Month in Review, March, 2016: Part 2, Two tales of two countries

May 24, 2016 | Argentina, Capital markets, China, Democracy, Global news, Government, Rent control, Rental, San Francisco, Sovereign bankruptcy, Zoning | No comments 61 views

By: David A. Smith

 [Continued from yesterday’s Part 1.]


As we saw in yesterday’s Part 1, in complex systems like cities, government, and housing, success looks easy only after the fact, and invites tinkering with the finely balanced elements of that success.



See?  Nothing to it!


Indeed, many there are who believe that bounty exists for their personal deployment, and who are then infuriated when the bounty disappears, such as Kristina Fernandez de Kirchner, Argentina’s erstwhile President whose eight year run to ruin only recently came to an end (in part because of the unthanked self-interest of financial investors) because she never listened to The rime of the Argent manager: Part 1, Now wherefore stopp’st thou me?:



“Why blogg’st thou me?” asks the helpless reader, paralyzed from clicking away


Argument: Driven by storms to the cold Country


At the very end of February occurred a remarkable event, reported erroneously in The New York Times (February 29, 2016):


Argentina has agreed to pay $4.65 billion to four hedge funds in a deal that could put an end to more than a decade of mudslinging and legal attacks that had cut the country off from global financial markets.


Though the Times’s phrasing is not actually false, it so jumbles effect and cause, martyring the perpetrator and smearing the righteous, that I will largely set it aside as a source of analysis, in favor of the measured accuracy of the Economist (print issue of March 5, 2016):


A deal with holdout bondholders is expensive, but worth it


Penance is seldom cheap.


“This is the equivalent of a giant albatross being lifted from Argentina’s neck,” said Brett Diment, the head of emerging market debt at Aberdeen Asset Management.


And that phrase took me back, and back, and back … to the original albatross.


Argentina’s capital-markets ostracism, like the Mariner’s albatross, was inflicted in vengeance for a callous act of aggression, in Argentina’s case the unilateral default on its obligations, reported in Part 2, And I had done a hellish thing,


With its currency pegged to the dollar and the Brazilian real floating (depreciating) and thus becoming much more competitive, Argentina’s economy stagnated into a Greece-like permanent-deficit. 


Previous AHI posts on Argentina’s defaulted bonds


November 13, 2012: Epic CAC

November 27, 2012: CAC-handed

February 19, 2013: Dictatorship is uneconomic

July 11, 2014: International law’s Tinkerbell moment 2 parts


Part III: I shot the albatross


That led to a bank run (sound familiar, Europe?, then a nationwide freeze on capital (the Corralito; sound familiar, Cyprus?), and a fiscal crisis – including defaulting on $93 billion of sovereign loans.


As always happens with sinking borrowers (whether Greece, Jefferson County, AL, or Puerto Rico), as the debtor’s fortunes dropped, many initial investors sold out at a loss to more risk-tolerant buyers, many of them hedge funds. 



“Pricing in anticipated default”


When Argentina defaulted, it was facing creditors ready for default and ready to collect on their collateral anyhow:


In December 2001, the Argentine government, facing economic collapse, ceased paying its external debt.  NML Capital, Ltd. (NML), a holder of Argentine bonds, filed suit in the Southern District of New York to collect on its bonds.


Though merely a district court, the Southern District of New York is globally famous, as it’s the court for Wall Street, and therefore the court for US capital markets. 


The New York court’s judgment knocked Argentina out of US markets, and gave the claimants a bounty license to pursue Argentinian assets anywhere in the world, which they did with comic effect and impressive financial consequences, covered in Part 3, Nor any drop to drink, Part 4, And I blessed them unaware, resulting eventually in Cristina’s loss in the 2015 elections and the ascendancy of a reformer who does understand, reported in Part 5, To him my tale I teach:


As yesterday’s post ended, the Argent ship of state had replaced its economically mad captain, charted a course back to the more temperature political climes, and repented (legislatively, anyhow) of its previous seizures.


The previous holders of those bonds had sold them in despair, after Argentina had defaulted on the bonds and told its creditors it would only pay a deeply discounted recovery. 


Once the laws have been scrapped, the government hopes to raise up to $15 billion through a bond issue, which it will use to pay the creditors. Some analysts doubt that the market can absorb such a large sum. But Argentina’s finance secretary, Luis Caputo, is bullish. “All the banks we’ve spoken with are confident that we can raise the money we need in the market,” he said.


