Debt Head

Illustration by Quick Honey

One morning in July of last year, Lee Buchheit smoothed his mustache, fastened his French cuffs, picked up his briefcase, and made his way uptown from the West Village to catch the Amtrak to Washington, D.C. He’d received a call the day before from Greece’s Public Debt Management Agency asking him if he could meet the Greek minister of finance at his hotel. He had an inkling of what it was about. In 2010, Buchheit, a senior partner at Cleary Gottlieb Steen & Hamilton, and a colleague, Mitu Gulati at Duke’s law school, had posted a widely read paper on an academic site explaining how Greece could dramatically cut the amount of money it owed by restructuring its debt—­essentially asking creditors to take less. Now the minister wanted to talk.

Buchheit wasn’t surprised it had taken him so long to call. In his 36 years spent negotiating on behalf of financially challenged countries, patterns have emerged. “The first thing I’ve learned is the period of denial is almost always too long,” he says, sitting in his book-filled corner office on 1 Liberty Plaza, a few days before the Greek elections. “They almost always hope that something will happen that will make this go away, they will discover oil under the presidential palace or something. By the time they get around to admitting that they need to restructure their debt, they have done irremediable damage.”

As he sees it, this is what happened with Greece. In May 2010, eurozone countries and the IMF loaned the country roughly $145 billion so it could pay off its bondholders—financial institutions, pension funds, and hedge funds—in full in order to stave off a restructuring. “Roughly eighteen months later, the Europeans woke up to what was happening,” he says, “which was that people who lent the money were getting repaid in full and some German hausfrau in Stuttgart found herself effectively the proud owner of the liability that they had just paid out.”

This was why the Greek finance minister had wanted to meet. The deal Buchheit and his colleagues devised cut the amount of money Greece owed by about ¤100 billion—but this time the onus would fall on the lenders. Using a legal precedent with roots in nineteenth-century Britain, his team muscled Greece’s creditors into accepting a 75 percent cut on their investment. “It was pretty savage,” he says, with a little pride.

And as went Greece, Buchheit believes, so will go the other sick countries of Europe, if they can bring themselves to accept the inevitable. “The theory is, debt restructuring is a unique affliction of emerging-market countries,” Buchheit says. “And to restructure your debt is to declare yourself similar to … fill in your favorite emerging-market country, Pakistan, Nigeria. It is a major psychological barrier.”

Buchheit has been referred to as a “guru” and “the philosopher king of sovereign debt.” Governments love him for his ability to magically erase their debts: After he helped negotiate a financial dispute involving Iceland, one newspaper named him Man of the Year. “In Iceland, my cabdriver knew who he was,” says Gulati. His adversaries either loathe or grudgingly admire him—sometimes both. “He’s brilliant and brutal,” says Hans Humes of Greylock Capital Management, one of the bondholders who choked down the concessions on the Greek deal.

A tall, slender man with a gentlemanly demeanor and a more than passing resemblance to Inspector Clouseau, Buchheit cuts an unusual figure for a white-shoe Wall Street law firm like Cleary. His bearing is more old-world English barrister than power lawyer. Though he was born in Pittsburgh, he speaks with a mid-Atlantic lilt, in long, eloquent paragraphs liberally sprinkled with quotes from Spinoza, Churchill, and Descartes. “It was pure happenstance,” he says, describing his entrée to the world of sovereign debt. After receiving a diploma from Cambridge, he took a job as an associate in Cleary Gott­lieb’s London office and arrived home just in time for the Latin American debt crisis. Mexico’s finance minister hired the firm. “It was only a matter of weeks before other countries began to come along,” he says. He stands up and walks to a shelf near his desk, where he picks up a small, plush globe and rotates it to Latin America. “There it is,” he says, smushing his finger down the coast. “Venezuela, Colombia, Ecuador, Peru, Bolivia, Argentina, Uruguay, Paraguay, Brazil. They all announced their restructuring within a year.”

