Paul Singer Interview August 2015 - 7 Sep 16 | Finance-Get.com

We've been actually investing in Korea for over 20 years, and we've been an investor in the Samsung complex for years. The Samsung C&T company and its constituents, and so it was a value situation that had optionality. We knew that there was a need for family restructuring, corporate restructuring. But we heard rumors, I think it was March or something, that that merger such as actually happened was being considered. We spoke to the company and we were assured that such a thing would not happen. It did happen, and we thought and think that the merger is unfair. So we didn't start this situation as an activist battle with a company that's one of the most important pillars of corporate existence in Korea. We started as a value situation, but when it turned that way, we evaluated as we do with every situation, passive or active. This one I'm going to call it passive just because we drifted into it rather than identified a possible activist situation from the get-go. And we evaluated the possibilities and legal as well as the vote, because the merger has to be voted through, and we thought it was worth the struggle trying to have it banned. We applied for a couple of injunctions. We haven't gotten... you know, we would turn down one or one application for injunction was against the merger, the other was against a bunch of treasury shares which they sold to a, let's call it, a sympathetic third party. We thought that they shouldn't be voted, and we got turned down. So we think now that it's a position for us. We own over 7% of the stock of Samsung C&T, so it has economic importance to us. But we think it's also important for Korea, the way Korea and Korean corporate governance is perceived in the world.

It matters to us because a place that we have and will invest, and we respect the people, we have affection for the place. For that place to be a rule of law place where you can be treated fairly, justly, and it's one of the most important countries in the world beyond the top few countries, and it has tremendous growth prospects. If that country is a rule of law country where corporate governance is reasonable, I think that both has impact on our ability to invest in it, but also signaling effects on the world of problematic places where corporate governance is difficult for a variety of reasons.

Well, it's interesting that you mentioned the pension service, because the internal adviser to the pension service recommended against the deal. So did Glass Lewis and ISS, the independent advisory firms. So we think that it shouldn't be quite so uphill a battle. We have a lot of small shareholders rooting for us, and we're still hopeful that the NPS, the pension service, may vote our way. So I'm not ready to say that it's an uphill battle. It's challenging. The merger we think should be voted down and the company should go in a different direction.

Well, I don't see any possibility of a higher price for us. We think that this merger ought not to happen as it is structured. Whether at some point in the future a different reorganization more favorable to shareholders happens, we think that's actually the preferred result and the right result. You have a very overvalued currency, this Cheil stock, combining with this undervalued Samsung C&T, so shareholders get the short end of the stick both ways.

I think risk control, as Barry described, risk control has been at the top of our list of goals. And risk control has a lot of different approaches. One is the obvious of hedging: get long something, get short something else. But what I came to feel relatively early on in my career is that manual effort, making something happen, getting on the committee, becoming part of the process, trying to control your own destiny, not just riding up and down with the waves of financial markets, was actually not only an important driver of value and profitability, but an important way to control risk, dig yourself out of holes when you slipped into a ravine. And so distressed investing came in that bucket, because you can get in the committee. Also uncorrelated: if we're involved in a process-driven situation, perhaps litigation, litigation is a very volatile set of outcomes, it's not a low-risk method of trading or investing, but the litigation could be very bounded, being uncorrelated with anything else in your portfolio. So these things don't arise out of my desire to fight with people, or our desire culturally to fight with people, but it arises out of the knowledge that manual effort, whether it's activist equity, distressed, event-driven, something that is or turns into event-driven, are good ways to control risk.

I'm not sure how those fellows structure their shops, but we have a very layered approach to organizational structure. I have a co-CIO, there's one portfolio manager that's sort of overseeing our activist investing. And so I'm involved in the structuring, the sizing, the shaping of just about every one of those positions. But we have trained a group of workout people here and in London who step into the various workouts. There's a culture at Elliott of the way that an activist position is structured. It's meant to be structured with the building blocks of basic understanding of the company, the industry, the reason for underperformance, and then the possible solutions, and then a plan to get from A to B. It's kind of a well-known process at Elliott, and I'm part of the process. I think what has happened to my role at the firm is because of this layering, and I think we have a terrific team or set of teams, because of this layering I'm able to devote my time to my highest and best use, which is creativity, smelling risk or opportunity, having a good understanding, cutting through the fog of war so to speak, and pounding on things that ought to be cut off or things that ought to be built. And creativity. I mean, I've been doing this for quite a while.