Though Ms. Kirchner Fernandez never understood the connection, others did, and fortunately one of them is now Argentina’s president:


[President Macri] attacked the Kirchner administration for refusing to settle the issue, adding that by letting the dispute fester, interest had accumulated and investors had lost confidence.



“I am silently condemning you.”

“No, I am silently condemning you.”


“This is a giant step forward in this long-running litigation,” Daniel A. Pollack, the court-appointed mediator, said on Monday, adding that Argentina’s decision to settle was “nothing short of heroic”.


Pace the Times, the investors weren’t contesting the government’s debt obligations, they were contesting the government’s unilateral cancellation of its own obligations, which cancellation it kept rationalizing with ex post facto laws:


The injunction will not be lifted until Argentina repeals two laws that block agreements with the holdouts.


[1] The Ley Cerrojo (Padlock Law), enacted in 2005 during the first round of debt restructuring, was intended to prevent Argentina from offering holdouts a better deal than that accepted by holders of restructured bonds.


[2] The Ley de Pago Soberano (Sovereign Payment Law) of 2014 was a failed attempt to circumvent Mr Griesa’s injunction by re-routing payments to bondholders who had accepted a deal through Argentina or France.


Evidently the Times deserves to be buttonholed like the Mariner’s wedding-guest.


If Argentina’s present is the beginning of recovery, it may well be that Argentina’s recent past is in fact Chain’s future:


AHI posts on China’s urbanization and capital


August 23, 2010: Gleefully running up the debts, 2 parts, SOEs and development

October 28, 2011: A little learning is a dangerous thing, 2 parts, hukou and schools

July 29, 2012: I’m shocked, shocked, kickbacks in property development

August 23, 2012: China’s cities and housing: “Nothing outside China matters”

August 25, 2012: China’s cities and housing: “Imperial economy is successful society”

August 26, 2012: Suburb stuffing, 2 parts, new ghost high-rise townks

September 17, 2012: China’s cities and housing: “Between observation and doctrine, report doctrine”

July 22, 2013: China’s runaway money train, 4 parts

December 16, 2013: Formula for an instant slum, 5 parts

September 19, 2014: Where the money goes, people will follow, 3 parts

February 1, 2016: Yuan to buy American housing?, 4 parts


To judge by China’s recent suppression of news, we may be seeing the early stages of The fall of China Mae: Part 1, Choose any number that fits:


When they start lying about economic data, short them.

– Smith’s Rule of Emerging-Market Investment

(Written March, 2016, backdated to June, 2007)



It looks so straightforward in hindsight


In January, 2008, I wrote a two-part blog post, Who’s next?, suggesting that Fannie Mae was overextended and due for a market correction. Though I believed my own prophecy, I never acted on it, because it was (at the time) not merely contrarian but virtually unthinkable.


Sources used in this post


YouTube video of CSIS February 2015 symposium

Ms. Stevenson-Yang at 3:00-28:15, 51:45-57:45, 1:08:30-1:10:45, 1:16:40-1:19:00

The New York Times (3 November 2015

Wall Street Journal (January 28, 2016; orange font)

The New York Times (25 February 2016)


In September, 2012, after four or five years of intermittently posting on China, I concluded a six-part on China’s urbanization and housing with the penultimate installment Between observation and doctrine, report doctrine:



Three premises that are breaking down (published September, 2012)


That approach is applicable in China today, where news about the economy is treated as a state secret, and propaganda is the only truth permitted, so that Part 2, Data disappears when it becomes negative, and Part 3, Everybody laughs at the official statistics:


China’s capitalism has been corrupt from inception; the symbiosis among state-owned banks, state-owned development companies, and municipalities profiting from high-rise land development.  The evidence for is so massive that it may be regarded as completely proven.




As Anne Stevenson-Yang perceptively spotted, China’s rush to urbanization, fueled by state-owned enterprises developing property for their own financial liquidity, has destroyed China’s rural cryptobiotica. 


The newly disenfranchised are now rootless, botanically and economically, and that can make them a mobile mass for a demagogue.




Whenever I write about imminent failure, I feel Cassandra’s ethical dilemma: on the one hand, I would like them to heed my advice, while on the other I am so narcissistically furious they are ignoring it I almost wish them to get smacked by reality.


