How US hedge fund's attack on Samsung should be seen
This is the first in a two-part series by National University of Singapore Professor Shin Jang-sup about Elliott Associates' attempt to block Samsung's intra-subsidiary merger. ― ED.
Since U.S. fund Elliott Associates acquired 7.12 percent of Samsung C&T and declared its opposition to the planned merger between the company and Cheil Industries on June 4, a titanic battle is ensuing between the world's most famous "vulture fund" and the biggest chaebol, which owns the world's largest electronics company, Samsung Electronics.
The battle is likely to be prolonged. On June 9, Elliott filed an injunction with a Seoul court to block the proposed merger, which the court is highly unlikely to accept.
This move, and others made later, are better understood as Elliott's attempts at accumulating pretexts for longer legal disputes.
Elliott's previous investment behavior was hardly geared toward earning quick cash.
It used to mobilize diverse and sometimes unthinkable resources until it achieved its targets. That would be why it earned the nickname "vulture fund" from fellow global financiers.
A vulture is hardly satisfied by taking a portion of meat from its prey. It aims at eating as much as it wants.
Greg Palast, a U.S. investigative journalist and author, who wrote books such as "Vultures' Picnic" and "The Best Democracy Money Can Buy," doggedly pursued Elliott and detailed its investment "picnics" across the globe.
According to Palast, the first overseas bonanza for Elliott came from Peru.
Major international banks and Latin American countries had agreed on the Brady Plan in 1989, following active intervention by Nicholas Brady, then the U.S. treasury secretary.
The plan was geared at making Latin America return to a growth path by allowing substantial debt relief and sharing fruits from the future growth.
However, Elliott purchased $20.7 million worth of defaulted loans made to Peru for a deeply discounted $11.4 million. Elliott then sued the nation and its Banco de la Naciondel Peru in a New York court for the original amount of the loan, plus interest. This lawsuit effectively held the Brady Plan hostage.
Elliott won a $58 million settlement and made a $47 million profit ― a 400 percent return.
Elliott scaled up the size of its picnic astronomically in Argentina.
According to Palast, it purchased $630 million of bonds as the country was headed for default in 2001, reportedly at $48 million, about 7 percent of the face value, and demanded Argentina pay $2.3 billion, including unpaid interest.
It won a judgment from a New York court of $1.6 billion. The Argentine government refused to pay. Elliott then made an unprecedented move. It seized the Argentine naval vessel ARA Libertad, which was anchoring at Ghana in West Africa, and demanded payment.
Victims: Peru, Argentine, Africa
Elliott's picnic spread to Africa. And other funds followed.
It even stopped international aid to African countries for famine and clean water to get its bonds paid (there was a cholera epidemic in West Africa due to the lack of clean water). Some African countries gave it money to receive aid.
Palast says, as a result, Elliott received $90 million for Congo's debts bought at $20 million.
The Wall Street Journal reported that Elliott was able to reach this settlement also by pressing forward on investigation into corruption by Congolese President Denis Sassou Nguesso.
Even in the U.S., Elliott made money by applying similar methods.
According to Palast, Elliott's first big bucks in the U.S. were earned by hitting asbestos victims.
Owen Corning and other companies were sued by workers who were "dying and injured by their asbestos." The companies filed for bankruptcy and agreed to pay all they could to the victims. Elliot bought Corning at a price "next to nothing". A campaign then began attacking the workers, claiming they were "faking it."
Palast says: "The legal, political, and PR attacks on the dying workers chiseled away the compensation expected to be paid by the asbestos companies, boosting the firms' net worth." Elliot then "flipped Corning, selling it for a near-billion-dollar profit."
When General Motors was on the brink of bankruptcy during the 2008-09 global financial crisis, Elliott and other hedge funds, John Paulson & Co. and Third Point, bought Delphi Automotive, a former GM subsidiary whose auto parts remain essential to GM's production lines.
They purchased Delphi's debts at "just 20 cents on the dollar of their face value" and owned it. And they threatened the U.S. government that it would derail the GM rescue operation if it would not forgo Delphi's debts and provide the company with funds. Steve Rattner, who was in charge of the task force negotiating with the troubled firms and their creditors, wrote in his memoir, "Overhaul, that they told the Treasury and GM to hand over $350 million immediately, ‘because if you don't, we'll shut you down.'"
Delphi's chief financial officer, John Sheehan, also said in a sworn deposition in July 2009 that the hedge fund debt holders backed up its threat with "an analysis of the cost to GM if Delphi were unwilling or unable to provide supply to GM," forcing a "shutdown."
