovery than the bankruptcy plan anticipates.
Buying defaulted sovereign debt has turned Elliott into something of a bête noire in international circles. It's also a tactic that has earned the firm big returns. The approach is simple: Buy up the bonds of struggling countries for pennies on the dollar, refuse to go along with offers other investors accept, and aggressively negotiate for every cent with the threat of a lawsuit if not satisfied. The architect of this strategy is Jay Newman, 60, a lawyer who joined Elliott in the mid-1990s after stints running emerging-markets desks at Shearson Lehman Hutton and Morgan Stanley (MS).
One of Elliott's first big successes in deploying the hardball approach was when it bought defaulted Peruvian debt in 1996. Testifying in that case, Singer explained his firm's position: "Peru would either pay us in full ... or be sued." The statement bolstered Peru's argument that Elliott's actions were illegal under what are called "champerty" laws, which, Peru claimed, don't allow an investor to buy a claim with the sole purpose of bringing suit. In 1998 a U.S. lower court agreed with Peru. But the ruling -- and that definition of "champerty" -- was later overturned. In 2000, Elliott was awarded a $58 million judgment, on debt for which it paid about $11.4 million. Elliott later lobbied successfully for the repeal of the state of New York's champerty statute. "Some of the stuff Elliott does is not good for the international system, but they're incredibly smart players and they are winning," says Mitu Gulati, a Duke University law professor.
While Elliott has become known as a sovereign vulture, the firm is selective in determining which countries to target. It has a policy of suing only nations that it believes can afford to pay, according to individuals close to the firm. What it does, Elliott says, is "go after bad actors." In its effort to force Congo-Brazzaville to pay up, Elliott uncovered corruption that eventually led the government to settle for an estimated $90 million on debt for which Elliott paid less than $20 million. Some legal scholars argue that the people in undemocratic countries ruled by corrupt leaders should not have to suffer for their rulers' misdeeds. It's called the "odious debt" doctrine. An international movement to cancel all such debt led the U.K. in 2010 to pass a law limiting lawsuits to recover the debts of the poorest nations, including Congo-Brazzaville. While not singling out Elliott, both the IMF and former Treasury Secretary Henry Paulson have deplored the practice of extracting large profits from countries in default.
By holding out, Elliott typically earns more than other investors, but that doesn't necessarily mean its peers are complaining. "Having someone like Elliott out there, figuring out what the documents really mean, is good for the markets," says Hans Humes, whose hedge fund Greylock Capital Management invests in distressed sovereign debt but does not go the holdout route.
The biggest challenge to Elliott's sovereign-debt strategy so far has come from Argentina. After the country defaulted on its debt in 2002, Elliott was one of a minority of investors that refused to accept the government's offer of less than 30¢ on the dollar. Elliott has received judgments against Argentina in numerous courts but has been unable to collect on much of it. The New York Federal Reserve would not release Argentina's central bank assets, and the U.S. Treasury Department sided with the Fed. Elliott has asked the U.S. Supreme Court to intervene.
The stakes are high. Elliott owns Argentine bonds with a face value of $630 million and says they are now worth $2.3 billion with accrued interest, according to court documents. Singer is optimistic that his patience will pay off. "We made significant progress on the legal front in the Argentina situation [in 2011], and we hope to see the logjam free up in 2012 or shortly thereafter," he wrote in the recent report to investors. In February a New York court ruling in Elliott's favor made it even more likely Elliott could collect, saying that Argentina will have to make pro rata payments to Elliott each time it pays investors who participated in previous debt-restructuring deals. Argentina is appealing the decision. Elliott has also taken the issue to Congress, lobbying for legislation that would pressure Argentina to pay off its debtors.
Singer's relentless legal tactics also have cast a shadow over Greece's sovereign-debt restructuring. It's no accident that the law firm representing Greece -- Cleary Gottlieb Steen & Hamilton -- is the one that also represents Argentina in its fight with Elliott. "Elliott scares the hell out of the Greeks," says one investor close to the Greek negotiations.
Hoping to avoid an Argentina-like battle over central bank reserves, the Greek bond exchange offer specifically stated that such monies could not be used to repay the debt, nor could anything that is considered Greece's cultural heritage. Then there's the collective-action clause, which Greece inserted in the new bonds. Since two-thirds of bondholders accepted the deal, all others were required to go along. Argentina's bonds did not have such a provision. Although there's some noise about hedge funds holding out on foreign-issued Greek bonds, extracting more from cash-strapped Greece is a long shot. Elliott hasn't built up a hold-out position in Greek debt, according to an individual close to the firm. Last year it profited instead by trading Greek credit default swaps.
But Elliott may well find other investments in Europe. "We do not think that the crisis is remotely over," wrote Singer at the end of 2011, calling the euro "a failed experiment." Observes Singer: "Amidst the danger lies opportunity, and often some of the most profitable trades germinate in such periods of market tumult." It sounds like Paul Singer will make out okay, no matter how Mitt Romney does at the voting booth this year.
This story is from the April 9, 2012 issue of Fortune.
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