Corruption is a double-edged sword: to make money in China, you must become corrupt because you engage with corrupt elected and appointed officials, but if the wheel turns then they expose your corruption to conceal theirs.


That has echoes of Fannie Mae, which contributed politically to the campaign of more 85% of the Members of Congress, all of whom came to see it as mom and apple pie.



What, us worry?


When that happens, you take your money out of the country, in anticipation of taking yourselves out of the country.


And yourselves, dear readers, out of this blog post and back to work.


AHI posts on global financial markets


June 26, 2006: Fannie Mae, the implied story, 7 parts, HUD OFA report

June 30, 2006: Part 5, Smoothing earnings with financial tricks, Gaming earnings

January 22, 2008: Who’s next?, 2 parts, Fannie Mae’s thin capital ratios

May 6, 2008: Catastrophe is a precondition to fundamental reform, 2 parts, US meltdown

December 4, 2012: Innumeracy precedes insolvency, 4 parts, San Bernardino bankrupt

October 7, 2013: The demise of deposit insurance, Russia investing in Cyprus

September 3, 2015: House and country, 9 parts, Russian oligarchs buying London



Month in Review, March, 2016: Part 1, Two tales of two cities

May 23, 2016 | Argentina, Capital markets, China, Democracy, Global news, Government, Rent control, Rental, San Francisco, Sovereign bankruptcy, Zoning | No comments 62 views

By: David A. Smith

Before human beings had nations, cities were the dominant political unit, and it was through cities that momentous change came to the world – so we say Athens and think philosophy, Rome and empire, Florence and the Renaissance. 



Inventing a Renaissance within the city’s walls


Because cities are defined as places where strangers live companionably in close proximity to one another, cities depend on both successful housing and successful municipal budgeting – two themes I regularly examine on the blog, as in March when I looked first at a city that was failing the budget side, leading to its residents to conclude they would be better off Opting out of micro-government: Part 5, This time they have the votes:


In the earlier parts of this rural-pace-of-life post about the deorganization of towns in forested northern Maine, I covered the forces that build up a political-economic gravity that makes sustaining public services difficult, and that invites the question, what tips it over?



I have no idea how it happened


Sources used in this post


Washington Post (March 28, 2004; Lavender font)

Bangor Daily News (October 2, 2013; navy blue font)

Bangor Daily News (July 31, 2015; brown font)

Bangor Daily News (November 27, 2015; buff blue font).

The New York Times (January 16, 2016); the story of Cary Plantation, Maine

Wikipedia, Bancroft, Maine (accessed February 21, 2016; Kelly green font)


2. Why does a municipality de-organize?


Boiled down to its essence, the answer is simple: To save money and improve service.


“[A deorganized township is] basically like a company: There’s so much less overhead,” said Paul G. Bernier, the public works director for Aroostook County, who is responsible for overseeing services to the unorganized territories at the very top of Maine.


Remember, all of Aroostook County has 70,000 people total. 


“Sometimes it’s half of what they were paying.”


The tipping point came, as it so often does, when people could no longer afford the status quo’s costs.




At some point, the town itself becomes an abstract thing, a subscription we signed up for years ago to a magazine whose content we no longer read, but canceling the subscription proves onerous, as I covered in Part 6, Abandonment of town structure, Part 7, Often in a nearby district, Part 8, Parent choice is a misunderstanding, leading ultimately to the town finally having the way forward to dissolve, concluding in Part 9, Fewer in numbers all the time:


“I don’t mind driving a few extra miles to pick up a fishing license. About the only thing that’ll change is the name. We’ll go from being the Town of Atkinson, to Atkinson Township,” said Michael Snow, the town constable, whose gas station and chainsaw shop mark the town’s commercial center.



Snows, saws, and laws, all in a one-stop shop


About all a woodsman needs a vehicle, a chainsaw to clear timber, and gas to power them both.


People here are still working in forestry, farming and outdoor guiding, with a number of lodge and guiding businesses around the town and the vast North Maine Woods beyond its borders. The town is aging, though, and some residents are looking to younger generations who may settle.

Almon Currier, owner of Umcolcus Sporting Camps, is heading into retirement and selling the lodging and cabin business. “We feel it’s time for a younger generation with more energy to continue the tradition,” Currier wrote on the Umcolcus website.


