WHEN: WEDNESDAY, JULY 15TH
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Paul E. Singer, Elliott Management Founder and President, live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Wednesday, July 15th.
Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.
DAVID FABER: Now we have established we've got a lot of old people in the audience.
PAUL SINGER: Not enough.
DAVID FABER: Can we start off on Samsung? Because you got a vote 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, fighting the most powerful company in the country, and it's getting kind of nasty. I mean, why bother?
PAUL SINGER: You didn't tell me this would be a therapy session.
We have 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, 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 -- and 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.
And Korea, we started as a value situation, but we went and turned that way. We evaluated, as we do with every situation, passive or active. This one, I'll 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 a couple of injunctions.
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 this 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.
DAVID FABER: Why should that matter to you?
PAUL SINGER: 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, 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 difficult for a variety of reasons.
DAVID FABER: It would seem that you are fighting an uphill battle here. 7.1% of your stock not withstanding and I know an important shareholders against the pension system has yet to weigh in, but nonetheless, all the levers that can be pulled by the family that controlled Samsung would seem to put you in a difficult position.
Why keep up the fight?
PAUL SINGER: 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 IFS, 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 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 --
DAVID FABER: Is that what you want, a different direction or are you just looking to hold them up for a higher price?
PAUL SINGER: 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 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 trail of stock, combining with this undervalued Samsung C&T. So shareholders get the short end of the stick sort of both ways.
DAVID FABER: 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.
PAUL SINGER: Since -- I'm trying to think of how to make this convince, 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 pension, 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, try to control your own destiny, not just riding up and down with the waves of financial markets was actually not only a driver -- important driver of value, and profitability, but an important way to control risk, dig yourself out of holes when you would slip into a ravine.
And so distressed investing came in that bucket because you could get on the committee, also uncorrelation. If we were involved in a process-driven situation, perhaps the 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 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, activist distress, event-driven, something that is or turns into event-driven are good ways to control risk.
DAVID FABER: 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 potentially with the person, whether it's Carl Icahn or Nelson Peltz at Trian or Bill Ackman of Pershing, but not as much Elliott. And in particular, 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?
PAUL SINGER: 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 U.S. 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 stepped into the various different workouts.
There's a culture in 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, 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 have been doing this for quite a while.
DAVID FABER: And I mentioned it because it seemed 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, anti-Semitic stories -- I'm going to 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.
PAUL SINGER: They should only know.
DAVID FABER: Is that part and parcel of it?
PAUL SINGER: 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 who want to paint this situation as Korea versus the foreigners versus -- and the Jewish component, I can't imagine why they thought that that was something that would get attraction.
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 -- you know --
DAVID FABER: You were there. You're a fan.
Are you surprised that it's taken that turn?
PAUL SINGER: No. Just because, you know, 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.
DAVID FABER: How's this day going so far?
PAUL SINGER: It's okay.
DAVID FABER: That's good.
I want to talk about what you are smelling right now in terms of risk, but before we move off the activism and the broader approach and we mentioned South Korea, you are not particularly well-loved in Argentina either.
Did you have to -- that vessel, in Ghana? That to me seemed kind of mean.
PAUL SINGER: We bought performing debt starting in 2001. It took them till 2005 to do a restructuring. 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 a real country, restructurings, down 70% 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 bond-holders didn't take the deal. And they haven't negotiated with us or any of the holdout bond-holders at all, ever, not for one minute.
And the name-calling is part of what they have done, but this is, so far, a lose-lose situation because what they 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 have lost every single part of the legal case.
They signed up for a complete waiver of sovereign immunity, and they have signed up for 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, the bond-holders, 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.
So this boat situation was after, I'd say ten-ish years -- roughly ten years of not being paid anything on our debt, and this was -- 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, Dave --
DAVID FABER: Yes, of course.
PAUL SINGER -- was 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.
DAVID FABER: But when it comes to Argentina right now, and I look at what has been no conversations whatsoever and your obvious desire to have them, and a change in government incoming 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?
PAUL SINGER: 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 bond-holder 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 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 aren't going to pay us a penny, but the next government would hopefully see the benefits to the people of Argentina of getting rid of this problem.
DAVID FABER: Right.
Do you have an expectation that the next leader of the country is going to perhaps change the tone? Could get worse than it would have been conceivably under Kirchner but is it going to get better?
PAUL SINGER: I have a hope, not an expectation.
DAVID FABER: I mean, they had, what, $30 billion in reserves and they aren't paying debt payments now anyway so they don't really...
PAUL SINGER: Well, they are paying some other --
DAVID FABER: Yeah. All right. Let's talk about the macro world that we live in right now. It could go any number of places, but let's start with China, actually, and your sense as 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.
PAUL SINGER: It's so interesting on so many levels, and starting sometime 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 are assuming that whatever happens, whatever the amount of bad loans see through not just buildings, but cities, a malinvestment in infrastructure, whatever it was, it was okay because they had trillions in reserves, they would fix it, they would overcome it.
And just started 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 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, we want IPO's to liquefy some of the state-owned enterprises, to equitize them.
And all kinds of 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 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 would come out of this are absolutely fantastic. The craziness of the stock market boom, the depths to which it went into people -- millions of margin accounts opened.
DAVID FABER: Happened over a very short amount of time.