It would take "years and tens of billions" for GM to replace Delphi's parts. Rattner likened the subsidies demanded by Delphi's debt holders to "extortion demands by the Barbary pirates," but had to acquiesce to most of their demands. After cleaning up Delphi, the hedge funds took the company public.
According to Palast, Elliott funds had at least "$1.29 billion in profits, about 44 times their original investment."
It is understood that Elliott was able to do these sorts of unthinkable "picnics" across the globe because Paul Singer, founder and CEO of Elliott, is a former lawyer ― J.D. from Harvard Law School ― who knows the details of the U.S. legal system's loopholes, and maintains strong connections with U.S political and legal elites.
It was the same in the other countries where Elliot was operating.
Palast says Peru President Alberto Fujimori ordered the treasury to pay everything Elliott asked for because Singer "seized" the presidential airplane by which Fujimori was escaping to Japan.
The fact that Ghana seized the Argentine naval vessel testifies how deep he could influence Ghana's government and courts.
In January 2005, when a campaign was going on against asbestos victims, U.S. President George W. Bush, according to Palast, "held a televised meeting with an ‘expert' who said over half a million workers suing were liars. … The ‘expert' was not a doctor, but notably, his ‘research' was partly funded by Paul Singer."
Palast alleged that it was because, "Since the death of Enron's Ken Lay, Singer and his hedge fund crew at Elliott … have become the top contributors to the Republication National Committee."
Palast also points out the close relationship between Singer and Mitt Romney, U.S. senator and the Republican Party's nominee for president in the 2012 election. According to Palast, Romney and his wife, Ann, personally gained at least $15.3 million from the bailout of Delphi. Palast juxtaposes this gain to The Wall Street Journal's report that Singer personally gave Romney $2.3 million during the election season, more than anyone else on Wall Street, while Singer and his colleagues in Elliott collectively donated $3.4 million.
However, Singer did not get on well with Democrats, especially Barack Obama and Hillary Clinton.
According to Palast, it was Obama and Clinton who broke the deadlock between Elliott and Argentina. Obama's Justice Department and Clinton's State Department together filed anamicus curiae, a "friend of the court" brief in the case of Elliott vs. Argentina. Obama, a constitutional law professor, "suddenly remembered that the president has the power, unique to the Constitution of the USA … [by invoking] his extraordinary constitutional authority under the separation of powers clause to block" the court decision to bankrupt Argentina again to pay $1.6 billion to Elliott.
"Obama and Clinton told the court that the vulture was undermining the safety of the entire world financial system, destabilizing every financial rescue mission from South America to Greece to the Congo."
This is the first in a two-part series by National University of Singapore Professor Shin Jang-sup about Elliott Associates' attempt to block Samsung's intra-subsidiary merger. ― ED.
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The battle is likely to be prolonged. On June 9, Elliott filed an injunction with a Seoul court to block the proposed merger, which the court is highly unlikely to accept.
This move, and others made later, are better understood as Elliott's attempts at accumulating pretexts for longer legal disputes.
Elliott's previous investment behavior was hardly geared toward earning quick cash.
It used to mobilize diverse and sometimes unthinkable resources until it achieved its targets. That would be why it earned the nickname "vulture fund" from fellow global financiers.
A vulture is hardly satisfied by taking a portion of meat from its prey. It aims at eating as much as it wants.
Greg Palast, a U.S. investigative journalist and author, who wrote books such as "Vultures' Picnic" and "The Best Democracy Money Can Buy," doggedly pursued Elliott and detailed its investment "picnics" across the globe.
According to Palast, the first overseas bonanza for Elliott came from Peru.
Major international banks and Latin American countries had agreed on the Brady Plan in 1989, following active intervention by Nicholas Brady, then the U.S. treasury secretary.
The plan was geared at making Latin America return to a growth path by allowing substantial debt relief and sharing fruits from the future growth.
However, Elliott purchased $20.7 million worth of defaulted loans made to Peru for a deeply discounted $11.4 million. Elliott then sued the nation and its Banco de la Naciondel Peru in a New York court for the original amount of the loan, plus interest. This lawsuit effectively held the Brady Plan hostage.
Elliott won a $58 million settlement and made a $47 million profit ― a 400 percent return.
Elliott scaled up the size of its picnic astronomically in Argentina.
According to Palast, it purchased $630 million of bonds as the country was headed for default in 2001, reportedly at $48 million, about 7 percent of the face value, and demanded Argentina pay $2.3 billion, including unpaid interest.
It won a judgment from a New York court of $1.6 billion. The Argentine government refused to pay. Elliott then made an unprecedented move. It seized the Argentine naval vessel ARA Libertad, which was anchoring at Ghana in West Africa, and demanded payment.
