How Much of a Short Position Did Paul Singer Take in Argentina? And Who Were the Bagholders?

With the Argentine default, we are seeing a replay of a strategy that established Naked Capitalism readers will remember from the crisis: use a complex structure to disguise risk so that short sellers can place their wagers at far lower prices than they would be able to otherwise. And that raises the interesting question of how large a net short position Paul Singer, the instigator of the litigation that has undone Argentina’s restructuring deal and put the country in default, took against Argentina, as well as the relationship among the parties that put on the positions on behalf of short sellers.

As we’ve discussed regularly on the site, and longer form in ECONNED, the main mechanism that famed subprime shorts like Magnetar and John Paulson used were synthetic and heavily synthetic CDOs. That means their “assets” were mainly or entirely the credit default swaps that were these short sellers’ bets against risky tranches of subprime mortgage bonds. By packaging them into CDOs, they were able to sell BBB risk at close to AAA prices (the AAA tranches of CDOs did carry a higher yield than conventional AAA investments). The really drecky remaining tranches were flogged to clueless investors or rolled into other CDOs.

We now see tales emerging of who were the bagholders on the Argentina CDS, as in who were the “protection sellers”. Although the deal structure was different, the general pattern is the same: use a complex credit instrument to shift risk onto naive buyers. FT Alphaville yesterday described one victim, a sole investor in a credit-linked notes deal that provided a premium yield in return for taking on Argentine default risk. The result was that the investment has taken 51% losses. Today, the press seems to have identified the victim. From Bloomberg:

Brazilian postal workers became unlikely victims of Argentina’s default last week after a $168 million fund used by their pension plan recorded a loss on most of its assets.

The fund operated by Bank of New York Mellon Corp (BK:US).’s local unit wrote down its value by about 51 percent after losses on securities linked to Argentine government debt, according to a regulatory filing yesterday. While the statement didn’t identify the entity that is the fund’s sole investor, all signs point to Postalis, the pension manager serving about 130,000 current and former postal workers in Brazil.

Postalis, which had 8 billion reais ($3.5 billion) in assets according to the latest data available, said in statements as early as 2011 and as recently as May that it had invested in the fund. Postalis’s press office declined to comment/blockquote>

Derivatives expert Satyajit Das explained via e-mail who the stuffees were:

· A lot of riskier (including emerging market) debt has been repackaged for retail (in the main high net worth and private banking client) in the ubiquitous “dash for trash”.
· So major dealers were intermediating CDS between hedge funds, institutions and banks (hedging inventory or underwriting risk), where the credit linked note buyers were taking on the risk from the forenamed parties.
· Typically the structuring dealers do not take much warehousing risk, though there can be timing lags.
· My understanding is there are around US$31 billion in CDS outstanding on Argentina (the US$ 1 billion that is spoken about is the net in the dealer/ bank system). I imagine a significant amount of the Argentina risk therefore found its way to retail and private banks, who now face prospects of loss. My understanding is that the holders of risk are mainly in Asia and Europe as well as South America, including banks, investors and also possible official institutions.

What makes the Brazilian pension fund case noteworthy was that these notes weren’t slipped into the portfolios of unsophisticated rich people. It was instead offloaded onto a government pension fund, which one would hope has better controls and oversight. However, experience in the US shows that that is often wanting. As NC contributor Michael Crimmins pointed out, the postal workers had already been defrauded before the large losses added insult to injury (emphasis his):

First the fund was massively defrauded in the original transaction by their portfolio manager. who sold them the credit-linked notes.

Then currently, they are the bagholders for a CDS written on Argentine debt that was part of the original structured notes .

Per Bloomberg

The investment linked to Argentina’s sovereign debt was made in December 2011, when the fund was managed by Atlantica Administracao de Recursos Ltda., according to the [SEC] filing. BNY’s Brazilian fund unit took over management in March 2012.

Per the SEC press release:

Bony took over the management after the original managers Atlantica Administracao were found to have defrauded two Brazilian public pension funds and a Colombian institutional investor that purchased from LatAm the structured notes issued by major commercial banks.
According to the SEC’s complaint against Neves and Luna filed in U.S. District Court for the Southern District of Florida, Neves negotiated with several U.S. and European commercial banks to structure 12 notes on his customers’ behalf from 2006 to 2009. But instead of purchasing the notes for his customers’ accounts for prices around the banks’ issuance amounts – which totaled approximately $70 million – in most transactions Neves first traded the notes with one or more accounts in the name of offshore nominee entities that he and Luna controlled. Neves then sold the notes to his customers with undisclosed markups as high as 67 percent. Neves had no reasonable basis to mark up the prices that significantly.