He found the negotiations fascinating. “It’s only 25 percent law,” he says. “The rest is some combination of finance and theater and politics.” In time, Cleary Gottlieb became the go-to firm for countries seeking debt relief, negotiating on behalf of far-flung governments. Each country, he saw, reacted differently to the specter of default. During the Asian financial crisis in the late nineties, South Koreans were so humiliated by the prospect of restructuring that they donated gold—jewelry, heirlooms, even wedding rings—to banks. “Then you have the other extreme,” Buchheit says, “which are some of the Latin American countries, that I think regard it as a great gain: You restructure every few years, and the gringos will lend you more money.”

There’s something else notable that happened during that period. “What’s fascinating,” he says, leaning forward in the spindly chair at the small wooden table next to his desk, “is that in the summer of 1982, the banks went to Washington and said to the Fed and the IMF and the World Bank, ‘All you have to do is lend Mexico the money it needs to repay us, and the markets will reopen.’ And they were absolutely rebuffed.” He adds, “They were told they had to man up to their credit decisions, that taxpayers were not going to bail them out, and they had to restructure. It was precisely the opposite of the decision that was made by the official sector of Greece in May of 2010, when they decided they would notoriously and openly repay their existing creditors in full and on time.”

Governments these days are a little too hesitant to tell financial institutions to man up, which is why Buchheit takes it upon himself. “He enjoys coming up with an elegant move, and he’s extraordinarily good at it,” says Anna Gelpern, a law professor who considers Buchheit a mentor. His signature style, she says often involves taking an accepted precedent from one country “and transplanting or transposing the rules onto something bigger,” as he did in Greece.

Of course, getting a good deal for his clients often means stiffing someone else, and not always the big guy. “They don’t want to recognize the people that they are screwing,” says one Wall Street executive that has tangled with Buchheit, noting that hedge funds contain investments from pension funds, state funds, and college endowments, even churches. “Priests and nuns,” he says, his voice rising.

Buchheit doesn’t mind being hated by the people he negotiates with. He rather enjoys being the swashbuckling Robin Hood of sovereign debt. “The lenders’ blood will run in the streets!” he was once heard exclaiming after devising a particularly nifty way of parting creditors from their money. He also enjoys cutting back the expected profits of so-called vulture funds that buy cheap debt of a country on the verge of default, then sue over the corpse. A folder in his office, marked vultures, contains a sheaf of articles about their activities. “Paul Singer is not the devil,” reads the first line of the article sitting on top. Singer’s $20 billion investment firm, Elliott Management, is perhaps Buchheit’s biggest nemesis. Over the years, millions of dollars have been spilled on court battles between his firm and theirs, most memorably over Peru, where one of their hedge funds managed to extract $58 million from the fleeing autocratic president, in part by taking possession of his plane. This week, they’ll meet again in court over bonds an Elliott affiliate purchased from Argentina during its 2001 economic crisis. After the country’s nearly $100 billion debt default, the rate of interest soared, and now, a decade later, the hedge fund claims the bonds are worth more than $2 billion. Argentina has recovered and theoretically can afford to pay. But: “Argentina doesn’t want to pay,” says the Wall Street executive. Cleary Gottlieb represents Argentina, as a critic of the firm points out, and is also the one who wrote the contracts that set the interest rate during the restructuring. Buchheit isn’t involved with Argentina—early in his career, he represented one of the creditors, which presents a conflict—but some see his hand in the country’s seeming disregard for its creditors and suggest the firm is being opportunistic. “Cleary has probably billed Argentina more than $500 million over the past decade,” the Wall Street executive adds, with a bitter chuckle. “Who’s the vulture now?”

Even some of Buchheit’s fans admit the critic kind of has a point. “Part of Lee’s identity is that he’s fighting the good fight,” says Gulati. “But from an academic point of view, it’s a classic before the fact and after the fact: After a country has no money, the good fight is to screw the creditors, give people as much money as possible. But before, if the people who lent you the money knew what you were going to do, they wouldn’t have lent you the money.”

Buchheit wouldn’t comment on Argentina, but several people tell me he actually disapproves of the country’s behavior. “It’s interesting because with Argentina, he was like, ‘The country has gone too far,’ which was sort of a surprise,” Hans Humes tells me.

But money is far from Buchheit’s prime mover. Back at his office, he puts down the plush globe. “It’s amazing that they pay me money to do it,” he says. “I would do it anyway. There’s nothing like it.”

Debt Head