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Hedge Fund Rights Are Human Rights

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It probably speaks well of the overall state of human rights in Europe that the European Court of Human Rights devotes a lot of its time to compelling moral issues like George Soros's insider trading conviction. (Fine, there's some torture too.) But how good is this:

Hedge funds have been known to use hardball tactics to make money. Now they have come up with a new one: suing Greece in a human rights court to make good on its bond payments. The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece’s debts.

You ... you think? You think that might look bad? Hmm.

More specifically the potential human rights violation here is the retroactive introduction of a collective action clause into the Greek-law bonds, which represent some 90% of the outstanding Greek debt. The idea here is along the lines of add CAC, scrape together a majority of the bondholders to agree to the exchange, and then force the holdouts to exchange on the same terms. Because Greece's bonds do not currently have a CAC, people who bought the bonds would understandably feel a bit miffed to have one added retroactively, and some of them might replace the words "feel a bit miffed" with the words "have their human rights violated." At the very least, though, retroactively and unilaterally adding material terms to the debt agreements seems pretty shady.

But one can have a little bit of perspective on this. I think there are about four things that Greece could do with its Greek-law bonds:
(1) pay them off at par;
(2) negotiate a principal reduction with banks who agree to a voluntary exchange, and pay anyone who doesn't agree at par;
(3) negotiate a principal reduction with banks who agree to a "voluntary" exchange, and force anyone who doesn't agree into an exchange at the same terms via retrofitted CAC; or
(4) not pay them.

All of these have various badness - (1) requires money, (2) creates a distinct lack of incentives to voluntarily exchange, (3) is the MORAL EQUIVALENT OF TORTURE, and (4) ... (4) raises some problems too.

But (4) is a thing Greece could do, legally, under most reasonable meanings of the word "legal." If I issue you a bond, governed by New York law and an indenture we negotiate, and then later I want to not pay it, you'd sue me, and we'd go to a New York court or, probably, a US bankruptcy court, and the court would tell me to pay you, and I'd pay you, to the extent I have assets and otherwise am required to pay under US contract and bankruptcy law, and if for some reason I didn't the court would find me in contempt and off to jail I'd go. It's not, like, a normal feature of US law that people are thrown in jail for refusing to pay their debts (right?), but if you ignore everything that the court system says you eventually end up in jail.

There's sort of a deep-background sense that the same thing applies to sovereign debtors: if you default on bonds held by international creditors, we'll send gunboats to cart off your acropolises until we've gotten our money back with interest and attorney/gunboat fees. But whereas US law actually works that way - courts really do tell you to pay your debts, and people really do get hauled off to jail for contempt of court when they don't do what courts say - "international" "law" doesn't really do that any more. No one invaded Argentina.

More specifically if Greece just pantomimed turning out its pockets, making a wry face and shrugging, there'd clearly be no human rights violation. A risk that you always, always assume in lending to a sovereign - or, y'know, to anyone - is that they won't pay you back. If they don't pay you back you're sad, and you get annoyed, but you don't go to court claiming that you've been waterboarded. What you do, of course, is huff and puff and say "well I'll never lend to Greece again!," and you and your friends and your governments and your IMFs all more or less mean that, and it becomes very hard for Greece to raise money to fund its acropolises, and that's a problem for them. All of that happens, but it's not really "law" - it's markets, and leverage, and negotiation.

Now a risk that it might surprise you to learn that you assumed is that the debtor nation will retroactively amend its laws to insert a collective action clause in its debt. But the worst thing that could happen to you is that Greece introduces a retroactive CAC and then uses it to - not pay you back. The substantive harm that Greek bondholders are in for is that Greece will default. There are more and less procedurally complicated ways to get there, but they all lead to the same place. And if you don't like it then you do the huffing and puffing thing. Maybe that thing is a bit undermined by the fact that there was a "voluntary" exchange and IMF support and whatnot, but what can you do?*

Just a guess here, but I think the hedge-funds-as-human-rights case is unlikely to be filed. But it's amusing as an example of legal path-dependency. If Greece said "hey, guess what, not paying you," no human rights violation. If Greece said "hey, we're going to amend our laws to allow collective action by bondholders and then try to cobble together a collection of bondholders to vote for a restructuring and the result of it will be, not paying you," human rights violation! The moral here may be that, if you take the time to really lawyer up your solution, you'll attract a comically over-lawyered response.

Hedge Funds May Sue Greece if It Tries to Force Loss [NYT]

* There's one maybe slightly more plausible aspect here, which is that the ECB is a big holder of the Greek-law bonds and isn't willing to take a haircut, and has the leverage to make that happen. So even in a clattering retroactive-CAC scenario Greece will treat the ECB more favorably than private creditors, and the private creditors will have a claim not only of procedural unfairness but also of unequal treatment. Which feels human-rightsy if you have, like, a really shallow conception of human rights. Whatever.

An aspect that probably isn't here is that the retroactive CAC will somehow hose bondholders with CDS by allowing the "voluntary" exchange to become involuntary without triggering a default event. That seems false.


Which Hedge Fund Manager's TV Commercial Are You Most Looking Forward To?

I take back whatever mildly negative things I may have said about the JOBS Act, since apparently in addition to making it easier for small startups to rip off investors, it will also make it easier for small hedge funds to rip off investors: President Barack Obama’s securities-law rollback known as the Jobs Act, expected to be signed into law next month, also contains a provision that would lift the ban on the marketing of private funds, potentially giving hedge funds, private-equity funds and others greater freedom in marketing their offerings to the public, industry attorneys said. Currently, private funds are allowed only to market to a small group of investors: those with whom they have pre-existing, “substantive” relationships. Under the bill, hedge funds could start sponsoring sporting events and begin advertising their funds in print, the lawyers said. The shift is “significant” and could provide a boost to small hedge funds trying to raise capital but that lack brand-name recognition or wide contacts, says Steve Nadel, a hedge-fund lawyer with Seward & Kissel LLP in New York; larger, more established firms sometimes have investors waiting to invest. The Journal goes on to talk about the free speech aspect of this, and I did that too, so yay, now you can tell strangers how awesome your hedge fund is, AND OF COURSE YOU WILL DO JUST THAT, and you probably are already and are surprised to learn that it's illegal*? Also, and more importantly, soon you will be able to give people money to induce them to tell strangers on the internet how awesome your hedge fund is, so, y'know, consider giving us some of that money, because we like money.