For a full description of the fraud involving these notes see here

The deals involved in the Brazilian and Columbian pension funds were structured by Commerzbank, Lehman, JPM, and Barclays.

So there was at least one dumb captive fund writing CDS for the commercial banks.

I suspect they weren’t the only ones.

Crimmins also points out that Argentina’s allegations of collusion aren’t unreasonable:

We’ll have to keep our eyes on the Argentine investigation into Eliot’s [Paul Singer’s fund’s] trading to see if a pattern emerges whereby the holdouts worked with the banks to cover their bets and then used the courts to force a default.

It’s a good arbitrage play. Use the courts to force full payment on the bonds v use the courts to force a default event to trigger the CDS.

These deals were being structured during the same period as the MBS deals and have a similar smell.

Indeed. Stay tuned

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    1. OpenThePodBayDoorsHAL

      I get very weary sometimes of the detailed chronicling of the perfidy and corruption and theft on all sides with little or no calls to action or remedies of any kind.
      Can we run a few articles on this site on hard core actions we can take that could make a difference. Perhaps a Great Restoration Manifesto that we get 316 1/2 million Americans to support, buy products, and vote by? (we don’t care what the other 1/2 million do)

      1. OpenThePodBayDoorsHAL

        “Yes, me too HAL, let’s put the clicker down, get up off the couch, and do our kids and grandkids a favor for a change”

    1. toldjaso

      Yves, please explore link from “JerseyJefferson” upthread (re Paul Singer as “busy bee”). Notice the KEY goldencauldronthread in the Tapestry: “Santander” — and “Just pull it” as only you can.

    2. ifthethunderdontgetya™³²®©

      Paul E. Singer is a nasty bit of work.

      A reserved, private man who would answer questions only via e-mail, Mr. Singer is a self-described conservative libertarian who has given millions of dollars to Republican organizations that emphasize a strong military and support Israel.
      Of course he’s a libertarian. A libertarian who has gotten rich off screwing over poor people via government bonds, and this country’s superpower status and judicial system.

      And then he sends a chunk of the profits to Israel, which lives off our $3 Billion a year in charity herself.

      What an Ayn Rand hero!

      1. toldjaso

        “a nasty bit of work”
        Notice one of the *tells* – on the board of “Commentary Magazine”
        “RUNNING COMMENTARY: The Contentious Magazine That Transformed the Jewish Left Into the NeoConservative Right” by Benjamin Balint (2010, Public Affairs, New York). His name does not appear in the index.

  1. washunate

    Great read.

    It’s almost as if there’s something fundamentally flawed about the model of funding public pensions through investment returns.

    1. toldjaso

      Such risky “investment vehicles” — especially if entangled with options and alchemical “derivatives” — were off limits even when I became an “Account Executive” in a major brokerage house (even though the Series VII exam included testing for “arbitrage” smarts, from the 1979-1980 turn-out of “rookie brokers”. The “Prudent Investment” rule was broken, along with the Putsch into “retail brokerage” with a vengeance, with a panoply of retail brokerage “experts” churning the water on Wall Street Week to set up the muppet counterparties in the Circus Maximus. Merrill Lynch was the first, with others quick to follow. Inflation was rampant, and Zero Coupon bonds were sold seriously in early 1980. “Naked” commodities options were trotted out for sport to hotshot wannabes. The “Bell” utility system was busted for private gain. It was clear by 1979 to any attentive observer that the world would become Mexico City, and that the utter ruthlessness of the “brokerage business” would be the “ethical” norm. “Mission Accomplished” and more besides, as the “Taxi To the Dark Side” has continued into every nook and cranny, at break neck speed.