You know, I think it's a shame that this whiff, more than a whiff, but this element of anti-Semitism has crept into what is a business dispute. I don't think the Korean people are anti-Semitic. I think there are some parties in this situation who want to paint this situation as Korea versus the foreigners and versus the Jewish component. I can't imagine why they thought that was something that would get traction. We have very positive feelings about Korea and Korean people. I went to the Korean World Cup in 2002, rooted for Korea, wore the shirt, wore the hat. I mean, the whole thing. You know, you're in the pan, you're a fan, right? So you surprised that it's taken that turn? No, no, no. Just because, you know, maybe you wake up every day thinking this is going to be a great day. I wake up most days saying, 'What is it going to be today?' As this day going so far? All right, that's good.

We bought performing debt starting in 2001. It took them until 2005 to do a restructuring. You know, Argentina was the seventh largest economy in the world coming out of World War II, so it's a sad path of a once very impactful country economically, self-inflicted wounds. And it took them four years to come up with a deal that was the most harsh restructuring in a real country, restructurings down 70% haircut or so. And we and a whole bunch of other holders did not take that deal. They said, in an effort to drum up support for that deal, 'If you don't take this deal, you will have nothing. The debt will be of no value. We will never pay again.' Fast forward to 2010, they reopened the deal, and so they ultimately got 93% of the holders of the debt to sign up for this deal. But over 61,000 bondholders didn't take the deal, and they haven't negotiated with us or any of the holdout bondholders at all, ever, not for one minute.

And you know, the name-calling is part of what they've done. But this is so far a lose-lose situation because what they've paid by lack of access to capital markets over this entire period of time is in the billions of dollars per year, extra inflation, the fall in the currency, the dissipation of reserves, the fall in foreign direct investment as a result of the situation. And they've lost every single part of the legal case. They signed up for a complete waiver of sovereign immunity, and so the United States, they've signed up for being subject to the American legal system. And so the Supreme Court of the United States has confirmed that we own the debt, we and the 61,000 bondholders, that they have waived sovereign immunity, and that the debt is pari passu with a whole lot of other debt, tens of billions of dollars of debt. And so this boat situation was after about 10 years of not being paid anything on our debt. And this was a cadet training vessel, not worth a lot of money. And we came to understand that Ghana sort of has the rule of law. And what we missed, I must say just between you and I, of course, just doesn't know, was that this was considered to be the flagship of the Argentine Navy. So they weren't happy. And without impugning any legal system on the planet Earth, let's just say that after a few weeks of litigation in Ghana, somehow the ship escaped in the dead of night and went home.

Well, as I say, they are imposing damage on themselves way out of proportion to the cost of paying the debt. This is valid debt, it's been mounting all these years. If they settled it, and the bondholder group has said that we would take paper, not cash, that we'd be amenable to taking a discount if only negotiation would start. If they issued paper and settled the debt, the impact on the stock market, economic growth, inflation, credit spreads would be electrifyingly positive. So the rational thing for them to do, but this government is highly ideological and puts, we believe, ideology above just about everything else. They said they were going to pay us a penny, and they're not going to pay us a penny. But the next government, one lives in hope, would hopefully see the benefits to the people of Argentina of getting rid of this problem right? And so do you have an expectation that the next leader of the country is going to perhaps change the tone? It couldn't get worse, and it's been conceivably under Kirchner, but nothing says it's going to get better. I have a hope, not an expectation. I mean, they have what, 30 billion in reserves, and they're not paying debt payments now anyway, so they don't really... what they're paying? Some other? Yeah.

No, it's so interesting on so many levels. Starting some time ago in our shop, we started asking ourselves and each other, could this be the first people in the history of the planet Earth that actually had complete control over their destiny? The way financial markets, global financial markets have treated China, and thinking about China as a macro risk, is in my view almost as if you're assuming that whatever happens, whatever the amount of bad loans, see through not just buildings but cities, massive investment in infrastructure, whatever it was, it was okay because they had trillions in reserves. They would fix it, they would overcome it. And you know, if you started with this kind of complete global investor trust, and then so what are the numbers? And of course the numbers are very opaque to outsiders, so you don't know the balance of forces. But this recent phenomenon in which the government encouraged in so many ways a stock market boom, somebody goodness knows who and how, and one would have loved to have been at the table when this was constructed. But somebody must have said, 'We want the stock market to go up. We want margin accounts. We want retail participation. Move on IPOs to liquefy some of the state-owned enterprises, to equity them.' And you know, phenomena in China tend to be big. If there's a bull market, it's not just a bull market, it's wild, it's something you read about. And in 1927 to 1929, we've all read, most of us have read, funny or amazing stories about that period in American financial market life. The stories that will come out of this are just absolutely fantastic. The craziness of the stock market boom, the depths to which it went, people, millions of margin accounts opened, happened over a very short amount of time. But it took these indices up 300%, 500%, 600%. But okay, so it tops out on a given day and starts crashing.

