Un­signed deals and rogu­ish bonds

The Pak Banker - - OPINION - Matt Levine

IN al­most any rea­son­able sense, Ar­gentina's 15-year bat­tle over its 2001 debt de­fault ended last month when Ar­gentina reached an agree­ment with its main hold­out cred­i­tors and Judge Thomas Griesa agreed to lift the in­junc­tion pre­vent­ing Ar­gentina from pay­ing its debts. But the saga con­tin­ues, and just this week this in­sane thing hap­pened: At­tor­neys for Red Pines LLC, a unit of Varde Part­ners, say the in­vestor en­tered into a set­tle­ment agree­ment with Ar­gentina that was later cited by the na­tion as ev­i­dence of its progress with cred­i­tors, and rea­son to lift the in­junc­tion. Yet af­ter the court agreed to do so - - the de­ci­sion that's cur­rently un­der ap­peal -Ar­gentina changed its stance, Sabin Willett, a part­ner at Mor­gan, Lewis & Bock­ius LLP, said in an emer­gency mo­tion filed last week. The gov­ern­ment said in a March 21 fil­ing that Red Pines was"mis­tak­enly" sub­mit­ted to the court in its list of set­tle­ments reached with cred­i­tors.

See, Ar­gentina reached a num­ber of agree­ments with its hold­out cred­i­tors. It at­tached those agree­ments to a fil­ing with Judge Griesa to ar­gue

See, we are not mean to our cred­i­tors any more, we are rea­son­able and com­pro­mis­ing and nice, you should lift the in­junc­tion and al­low us to re­turn to the cap­i­tal mar­kets. And he did. (Sort of: It's up on ap­peal, though the Jus­tice Depart­ment sup­ports him.) And then Ar­gentina was like, ha­haha no, just kid­ding, we don't ac­tu­ally have an agree­ment with Red Pines. Be­cause -- this is true -- they never signed it. Yes, sure, they told the court that they had an agree­ment. And yes, sure, they filed that agree­ment with the court. But any­one who has watched enough tele­vi­sion shows about lawyers would have been able to tell that it wasn't a real agree­ment, just by flip­ping to the last page:

Yoink! Ar­gentina ex­plains, in a foot­note to its brief on ap­peal, that it "sub­se­quently de­ter­mined that the sub­mit­ted agree­ment pro­vided for pay­ment with re­spect to claims that are time-barred" and so never signed it. The idea is that Red Pines, like sev­eral other bond­hold­ers, didn't get around to su­ing on its bonds be­fore the statute of lim­i­ta­tions ex­pired, and so it doesn't have a valid claim to get paid --and "Ar­gentina can't make pay­ments that its lawyers have deemed un­nec­es­sary." Hon­estly that does not strike me as all that se­ri­ous a con­cern? Just pay the guys, you know? Es­pe­cially the ones you al­ready have agree­ments with? (There are oth­ers, in­clud­ing two that Ar­gentina did sign but then "asked those par­ties, in the in­ter­est of fair­ness, to amend the agree­ments to re­move pay­ments re­lated to time-barred claims.") You can see why the main hold­outs' agree­ment with Ar­gentina in­cludes in­tri­cate es­crow me­chan­ics for any fundrais­ing that Ar­gentina does be­fore pay­ing them off, and why the hold­outs are op­posed to just ca­su­ally lift­ing the in­junc­tion with­out any fur­ther court pro­tec­tion. They may be para­noid, but Ar­gentina re­ally does seem to be out to get them. I have said some mean things about Credit Suisse over the last cou­pleof days, but hon­estly it might be my fa­vorite big bank, just for its dream­ily artis­tic ap­proach to cap­i­tal and fi­nanc­ing. The way bank cap­i­tal reg­u­la­tion works is, ba­si­cally, you have to quan­tify a bunch of risks, and then you need to have enough eq­uity cap­i­tal to pro­tect you against those risks. And reg­u­la­tors are al­ways find­ing new risks and de­mand­ing that banks quan­tify them and have cap­i­tal against them. But mean­while Credit Suisse is al­ways find­ing new ways to sell those risks to some­one else, so it doesn't need to hold as much cap­i­tal. This led Credit Suisse to what might still be my fa­vorite trade ever: Credit Suisse had some de­riv­a­tives, and reg­u­la­tion re­quired it to quan­tify and hold cap­i­tal against the risk that its de­riv­a­tive coun­ter­par­ties wouldn't pay Credit Suisse what they owed. So Credit Suisse pack­aged that risk into se­cu­ri­ties, gave some of the se­cu­ri­ties to its own bankers as part of their bonuses (sur­prise!), hedged the rest of them by buy­ing yet an­other de­riv­a­tive from yet an­other coun­ter­party, and then agreed to fund any amounts that the coun­ter­party owed un­der the de­riv­a­tive. Did you not fol­low that? It's okay if you didn't; it is a Möbius strip of de­riv­a­tives, and any­one who does grasp it in its en­tirety, even for an in­stant, is im­me­di­ately rap­tured. (Even­tu­ally reg­u­la­tors de­cided it was too beau­ti­ful to live, and nixed it.)

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