      1. toldjaso

        To be clear, even in 1980 “risky” investment was off-limits for pension funds and any retirement fund. Prudent investment for the “nest egg” of the working People up to then still was required to be “conservative” (slow, low interest that went necessarily with low-risk, steady investment–usually in U.S.Treasuries and “safe” muni bonds and bluechip stocks–over a long, long time). Even then, it was Standard Practice in the brokerage house that wasn’t a bucket shop. To violate this RULE, was to incur punishment. “Conservative investment” was taken quite seriously. It seems that 1980 was the turning point. It wouldn’t be long before wealthy conservative “investors” were to be steered into (naked) “futures” trading, and to be hooked into (naked) “options” benders on credit with high margins. Wall Street Week definitely was the barker’s platform, ringing in the “smart money” suckers in an “intellectual vanity” market. Discount brokerage capitalized on the “smart money” vanity lure, as doctors and lawyers were told they were “too smart” to invest through licensed account executives and pay standard fees. They became their own hotshots on cellphones trading with “Chuck” forgetting their algebra as they paid swift set commission on each hot OTC penny stock trade, including Denver metals potentials. The “market” turned into “Vanity Fair” — setting the tone for the elimination of “old fogey” standards for safety such as Glass-Steagall. Financial “alchemy” was hot, hot, hot, and every smart jackass got on the bandwagon to be an “investment banker” on the fly, and to hell with prudence.

        Turning America into hell in a shyster’s handbasket was not a spontaneous “happening”.
        “It.was.a.conspiracy.” (Ted Gunderson, speaking on another facet of The Golem Show in America).

        1. toldjaso

          Is clock running out on algomarketkayfabe? Is the nausea just too disgusting, the lie too shameful?

    2. craazyboy

      Not that doing it yourself from savings hasn’t been like a nighttime walk in Central Park. A tumble face first into a nice smelling, but thorny, bed of red roses. Rolling over into a refreshing pool of cool water and looking up to see a beautiful, but dimly lit, Greek statue peeing straight down onto your bloody face. Then finally realizing the water looks yellow because IT IS “re-cycled” water.

    3. Jim Haygood

      ‘It’s almost as if there’s something fundamentally flawed about the model of funding public pensions through investment returns.’

      When ZIRP is the de facto law of the land, there ARE no investment returns on risk-free debt (e.g., short-dated Treasuries). In fact, their real returns are negative.

      These are your central planners on bath salts …

      1. Alejandro

        Jim, I highly recommend re-reading the full chapter on compound interest, here’s an excerpt:
        “Economic history provides a corrective sense of proportion by showing that in the two thousand years since the birth of Christ the European economy has grown at a compound annual rate of 0.2%, far less than the level at which interest rates have stood in recent times. The proceeds of much of this growth have had to be allocated to pay debt service, absorbing the revenue that otherwise would be available for direct investment and enhancement of living standards……. Something has to give. The political fight in nearly every economy for thousands of years has been over whose interests must be sacrificed in the face of the incompatibility between financial and economic expansion paths. Until quite recently, creditors have lost, for the simple reason that never in history has any economy been able to turn a penny — or any other sum — into a surplus large enough to pay creditors a solid sphere of gold reaching out to Saturn’s orbit. This is the point that modern economists and futurists fail to appreciate.”-Hudson, Michael THE BUBBLE AND BEYOND

  2. Amateur

    It is totally legal for NML to buy as many CDS as they desire, covering Argentine default.
    And such purchase would have been also a sound and prudent financial strategy.
    The terms of the Court resolution were public knowledge, and NML has the right to collect 100%. If that would trigger a default or not, it depended only from Argentine actions.
    If someone may have traded on the basis of privileged knowledge, it is the offshore accounts of Argentine officials and their nominees.
    Watch out whom to demonize, or you will end with the wrong devils.

    1. Yves Smith Post author


      First, your comment is a straw man. Did this post anywhere contend that buying CDS was illegal?

      Second, what we are discussing is the degree to which stuffees were on the other side of the Argentina CDS. Per Das, there’s good reason to believe the other side of these trades were chumps, many of whom had accounts where the managers had discretion and were willing to sell out their client to get bonus credits (or in the case of Neves, simply engaged in flat out fraud) to place the derivatives. Glad to see you don’t have a problem with ripping off customers as long as it gets CDS placed at an artificially low price.

      If Singer entered into these trades with his strategy mapped out in advance (probable but not readily provable) it would be fraud under US securities laws, which makes the failure to disclose material facts a securities law violation. But derivatives aren’t securities, and these deals weren’t done in the US.

