By Peter Eaves, The New York Times, December 11, 2012
President Cristina Fernández de Kirchner of Argentina, above, is battling Paul Singer, a hedge fund manager Photo credit: Reuters |
Argentina’s president, Cristina
Fernández de Kirchner, was re-elected with a huge margin last year,
leaving her political opponents fractured and demoralized. But in recent
months, she has found herself locked in battle with a determined adversary who
may outmaneuver her.
Her opponent is not a participant in Argentina’s
domestic political scene. Rather, he is Paul Singer, a soft-spoken New York
hedge fund manager. Through one of his funds, Mr. Singer is fighting in United
States courts to press Argentina to pay up on some defaulted bonds. Mrs.
Kirchner has refused.
Mr. Singer may be deploying arcane legal strategies
thousands of miles from Argentina, but his tactics are dominating the nation’s
political discourse. “This has been on the front page every day in Argentina,”
said Maria Victoria Murillo, a professor of political science and international
affairs at Columbia
University.
In other words, a hedge fund has become an important political
player in a
With the right idea at the right time, and with the
requisite financial firepower, hedge fund investors can exert significant
political and economic influence. That may even prompt political scientists and
economists to consider analyzing hedge funds the way they do trade unions and
political parties.
The ability of hedge funds to act as decisive change
agents dates to one momentous trade: George Soros’s
bet against the British pound in 1992.
At the time, the British government had tied the value
of the pound to that of other European currencies. Many people contended that
the pound’s exchange rate was too high in this arrangement and was weighing on
the British economy.
Mr. Soros’s fund wagered that the government would
ultimately have to let the pound fall in value, prompting the fund to sell
billions of pounds and buy other European currencies. The selling pressure was
too much for the British government, and the pound left the currency
arrangement. The day it dropped out was known as Black Wednesday.
When the dust settled, some politicians saw Mr. Soros’s
actions in a positive light. They said the pound’s exit allowed the British
economy to flourish.
The impact of Mr. Soros’s trades may have been even more
far-reaching. Britain’s departure from the arrangement influenced its decision
not to join the European single currency, according to Norman Lamont, Britain’s
chancellor of the Exchequer at the time.
“After Black Wednesday, it was politically impossible
for any government, Conservative or Labour, to join the euro,” Mr. Lamont wrote
last year in The Daily Telegraph.
After the success of his pound wager, Mr. Soros’s fund
focused on Asian currencies. They were vulnerable because, like the pound,
their value was fixed in a way that could create unsustainable economic imbalances.
The bets by Mr. Soros and others forced some countries to abandon the rigid
approach to managing currencies, said Sebastian Mallaby, author of “More Money
Than God: Hedge Funds and the Making of a New Elite.”
Since then, developing nations have mostly avoided fixed
currency arrangements, a choice that has generally served their economies well.
“The upshot was that emerging markets broadly adopted flexible exchange-rate
regimes,” Mr. Mallaby said.
Hedge funds never make bets as a selfless way to free nations
from suffocating currency regimes. And those regimes might have collapsed
anyway. But the hedge funds probably hastened their demise, leading to relief
sooner rather than later.
Hedge fund actions also contributed to a landmark
legislative change in the United States a decade ago.
Kynikos Associates and other hedge funds had doubts
about Enron’s
books and were betting that its shares would decline. Eventually, fraud was
exposed, and Enron, an energy trading company, went bankrupt in 2001.
The company’s collapse, with the crash of other
fraudulent businesses, helped create the political climate for an overhaul of
how companies report their financial condition. A result was the Sarbanes-Oxley
Act of 2002.
It is possible, even likely, that something like
Sarbanes-Oxley would have developed anyway. But the hedge funds’ ability to
pick up on the fraud played an important role in shaming the main players. Auditors,
regulators and banks largely missed Enron’s skulduggery, underscoring the need
for big changes.
“I can’t think of one major financial fraud in the
United States in the last 10 years that was uncovered by a major brokerage
house analyst or an outside accounting firm,” James S. Chanos, founder of
Kynikos, said in testimony before Congress soon after Enron’s collapse.
Hedge funds also played an early role in the housing
bust, which affected millions of people and led to deep societal changes.
Managers like Michael Burry of Scion Capital and John Paulson
saw the shakiness of the housing market well before regulators, politicians and
banks did.
While house prices would have collapsed without hedge
funds, the funds helped lead to the crash. In particular, their bearish housing
bets helped convince Wall Street, a critical part of the mortgage machine, that
the good times were ending.
As early as 2005, Mr. Burry pestered investment banks
for ways of betting against housing, according to “The Big Short: Inside the
Doomsday Machine,” by Michael Lewis. Eventually, the banks provided the
financial instruments that allowed Mr. Burry to place the bearish trades. Soon,
firms like Deutsche Bank
and Goldman Sachs
were betting heavily against housing in a similar way.
Once the establishment started to turn against subprime
mortgages, the game was up. Again, hedge funds helped end a bubble earlier and
clear out excesses. Again, their prescience shamed those who should have seen
the trouble brewing, fueling the postcrisis overhaul.
But funds’ efforts are often frustrated, and their
antagonistic actions can backfire. For example, Mr. Singer’s lawsuits may
actually be making Mrs. Kirchner more popular, some specialists in Argentine
politics said. “This is a beautiful thing for her,” said Ms. Murillo, the
Columbia professor. “It’s a unifying cause.” Hedge funds may now think twice
before taking on a government in the same way.
Also, some markets are so big that funds may struggle to
gain sway, especially if other investors do not share their theories.
J. Kyle Bass, managing partner of Hayman Capital
Management, is outspokenly gloomy about Japan, saying its government debt
levels may soon become overwhelming. But he says his fund is not a meaningful
catalyst. “I am a very small asset manager,” he said. “When there’s a
quadrillion yen of debt outstanding, it’s nonsense to think I can have an
influence.”
Now, hedge funds can also be outgunned by government
entities aiming to shore up markets.
Since the financial crisis in 2008, the world’s central
banks have shown a willingness to print trillions of dollars to support
financial assets. This makes it much harder for some bearish bets to work.
Hedge funds betting on the collapse of the euro have had a hard time since the European Central
Bank stepped up its support in September, agreeing to buy government
bonds of stressed countries.
In many ways, it looks as if central banks will be able
to dictate market prices for a long time, which might deter hedge funds from
trying to upset the apple cart. After all, central banks can effectively print
money to protect the prices of assets singled out by funds.
But Mr. Bass said he was not convinced that central banks could
maintain their support indefinitely. “They are not allowing natural forces to
react in the marketplace,” he said. “No one’s willing to say, ‘Maybe central
banks can’t fix it.’ ”
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