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

Can we start off on Samsung? Because you've got a boat two days away. And I just wonder, why do you get yourself involved in these situations where you're fighting the most powerful family in the country? You're fighting the most powerful company in the country. And it's getting kind of nasty. I mean, why bother?

You didn't tell me this would be a therapy session. 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 in, I think it was March or something, that a 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 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. ERIC SCHMIDT- You haven't gotten those. No, we were turned down. 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 Korean, the way Korea and Korean corporate governance is perceived in the world. Ron Charles, Why should that matter to you? It matters to us because a place that we have and will invest and we respect, 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 just 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 Korea, but also signaling effects on the world of problematic places where corporate governance is

is difficult for a variety of reasons.

It would seem that you are fighting an uphill battle here, 7.1% of your stock notwithstanding. And I know an important shareholder, I think it's the pension system, has yet to weigh in. But nonetheless, all the levers that can be pulled by the family that controls Samsung would seem to put you in a difficult position. Why keep up the fight?

Well, it's interesting that you mention the pension service, because the internal advisor 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.

And... Is that what you want, a different direction? Or are you just looking to, you know, as they might term it, hold them up for a higher price?

Well, I don't see any possibility of a higher price for us. We think that this merger ought not to happen as it's structured, whether at some A 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 Chael stock. Combining with this undervalued Samsung CNT. So shareholders get the short end of the stick sort of both ways.

Ron Charles, you mentioned of course that in this case you weren't seeking out trouble, it just seemed to find you. But that does seem to happen a lot.

I'm trying to think of how to make this concise. But since Elliott was formed, 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. 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 a driver, an important driver of value and profitability, but an important way to control risk, dig yourself out of holes when you slip into a ravine,

And so distressed investing came in that bucket, because you can get on the committee. Also, uncorrelation. If we're involved in a process-driven situation, perhaps a litigation. A litigation is a very volatile set of outcomes. It's not a low risk. inherently a low risk method of trading or investing. But litigation can 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, activist distressed, event driven, something that is or turns into event driven are good ways to control risk.

When it comes to activism, are you intimately involved in all of the positions that are taken at the firm? And I mention that because oftentimes we equate a firm essentially with the person, whether it's Carl Icahn or even Nelson Peltz at Tryon or Bill Ackman at Pershing, but not as much at Elliott, and in particular in some of your technology investments. Are you personally invested in that process as much as perhaps some of the aforementioned gentlemen would be in theirs?

Larry Appelbaum, Jr.: 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 US activist investing. And so I'm involved in the structuring, in 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 different 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 possible solutions, and then a plan to get from A to B.

It's kind of a well-known process at Elliott. 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. 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.

And, well, I mention it because it does seem to have been a particular approach that you have as opposed to some of the other noted activists where you are not as associated with the position. And yet, coming back to Samsung, you are actually receiving some personal criticism. And I just wondered, does it upset you? There's been some anti-Semitic stories. Others would argue, I think, and I'll quote from one here, I mean, under a caption of your picture, you're described as greedy, ruthless, and the head of a notorious hedge fund. They should only know. Or is that just part and parcel of it?

You know, I think it's a shame that this whiff, or 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 want to paint this situation as Korea versus the foreigners and versus the Jewish component. I can't imagine why they thought that that was something that would get traction. I and we have very positive feelings about Korea, Korean people. I went to the Korean World Cup in 2002, rooted for Korea, wore the shirt, wore the hat. I mean, the whole, I mean, you know, I'm a fan. You were there.

You were there. You were a fan, right. So you're 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?

How's this day going so far?

It's okay.

That's good. Well, I want to do talk about what you're smelling right now in terms of risk, but before we move off of sort of activism and the broader approach, I mean, we mentioned South Korea. You're not particularly well loved in Argentina either. I mean, did you have to seize that vessel? Where was it? Ghana? Did you have to? That, to me, seemed kind of mean.

We bought Performing Dead starting in 2001. It took them until 2005 to do a... a restructuring. You know, this crowd was the, Argentina was the seventh largest economy in the world coming out of World War II. So, it's kind of a sad path of a once very, 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 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 60, over 61,000 bondholders didn't take the deal. And they haven't negotiated with us or any of the holdout bondholders ever, not for one minute. You know, the name calling is part of what they've done. But they've, this is a, 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've signed up for a complete waiver of sovereign immunity.

And so the United States, and they've signed up for of the American legal system, to be subject to the American legal system. And so the Supreme Court of the United States has confirmed that we're owed 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 defined debt, tens of billions of dollars of debt. And so, this boat situation was after I'd say 10-ish years, roughly 10 years of not being paid anything on our debt. And this was a, is 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, 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.

But when it comes to Argentina right now, and I look at what has been no conversations whatsoever, and your obviously desire to have them. You've got a change in government, I think, coming, I guess, next year. I mean, what leverage do you have, if they don't need to go to the bond market, what leverage do you possibly have here to try to get them to the table?

David M. 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. the claim has 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 a negotiation would start. If they issued paper, settled the debt, the impact on the stock market, the impact on 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, puts ideology above just about everything else. They said they weren't 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?

I mean, it couldn't get worse than what 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...

Well, they're paying some other, right.