      I don’t approve of using the standard of mere legality to abuse investors, particularly when many of the intermediaries likely had fiduciary duties to their clients. But I see you are all in favor of financial services industry rape and pillage of the clueless.

      1. steelhead23

        I don’t really want to get into the middle of this argument, but Amatuer is merely voicing the overarching ethical reality of Wall Street. It goes something like this: “If you invest with us [well known conniving weasels], then we assume that you are a ‘sophisticated investor’. As such, we may [and very likely will] take positions opposite of those investments you make through us [think Magnetar]. In fact, we may be actively selling securities we recommend that you buy – after all, we are ‘market makers’. We stand ready to assist you with our highest ethical standards.” Sadly, Amatuer is not alone among U.S. citizens in supporting some folks’ right to do what’s wrong.

        So, of course Eliot et al. are fully within their rights to purchase CDS from brokers with these “high” ethical standards. In a way, this brings to mind the differences between the English interpretation of law and the U.S. interpretation of law. If I understand it correctly, English law seeks to understand the law’s intent – and very likely would not have agreed with Eliot’s claim – as it stinks to high heaven. In the U.S., the stench is just as obvious, but the contract’s wording is sacrosanct (or a judge can define the words to his liking and then get other judges to declare his interpretation sacrosanct).

  3. TulsaTime

    Silly me, I always thought if you defaulted on something, the instrument was gone. But it looks like if you have enough money, you can force anything through the courts.

  4. toldjaso

    Yves, don’t the gory details remind you of the BMPS fiasco? Pleeeeeze connect the deeply hidden dots to GROUND, because there is a pattern here, and their are *tells* that may speak only to you.

  5. MichaelC

    More on Argentina’s collusion concerns:

    The CNV ( Argentina’s National Securities Commission) asks how it is possible that Elliott can litigate in court for payment on the defaulted bonds it possesses, and at the same time sit on the ISDA committee that declared the country in default and collect on credit default swaps in its possession.

    The filing with the SEC is the first step in Argentina’s international offensive to expose the vulture funds’ predatory global operations, which threaten other sovereign debt restructurings and particularly prey on poorer nations

    And the money quote:

    .” Describing the vultures appropriately as “the scabies of the international financial system,” he ( Oscar Parilli, Secretary General to the Presidency) warned that while they prey on and exploit weak countries, such as those in Africa, in Argentina they have found a government “that will not allow itself to be trampled on.”

    1. MichaelC

      Some background on the CDS at issue.

      Sovereign CDS on Argentina
      Standard Latin American Sovereign CDS terms (which would apply to Argentina CDS) are set out in the ISDA Physical Settlement Matrix [see with one special Argentinian additional provision, namely that the old bonds are excluded from any assessment of Credit Events
      (e.g. failure to pay on an old bond cannot create a Credit Event) and any CDS settlement process.
      The Credit Events are: Failure to Pay, Obligation Acceleration, Repudiation/Moratorium and Restructuring. The obligations of Argentina against which these Credit Events are tested are the new bonds, excluding any subordinated bonds, any peso-denominated bonds, any Argentine law bonds and any domestically issued bonds. Because the obligations for this test must be “Bonds”, they must be obligations for the payment or repayment of “borrowed money”; it is not clear that the new GDP-based instruments satisfy this requirement, so they may well also be excluded.

      Source Shearman and Sterling–Tamed-by-the-US-Courts–The-CDS-Conse__/Files/View-full-memo-Tamed-by-the-US-Courts-The-CDS-Co__/FileAttachment/Tamed_by_the_US_Courts_The_CDS_Consequences_FG_1__.pdf

      Open questions
      Who is long these CDS (Hedge funds, i.e the holdouts)?
      Who is short these CDS (chump investors, i.e Brazil Postal employees,via synthetic CDOs,banks,)?
      Were these synthetic CDO’s structured by the commercial banks at the behest of the Argentine vulture investors?

      Since the CDS do not cover the old bonds held by the holdouts, the vultures would have an incentive to load up on the CDS for the restructured bonds and pursue a CDS default trigger event through the courts in tandem with their fight to force Argentina to pay 100% on the holdout positions

      This seems to be plausible scenario given the logic of the pari-passu argument the holdouts used.