“We’re fewer in numbers all the time, and the break in the taxation is going to be a big help,” Currier said at the meeting.


Every journey has an end.


“There’s privacy, and it’s so quiet,” said Ms. Libby, 51. “We want to stay here. And to do that, it needs to be affordable for us to stay here.”



And I have blogging posts to keep


AHI posts on municipal expansion, reconstitution, and contraction


May 25, 2007: As a town dies: The depopulation of Oakridge, Oregon

August 13, 2007: Cities and scale, 3 parts: Could be too big or too small

May 12, 2008: Too many houses, 2 parts: The shrinkage of Youngstown, Ohio

November 9, 2011: The un-building of un-growing cities, 3 parts: Demolitions Cleveland

February 8, 2012: Grids city, scalable city, 2 parts: The land-use patents for success

December 31, 2013: Sub-cities?, 3 parts: Chicago’s neighborhood contradictions

April 13, 2015: A tale of two cities, 12 parts: Will Chicago’s north side secede?

November 30, 2015: Fine for you but not fine for me, 15 parts: Pagedale, Missouri


Later in the month we traveled from the far Atlantic coast to the far Pacific coast, from a town dissolving because its homes are too cheap to one at war with itself because its homes are too expensive, via the Housing in Pogoland: Part 1, Good intentions:



But we’re all such good people …


It’s a good thing the Atlantic’s Conor Friedersdorf doesn’t live in San Francisco, because if he did, his recent article (The Atlantic: December 29, 2015, San Francisco’s Self-Defeating Housing Activists, would get him evicted if he were a renter, picketed if a homeowner, and declared persona non grata if merely a worker:


Tech companies and workers are vilified while longtime homeowners who fight high-density growth continue to profit from rising rents and property values.


Mr. Friedersdorf then goes on to deconstruct, dismantle, eviscerate, and otherwise dismember the hypocrisy – de facto if not de jure – of those who say they want diversity and affordability but who then pursue policies that any fool can see make diversity and affordability impossible, as detailed in Part 2, Failure to foresee, and Part 3, Refusal to acknowledge:


In Pogoland-by-the-Bay, the high price of market housing means the city ought to be consumed with a burning political desire to build more housing and a zeal to slice away any laws or regulations that obstruct affordable housing production – but, as Conor Friedersdorf discovered (The Atlantic: December 29, 2015 to his evident surprise, those who most profess passion for housing affordability are oblivious to the reasons why their advocated causes yield the diametrically opposite effect.


In a quote Mr. Friedersdorf cited, Gabriel Metcalf, President and CEO of SPUR, San Francisco Bay Area Planning and Urban Research Association, distills the paradox of American urbanization down to a single sentence so brilliantly epigrammatic I will quote it evermore:


“In a world where we have the ability to control the supply of housing locally, but people still have the freedom to move where they want, all of this has played out in predictable ways.


And here’s another moral paradox:


Think globally, act locally is a mantra for spatial exclusion.



Advocate globally, oppose locally


The city’s ideological progressives have exacerbated the problem:


“Instead of forming a pro-growth coalition with business and labor, most of the San Francisco Left made an enduring alliance with home-owning NIMBYs.”


Again Mr. Metcalf is spot-on, and this time with the paradox of values versus positions.  Because San Francisco’s liberals dislike the values they impute to business leaders and entrepreneurs, they are oblivious to the commonality of positions; instead they make alliances based on affinities (homeowners are ‘authentic San Francisco’) and thus made blind to the inconsistency of homeowners’ positions versus their stated values.



No inconsistency here


In San Francisco, NIMBYism is the bigotry that dare not speak its name, so as I’ve written elsewhere it’s always cloaked in something else: green space, historic buildings, traffic and parking, neighborhood character, or goodness knows what else.


They do this through hundreds of politically powerful neighborhood groups throughout San Francisco like the Telegraph Hill Dwellers.  



“Everything before us Great! Everything after us Terrible!”


[Continued tomorrow in Part 2.]

Are greatly exaggerated

May 20, 2016 | Apartments, California, Conferences, Housing, Innovations, Personal, Rental, US News | No comments 69 views

By: David A. Smith


It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.

A – Mark Twain



Can‘t be a Genie without a turban, can you?