Yeah. All right, let's talk about the macro world that we live in right now. And we could go any number of places. But I'd love to start with China, actually, and your senses to the dislocations they've seen in their stock market. And what, if any, impact that will have on the world economy or on equity or bond markets around the globe?

You know, it's so interesting on so many levels. And 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, malinvestment 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 start with a, this can't be, you know, 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, 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. We want IPOs to liquefy some of the state-owned enterprises, to equitize them. And phenomena, all kinds of phenomena in China tend to be If there's a bull market, it's not just a bull market. It's wild. It's something you read about. And 1927 to 1929, most of us have read funny or amazing stories about that period.

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 into people, millions of margin accounts opened. It happened over a very short amount of time. Very short amount of time. But it took these indices up 300%, 500%, 600%. But OK, 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. Ron Charles, Jr.: What's wrong with that? Ron Charles, Jr.: Anybody from an investment banking credit department probably had palpitations reading about that.

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 they're 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 the, I guess the, maybe you asked it, maybe it would be your next question, but what happens now?

Ron Charles, Jr.: 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. No, 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 Among other things, ownership. What does it mean to own a Chinese stock? One could ask themselves if this can happen. There you are. You own your stock. Then all of a sudden, not only can't you trade it for days or weeks, but you don't even know roughly what the right price is. And there's an edict that And your brokerage firm has become insolvent, because I forgot to mention the part about the $20 billion fund of brokers to buy stocks.

So I think it's a very damaging thing that connects with other you know, other parts of the world.

Ron Charles, Jr.: But why do you think that? I mean, because we're still talking about an export-led economy, in which I understand there's still a small percentage of the overall population on stocks. And while many of them may have gotten hurt, they represent roughly, what, 30% of the economy is consumer-led in that country, almost a flip of our own. Why do you believe it would spread out, or has the potential to spread outside of China's borders as a real issue?

David M. That's a great question. And, you know, I think one of the characteristics of modern markets is because of the leverage and interconnectivity is 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 cascading 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 conflagration, 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. 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 0% 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. You know, in a lot of risk management and a lot of looking at these macro factors is 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 and 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 the long-term entitlement obligation promises, insolvent and financial markets determined by central banks keeping interest rates at zero for six, six and a half years now.

buying up to now $15 trillion of various assets to hold up the price.

But we could have had a conversation where you brought up a number of those things, other than perhaps the Chinese stock market. After 2009, of course, 0% free money, essentially, that we've been living with now for, call it, six years. You're a bit behind us. And insolvency, when you look at the numbers. And yet, anybody who chose to say those risks were too high for me to want to participate in the equity market, or for that matter, in the bond market, would be a loser. I mean, at what point do you lose an opportunity because of your fears, or how do you then get over your fears, even though you may, to your words earlier, may be smelling risk?

David M. 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 a 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, you know, a 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,

of these risks come or not. What I, so these, this kind of discussion and these kind of 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 to 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, passed its all-time high P.E.

So in 1997 or 8, 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 until March of 00? 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, magical invention. And we say, no, 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 AAA somehow. But that's actually what the subprime was also. But so today, it's never been done before that this zero percentage of trades 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 of. 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, the global bond market is still much, 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. I don't believe confidence in central bankers who, parenthetically, and this is unchallengeable, didn't have a clue about the risks in 05, 06, 07. They didn't understand the risks. 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 a boilerplate, We don't know.

It's going to be a very ugly period, then, isn't it? I mean, you seem to be, if I follow your line of reasoning, we get to a place where, what, a lot of these suddenly insolvency is seen for what it is?

Here's the ugly period, the truly ugly period. Truly ugly would be if Europe or the United States falls into a recession before a boom. In other words, right now, America's kind of plunking along at a, you know, 2%, yeah, 2, 2 and 1 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 will begin to rise. Right. But they'll be handleable because of the growth. However, the next different thing that happens is a global downturn. That's fireworks. 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 currencies. And that would be a real problem. So we don't have time 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 2007. 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. Now you have this, by the way, you have this Euro situation.

David M. Well, we didn't, you know, speaking of insolvency, we haven't mentioned Greece.

Ron Charles, Jr.: Well, just 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? 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

meet the standards of the Euro. And they shouldn't have been in the Union in the first place. So Germany's trying to, 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. And if, but I think if, 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, thinking of default and pulling out of the European currency union.

But nothing says that reinstating the drachma would have brought somehow a better standard of living. It would have been very, and would be, extremely painful.

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 they, 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 up front. 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, 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.

getting into a fight with Germany. The Germans are very resentful. The Greeks are super resentful. I'm not optimistic about this.

Ron Charles, Finally, Paul, before we let you go, you're a noted supporter in the past certainly in terms of Republican politics and been active in general in the public interest. When you look at this field of candidates, and it's hard to look at because there's so many of them, we'll be hearing from Ted Cruz I think later here at the conference, is there anybody who you're going to support?

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, leaders and potential leaders. So, I look forward to the sorting out process that represents this period of time between now when the debates start until the primary.

Ron Charles, Is 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? Ron Charles, Well, for us, for me and my, 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. We like Carly Fiorina. Ron Charles, Jr.: You like Carly Fiorina? Yeah.

Ron Charles, Jr.: All right. So you have yet to make up your mind, though. That's right. Paul, thank you for your time. Very much appreciate it.