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Victims: Peru, Argentine, Africa
Elliott's picnic spread to Africa. And other funds followed.
It even stopped international aid to African countries for famine and clean water to get its bonds paid (there was a cholera epidemic in West Africa due to the lack of clean water). Some African countries gave it money to receive aid.
Palast says, as a result, Elliott received $90 million for Congo's debts bought at $20 million.
The Wall Street Journal reported that Elliott was able to reach this settlement also by pressing forward on investigation into corruption by Congolese President Denis Sassou Nguesso.
Even in the U.S., Elliott made money by applying similar methods.
According to Palast, Elliott's first big bucks in the U.S. were earned by hitting asbestos victims.
Owen Corning and other companies were sued by workers who were "dying and injured by their asbestos." The companies filed for bankruptcy and agreed to pay all they could to the victims. Elliot bought Corning at a price "next to nothing". A campaign then began attacking the workers, claiming they were "faking it."
Palast says: "The legal, political, and PR attacks on the dying workers chiseled away the compensation expected to be paid by the asbestos companies, boosting the firms' net worth." Elliot then "flipped Corning, selling it for a near-billion-dollar profit."
When General Motors was on the brink of bankruptcy during the 2008-09 global financial crisis, Elliott and other hedge funds, John Paulson & Co. and Third Point, bought Delphi Automotive, a former GM subsidiary whose auto parts remain essential to GM's production lines.
They purchased Delphi's debts at "just 20 cents on the dollar of their face value" and owned it. And they threatened the U.S. government that it would derail the GM rescue operation if it would not forgo Delphi's debts and provide the company with funds. Steve Rattner, who was in charge of the task force negotiating with the troubled firms and their creditors, wrote in his memoir, "Overhaul, that they told the Treasury and GM to hand over $350 million immediately, ‘because if you don't, we'll shut you down.'"
Delphi's chief financial officer, John Sheehan, also said in a sworn deposition in July 2009 that the hedge fund debt holders backed up its threat with "an analysis of the cost to GM if Delphi were unwilling or unable to provide supply to GM," forcing a "shutdown."
It would take "years and tens of billions" for GM to replace Delphi's parts. Rattner likened the subsidies demanded by Delphi's debt holders to "extortion demands by the Barbary pirates," but had to acquiesce to most of their demands. After cleaning up Delphi, the hedge funds took the company public.
According to Palast, Elliott funds had at least "$1.29 billion in profits, about 44 times their original investment."
It is understood that Elliott was able to do these sorts of unthinkable "picnics" across the globe because Paul Singer, founder and CEO of Elliott, is a former lawyer ― J.D. from Harvard Law School ― who knows the details of the U.S. legal system's loopholes, and maintains strong connections with U.S political and legal elites.
It was the same in the other countries where Elliot was operating.
Palast says Peru President Alberto Fujimori ordered the treasury to pay everything Elliott asked for because Singer "seized" the presidential airplane by which Fujimori was escaping to Japan.
The fact that Ghana seized the Argentine naval vessel testifies how deep he could influence Ghana's government and courts.
In January 2005, when a campaign was going on against asbestos victims, U.S. President George W. Bush, according to Palast, "held a televised meeting with an ‘expert' who said over half a million workers suing were liars. … The ‘expert' was not a doctor, but notably, his ‘research' was partly funded by Paul Singer."
Palast alleged that it was because, "Since the death of Enron's Ken Lay, Singer and his hedge fund crew at Elliott … have become the top contributors to the Republication National Committee."
Palast also points out the close relationship between Singer and Mitt Romney, U.S. senator and the Republican Party's nominee for president in the 2012 election. According to Palast, Romney and his wife, Ann, personally gained at least $15.3 million from the bailout of Delphi. Palast juxtaposes this gain to The Wall Street Journal's report that Singer personally gave Romney $2.3 million during the election season, more than anyone else on Wall Street, while Singer and his colleagues in Elliott collectively donated $3.4 million.
However, Singer did not get on well with Democrats, especially Barack Obama and Hillary Clinton.
According to Palast, it was Obama and Clinton who broke the deadlock between Elliott and Argentina. Obama's Justice Department and Clinton's State Department together filed anamicus curiae, a "friend of the court" brief in the case of Elliott vs. Argentina. Obama, a constitutional law professor, "suddenly remembered that the president has the power, unique to the Constitution of the USA … [by invoking] his extraordinary constitutional authority under the separation of powers clause to block" the court decision to bankrupt Argentina again to pay $1.6 billion to Elliott.
"Obama and Clinton told the court that the vulture was undermining the safety of the entire world financial system, destabilizing every financial rescue mission from South America to Greece to the Congo."
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