PAUL SINGER: Very short amount of time. But it took the industries up 300%, 500%, 600%, but, okay, so it tops out on a given day and starts crashing. When it was down 30%, as we know from a few days ago, corporate executives can't sell the stock. If they sold stock in the last few months, they have to buy it back.
People can post their houses in the margin accounts as collateral. 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 in two seconds and I have to mention it, there were stories a few months ago that China was being discriminated against. Why is 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 maybe it would be your next question, but what happens now --
DAVID FABER: What happens now?
PAUL SINGER: Well, when I left the office, the Chinese market has resumed, some kind of a downturn, but had not hit new lows. 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? There you are, you own your stock, but 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 -- so I think it's a very damaging thing that connects with other parts of the world.
DAVID FABER: Why do you think that? I mean, because we are still talking about an export-led economy, and which I understand is still a small percentage of the overall population on stocks. And while many of them may have gotten hurt, they represent roughly 30% of the economy that's consumer-led in that country, flip of our own.
Why do you believe it would spread out or has the potential to spread outside of China's borders is a real issue?
PAUL SINGER: Great question. 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 sub-prime, of course, serves as a trigger on a basically unsound system for losses, and in some instances, 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 direction.
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, but 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. Nobody's ever seen anything like China as a phenomenon of the rapid growth and rapid growth financially, business-wise, hundreds of millions of people making a rural to urban transition, but no one's 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 0 for 6, 6.5 years now, and buying, up to now, $15 trillion of various assets to hold up the price.
DAVID FABER: We could have had a conversation where you brought up a number of those things, other than perhaps the Chinese stock market after '09, of course, 0% -- free money essentially that we have been living with now for six years, you're a bit behind us -- and its solvency 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, the bond market would be a loser. What point do you lose an opportunity because of your fears or how do you then get over your fears, even though you made, your words earlier, may be smelling risk?
PAUL SINGER: 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 -- 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, 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 this kind of discussion and these kind of talks about the world inform our activities, but I totally understand that, on Wall Street, in the macro area, 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, 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 when they happen, you say, well, why now.
Let's just talk briefly about the dot-com boom. It was in 1995 that the American stock market passed -- without a quiver, passed its all-time high of PE. So in 1997 or '8, the dot-com was going completely nuts, and I have yet to meet any person who credibly claims to have made money, net money shorting Internet stocks.
So how could it be, I would have asked myself in '98, when I was losing money shorting Yahoo! after the twelfth doubling or whatever it is. How could it be that this is going to last to March of '01 and who knew that it was going to last 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 go, you can't be serious. If anyone remembers CPBO's, you take a whole bunch of junk, wrap it up and leverage it and it's AAA somehow. But that's actually what the sub-prime was ultimately.
So today, it's never been done before that this -- 0% interest rates and all of this bond-buying -- in other words, they print the money to pay the bills, but they use -- I'm sorry. There are people in the world that think it's not money printing. I believe it is, the equivalent of.
But you use it to buy bonds, and reduce interest rates and, therefore, all along the curve, but particularly in the 10, 30-year range and lift up the capital market line, the value of stocks.
So if and when people reject that mechanism in some way, by either selling down bonds, because the bond -- global bond market is still much, much bigger than the cachewy (phonetic) 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, five, six, seven, they didn't understand the risks, don't read the Fed minutes to prove that to yourself.
But these folks, we shouldn't have confidence in them. They do their trick, 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, but we don't know, I mean --
DAVID FABER: You seem to be, if I follow your line of reasoning, we get to a place where, what, a lot of these suddenly insolvencies are seen for what it is?
PAUL SINGER: Here's 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 plugging along, 2, 2.5, Europe, 1.5, 1.
If they -- if somehow this combination circumstance lights up like boom, 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 -- but they'll handleable because of the growth.
If, 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 will 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 made the financial system, large financial institutions sounder than they were in 2006 and '7.
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 government.
By the way, you have this Euro situation --
DAVID FABER: We haven't mentioned Greece.
PAUL SINGER: Well, just real briefly, everyone is focused on the Greece situation as a tragedy for all involved, but while they're completely focused on Greece and preserving 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 between the well-performing country 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 and some of the other countries, trying to keep them in, and it's causing a tremendous amount of rancor, but also causing the authorities to not be watching the bigger picture. Well, I admit the Euro currency union is a big picture item, and if -- 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 have done to themselves is a tragedy. Thinking that pulling out -- thinking of default and pulling out of the European currency union --
DAVID FABER: But nothing says that reinstating the drachma would have brought somehow a better standard of living, it would have been and would be extremely painful.
PAUL SINGER: Yes, 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 up front. They're taking the hit every day now, and so I don't think they have benefited from this.
But one more point I want to make on this is that if you are going to default or possibly default, which they need to do, or -- 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.
DAVID: 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 public interest, when you look at this field of candidates, and it is hard to look at because there's so many of them -- we will hear from Ted Cruz later here at the conference -- is there anybody who you are going to support?
PAUL SINGER: 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 and debates start, until the primaries.
DAVID FABER: Is there a particular quadrant of the 16 or so candidates that you would group in some way? Four over here and two over there?
PAUL SINGER: For us, 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 at the moment we think are plausible candidates. We like Carly Fiorina.
DAVID FABER: So you have yet to make up your mind, though?
PAUL SINGER: Right.
DAVID FABER: Thank you for your time. Very much appreciate it.
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