Explaining the rules to the three Visionaries: Red (Carol Ornelas, Visionary Homes), White (Michael Costa, Highridge Costa), and Blue (Robin Hughes, Abode Communities)


Last week, and much of this week, I was in California, first at the California Housing Consortium’s 2016 Policy Forum and California Housing Hall of Fame Awards, as the Genie offering three wishes to an All-American panel of visionaries red, white, and blue – with the winner decided by live votes of the roughly 350 people in attendance.



Right here, direct from the lamp for your very much wish-fulfillment


After that, the Boss and I had a few desert in our favorite desert, Anza-Borrego Desert State Park, featuring slot canyons and bighorn sheep:



The Boss navigating a slot canyon


The park surrounds Borrego Springs, the Resort Town That Time Forgot.



No traffic lights anywhere in town


Wednesday we flew back to Boston, and Thursday I reoriented (more or less).


With my return to blogging, our long national nightmare is over.



How do you spell ‘affordable’ again?

Time to thank the vultures? Part 2, Any investigator anywhere in the world

May 9, 2016 | Argentina, Capital markets, Ecosystem, Global markets, Hedge funds, Law, Panama Papers, Sovereign bankruptcy | No comments 100 views

[Continued from yesterday’s Part 1.]


By: David A. Smith


As we glimpsed in yesterday’s Part 1, using the unwitting diptych of two Economist stories from the same April 16, 2016 issue, the first a sidelight on the Panama Papers, the second Economist (April 16, 2016; buff blue font), the best systems of governance and human organization set up systems where the single-minded pursuit of self-interest produces additionality as an ecosystemic byproduct.



Don’t use such yuge words, okay?


That’s the political-theorist’s way of saying that Elliott Management’s obsessive pursuit of hidden Argentinian sovereign assets led it to crack open the wall of secrecy surrounding one of the world’s most underappreciated criminality-facilitating law firms, Mossack Fonseca, whose client list includes both those who earn their money in high-tax countries and those who earn it in no-rules countries.



We’re everywhere a crook may want to be!


And puncturing the Mossack shell allows Elliott, and anyone who chooses to follow it, a global-secrecy endoscopy:



We know you swallowed the documents – now, where are they?


But [March 2015 Las Vegas court ruling]’s full significance is only now becoming apparent: it means that, under an American law about assisting with foreign legal proceedings, any investigator anywhere in the world can subpoena Mossack, through the Nevada subsidiary, for information that could be relevant to cases in any country.  


Meanwhile, the same Elliott that crowbarred open Mossack Fonseca was also instrumental in Cristina Fernandez de Kirchner’s downfall; Mr. Macri would never have been elected without the holdouts’ diligence in nailing shut any aperture to the capital markets.


The appeals court upheld a decision taken on February 19th by Thomas Griesa, a lower-court judge, to lift an injunction blocking Argentina’s access to international credit markets. Mr Griesa agreed to remove the bar on two conditions:


[1] That Argentina repeal laws barring payments to the holdouts, whom the previous government had dismissed as “vultures”.

[2] That it promptly pay those of them who agreed to a deal.


The move infuriated the holdouts [Not all of them, just the 10% remaining holdouts from among the holdouts – Ed.], who had used the injunction as leverage in their negotiations. While they took their case to the appeals court, Argentina fulfilled its end of the bargain: last month its Congress voted to repeal the relevant laws.


That was as I predicted (not that this was a hard prediction to make).



I saw it with both eyes


Argentina now plans to raise up to $15 billion through a bond issue, which is set to begin on April 18th.  


In fact, Argentina’s bond issue was an immense success; it was fully subscribed that day, raising $16.5 billion in an issue that was 4x oversubscribed.


It will use $10.5 billion-12.5 billion of that to pay the 90% of holdouts with whom it has reached an agreement. The remainder of the cash will be used to finance the budget deficit, which amounted to 5.8% of GDP last year.


The bonds will be issued under New York law


Here’s the third beneficiary of Elliott’s principled stance.  America’s capital markets are now seen globally as the best shield for creditors’ rights.


– in tenors of 5, 10 and 30 years; the government expects to pay interest of 7.5-8.5%.


In fact, the rates were even lower that the indicative guidance:


It sold $2.75 billion worth of 3-year notes at 6.25%, $4.5 billion of 5-year bills at 6.87%, $6.5 billion of 10-year bonds at 7.5% and $2.75 billion of 30-year bonds at 7.62%.