      1. djg

        “given the logic of the pari-passu argument”…. which is the lynchpin to the default ie. without the pari- passu decision by the Judge the default would not have occurred.

        what is the history of Griesa in this case and how old is he?

  6. Lead Bow

    Surely Argentina still has – perhaps as a legacy from the days of Galtieri – some little covert operation which could arrange for a nasty and hopefully terminal accident to befall Mr. Singer, earning the applause of the world.

    1. Enrique Massot

      No my friend, the days of the Galtieris are happily over in Argentina, and Cristina Kirchner will never resort to such activities. Argentina is today a country where the opposition can organize a demonstration, call the president “yegua” (mare–demeaning word) and bring the children and the grand parents to the street with no police incidents at all.
      That being said, Argentines feel they have a strong team negotiating tough on their behalf. Their fight has totally irked Judge Thomas Griesa and alarmed Paul Singer and company, who are desperate about all this unwelcome media exposing their predatory practices.

  7. ChrisPacific

    As schemes for blowing up world economies for fun and profit go, this has one drawback relative to the Magnetar scheme, which is that it has a high public profile. (Although there may be other players at work besides Singer, it seems clear he is a major actor). By contrast, Magnetar kept largely under the radar until it was too late, and might have gone completely unnoticed but for the work of Yves in ECONNED and other investigations. If there is dirty laundry to be aired, then let’s hope that the Argentines succeed in doing it.

    As an aside, pension fund management seems like a potentially dangerous ground for corruption. The difference between a naive investment manager who was bamboozled by all those complex financial instruments and a knowing fraudster with a good cover story might be quite difficult to unpick at times. For those that are willing to compromise their fiduciary duty, I’m sure there is good money to be made by hooking financial predators up with access to public funds.

    1. Jim Haygood

      That’s just silly. Commodity futures wouldn’t exist if farmers couldn’t pre-sell their crops (i.e., go short).

  8. Enrique Massot

    Thank you Ives Smith for a well-reasoned article, and thanks as well to the authors of pertinent comments. From outside of the world of finance, I would like to add that many Argentines do feel well represented, which has been reflected in an approval rate of 54 per cent for Cristina Fernandez de Kirchner and 52 per cent for Economy Minister Axel Kicilloff.
    I believe the fight Argentina is holding against the holdouts will result in a benefit to all, if the financial world pays attention and realizes the speculative practices of the Paul Singers of the world are harmful to most and need to end.
    Additionally, a justice system that can showcase characters as NY Judge Thomas Griesa (and give the man Supreme Court endorsement) is a terminally ill, rotten system.
    This saga has potential to end in scandal at best and harm future debt restructurings around the world at worst, must provide momentum to corrections if the lesson is to be learned.

    1. Jim Haygood

      If losing nearly half the country’s forex reserves in three years owing to bad policies (an overvalued peso; attacks on exporters), then yes, I suppose you are well-represented.

      Argentines love to blame anyone but themselves for their unique status as the world’s only FDE (Formerly Developed Economy). Poverty is noble, comrade!

      1. Alejandro

        Bud Fox: There is no nobility in poverty anymore Dad. Just wait, you’re gonna be proud of me someday.
        Buds’ Dad: It’s yourself you gotta be proud of son.

        In the surreal world of “never enough”, nobility is bestowed from on-high for insider ‘trading’, derivatives ‘market’ making etc.etc.etc….

  9. JerseyJeffersonian

    The thought came to me that, Mr. Singer being a bigtime zionist supporter & all, in the case of Argentina, he might be partly motivated by animus about the 1992 bombing of the Israeli embassy, & the 1994 bombing of a Jewish community center in Buenos Aires. In the Israeli view, insufficiently addressed, although opinions on this are mixed in Argentina. Just a thought that might go a ways toward comprehending the situation.

  10. Dave

    Clearly the game has changed! Stocks, bonds, cash, real estate…, Ha!
    I do not posses the knowledge to discuss, let alone disect, synthetic securities and the various other means used to manipulate the economies of entire countryies. (grammer?).
    However, my gut tells me that Mr. Singer et al are engaging in manipulation at the highest level… Sadly, the toll on humanity doesn’t seem to be of concern.

Comments are closed.