And when it was down 30%, as we know from a few days ago, corporate executives can't sell their stock. If they sold stock in the last few months, they have to buy it back. People can post their houses in their margin accounts as collateral. That anybody from an investment banking credit department probably had palpitations reading about that. And so now they're in cleanup mode or stem the tide mode, because this is a fantastic crash in which an amazing proportion of Chinese listed stocks are frozen from trading, thousands of stocks. And so just because I'll forget it in two seconds, and I have to mention it, there were stories a few months ago that China was being discriminated against. Why? Because there were only 3% of the something, I don't know, the MSCI something, and they should have been 16% on market value. So I was thinking about that in the last few days, because imagine if China had been at full weight with these indices, where half the stocks weren't trading and completely manipulated by the government. So I guess the maybe you asked, maybe it would be a next question, but what happens now? Well, when I left the office, the Chinese market had resumed to some kind of a downturn but had not hit new lows. Now it was down about 3, 4% I think last night. Nobody, no outsider can really know. Can they really hold this thing up? Is it in their interest to hold it up? But I think the damage that's been done to people's perception of the reality of, among other things, ownership. What does it mean to own a Chinese stock? One could ask themselves if this can happen. You know, there you are, you own your stock, then all of a sudden you can't trade it for days or weeks, but you don't even know roughly what the right price is, and there's an edict that you and your brokerage firm has become insolvent. Because I forgot to mention the part about the 20 billion dollar fund of brokers to buy, right? They put together. So I think it's a very damaging thing that connects with other parts of the world.

That's a great question. And you know, I think one of the characteristics of modern markets is because of the leverage and interconnectivity, transmission mechanisms where something that sounds or feels not so big, and this is way bigger than subprime of course, serves as a trigger on a basically unsound system for losses and insolvencies to go cascade through different parts of the world. The narrow answer to the question is, it sounds like it may not be big enough to cause a global financial market conflagration. But in me or us looking at the big picture, I see an ever-growing part of the big picture being dominated by government action. I mean, who can tell me what the right price is or the fair price or the unaffected price of a stock or bond in the developed world with QE and zero percent and negative interest rates pervasive in the developed world? How China and the China stock market crash interacts with currency relationships, the confidence of investors around the globe, confidence in central banks, confidence in paper money. It's hard to tell. But you know, in a lot of risk management and a lot of looking at these macro factors, it's connecting dots in a very dense fog or dust storm. I mean, nobody's ever seen anything like China as a phenomenon of rapid growth, financially, business-wise, hundreds of millions of people making a rural to urban transition. But nobody's ever seen anything like the entire developed world being insolvent, insolvent with long-term entitlement obligations, promises insolvent, and financial markets determined by central banks keeping interest rates at zero for six and a half years now and buying up to now 15 trillion dollars of various assets to hold up the price.

My job is managing money and keeping out of trouble and avoiding big losses. I try to understand what's going on in the world as a guide to either risk management or where my hedges should be. But my primary job is trying to assess things that may or may not happen to my portfolio in the near future. So it's very, you're right in the way you stated that. But the stuff that we try to do every day is to either hedge those risks and make money after the hedges, or to do things that aren't involved. If you're in a litigation, if you're in a committee, multiyear bankruptcy where you're trying to negotiate or create a restructuring or help a restructuring, you're not so involved with whether or not these risks come or not. So these kinds of discussions and thoughts about the world inform our activities, but I totally understand that if on Wall Street, in the macro area, in any area, if you're early, it's frequently indistinguishable from being just plain wrong. So the idea of the way I think about the world is try to make money or at least not lose gobs of it regardless of whether we're right or wrong. The narrow answer to the question though is my answer is sometimes things take a long time. I mean, imagine longer than you think, and then when they happen, you say, 'Well, why now?'

