| NEW YORK
NEW YORK May 22 If any other European countries
were to follow Greece into a debt default, Athens can recommend
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,"
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
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
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.
CLAUSE THAT REFRESHES
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
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.
MAP FOR FUTURE DEFAULTS
Buchheit relishes turning a long-standing legal precedent on
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
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
"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."
"JAMMING" THE VULTURES
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
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
"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
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
"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."