Let's just talk really briefly about the dot-com boom. It was in 1995 that the American stock market passed without a quiver past its all-time high P/E. So in 1997 or 98, the dot-com boom was going completely nuts. And you know, I have yet to meet any person who credibly claims to have made money net money shorting internet stocks. And so how could it be? I would have asked myself in 98 when I was losing money shorting Yahoo after the 12th doubling or whatever it was, how could it be that this is going to last till March of 2000? And who knew that it was going to last another two or more years? Same thing with the real estate boom. I mean, that thing just went and went. And these structured products, we would sit on the desk and talk about the next crazy, insane derivatives, magical invention. And we say, 'No, no, you can't be serious. If anyone remembers CPDOs, you take a whole bunch of junk and wrap it up and leverage it and it's triple A somehow.' But that's actually what the subprime was also. But so today, it's never been done before that this zero percentage rates and all of this bond buying, in other words they print the money to pay the bills, but they use it, and I'm sorry, there are people in the room that think it's not money printing. I believe it is the effective equivalent. But you use it to buy bonds and reduce interest rates, and therefore all along the curve, but particularly in the 10 to 30 year range, and lift up by the capital market line the value of stocks. So when, if and when, people reject that mechanism in some way, by either selling down bonds, because the bond market, global bond market is still much bigger than the QE reservoir that's on the books of the central banks. Nobody can tell when that loss of confidence, if and when that loss of confidence happens. My view is I don't believe confidence in central bankers, who parenthetically and this is unchallengeable, didn't have a clue about the risks, you know, 2005, 6, 7. They didn't understand the risk. Go read the Fed minutes to prove that to yourself. But these folks, we shouldn't have confidence in them. They do their trick, 'Hey, it's today. Let's keep interest rates at zero, or maybe we'll talk about a quarter of a point or half a point or something.' But confidence in them is not justified. And therefore, when it actually goes away, if and when, I have to say not just as boilerplate, but we don't know.

America is kind of plunking along at a two, two and a half. Europe, you know, one half, one, one half. If they, if somehow this combination of circumstances lights up a boom, well then the central banks feel they may get out of their jam in that manner. They'll let the bonds go, they'll let them mature, the rates may begin to rise, right, but they'll be handleable because of the growth. If, however, the next different thing that happens is a global downturn, that's far worse. That's a real problem because doubling down on QE, doubling down on more negative interest rates, or even more negative interest rates in Europe, that could be a real trigger for the loss of confidence in the bond market and or paper money and or any one of the major major currencies. And there would be a real real problem. So I, we don't have time today to really go into depth on the financial system, but I don't think the fixes to the financial system have actually made the financial system of large financial institutions sounder than they were in 2006 and 7. And so everything is now riding on government policy. And I just think it's an environment which is characterized by prices that you can't trust because the prices are manipulated by governments.

Well, just real real briefly. Everyone's focused on the Greece situation, and it's a tragedy for all involved. But while they are completely focused on Greece and preserving the unity of this currency union that many of us thought was ill-advised from the start, their focus has gone away from some of the basic fixes that they need to get their economy growing more quickly, such as reforming labor practices, taxes, regulations. Europe has structural impediments to growth, and this euro currency union situation is another layer of problem which is causing this distortion obviously between the well-performing countries, so to speak, and the countries that are not keeping up in terms of being able to meet the standards of the euro. And they shouldn't have been in the union in the first place. So Germany's trying, Germany and some of the other countries, trying to keep them in, and it's causing a tremendous amount of rancor, but it's also causing the authorities to not be watching the bigger picture. And well, I admit that the euro currency union is a big picture item, but I think Greece should have pulled out after the first restructuring a few years ago. I think they should have pulled out now. I think what they've done to themselves is a tragedy.

Yes, in the short term, in the short term. But I think sometimes there's a short term pain for a greater good in the medium to longer term. And none of the governments have been willing to enter into that. 'Let's do the short term pain, but then we'll be free. We'll have our own currency. We'll take a hit upfront.' They're taking the hit every day now. And so I don't think they've benefited from this. But one more point I want to make on this is that if you're going to default or possibly default, which they need to do, or put and/or pull out of the currency union, you need to prepare for it. What they did a few weeks ago, just sort of wandering into this referendum thing, and now having no good choices, and getting into a fight with Germany. The Germans are very resentful, the Greeks are super resentful. I'm not optimistic about this.

I haven't committed to anyone at this point, and I'm not on the verge of committing to anyone. I think there are a number of candidates that are smart, solid, good potential leaders. So I look forward to the sorting out process that represents this period of time between now when the debates start. There a particular quadrant of the 16 or so candidates that you would group in some way? You know, are there four over here and two over there? Well, for me and my close team, we like Marco Rubio, we like Jeb Bush, we like Scott Walker, and several of the others. But I think those are ones that at least recently and at the moment we think are plausible candidates.