While the challenges confronting Argentina remain huge, at least the country is once again back in good standing with the global capital markets.  This should strengthen Mr. Macri’s hand with his legislature.



Don’t make me point that finger at you


Argentina’s stock market responded positively to the news of the appeals-court decision, jumping by 4% to a five-week high. The same cannot be said of those bondholders who have yet to reach an agreement with Argentina. Some are retail investors, who bought bonds with their savings.  They now have little alternative but to accept Argentina’s formal offer, made on February 5th, of 72 cents on the dollar.


Without the hedge funds, those retail investors wouldn’t be in line for even that much. But the story’s not over yet:


(Mossack plans to appeal the Las Vegas ruling.)



Redacted redacted with redacted for redacted purposes


I’ll bet it does.  I also bet that the firm starts hemorrhaging talent at an accelerating pace, as the non-corrupt lawyers and employees first tiptoe, then scuttle, then stampede for a job, any other job, than this one. 


Faced with the power of American subpoenas, Mossack’s head office will find it much harder to stonewall foreign requests for information.


Mossack will also start losing clients hand over fist:


Ignoring them could mean being found in contempt of court.


That would leave it open to penalties designed to compel it to comply, including asset seizures, in other countries where it operates.


The firm could, of course, slam the door shut by closing its American business.


It will do so as quickly as it can. 


But it is contractually obliged to provide services for thousands of companies there, and cannot disentangle itself from them overnight.



A lot of secrets published into the political arena


Vultures have their uses; they spot rotten beasts, and they pursue them.



I spy with my little eye money moving on the sly


In this case, Elliott’s self-interested pursuit of recovery on Argentina’s sovereign obligations generated additionality benefits for all these beneficiaries:


1.     All other bondholders who didn’t settle.

2.     The US court system and New York’s capital markets.

3.     The cause of global transparency and those seeking to reduce global financial corruption.

4.     Mauricio Macri, the new reformist president of Argentina, and through him the Argentinian economy


It would be too much to expect any of them to write thank-you notes (or even thank-you tweets), but perhaps those critical of Elliott could now at least dial back their moral superiority.


Still, those looking to take advantage of the trail Elliott has blazed shouldn’t hang around.


When the pantry lights come on, the roaches scatter.



Venality not to scale

Time to thank the vultures? Part 1, A crack in the wall of secrecy

May 6, 2016 | Argentina, Capital markets, Ecosystem, Global markets, Hedge funds, Law, Panama Papers, Sovereign bankruptcy | No comments 88 views

 By: David A. Smith


Are you glad the Panama Papers came to light? 


With numerous governments already announcing probes into the Panama papers and others preparing to do so, Mossack Fonseca, the law firm from which the hoard of documents about offshore companies was leaked, will be receiving lots of inquiries in the coming months.  


Then you have an unlikely hero to thank, one hiding in plain sight:



One of the two unsung heroes of this story


I stumbled on it from the random juxtaposition of two stories, such as these in the Economist (April 16, 2016) and the Economist (April 16, 2016; buff blue font):



I’d have got away with it if not for those meddlesome hedge funds


Argentina’s exit from default is finally in sight.  On April 13th, more than 14 years on from a catastrophic $82 billion sovereign default –


With perpetual amnesia a side effect of our attention-deficit-disorder-inducing media froth and its emphasis on conflict by soundbite, the muddier the better, it’s all too easy to forget that a decade and a half ago, Argentina stiffed all its creditors and dared them to fight back.  Some did, and those who did had to use asymmetric warfare, fighting not on the enemy pitch but in neutral territory:


– a federal appeals court in New York upheld a ruling –


As I’ve previously posted, global financial and capital markets represent in some ways a supra-sovereign network of private-sector capitalism, and as capital markets add value to economies, any nation that chooses to isolate itself entirely learns, as Napoleon did with his Continental System, that while markets fight not with guns, for all that they can nevertheless cripple.



I’ll hold my economy’s breath until you turn blue



Should’ve had Plan B ready


For all of Cristina’s fuming, the voters rejected her in favor of a reformer who believes in keeping his word:


The decision marks another important victory for new President Mauricio Macri, who reopened formal negotiations with the holdouts after becoming president in December.


Elections have consequences, and Mr. Macri’s changed both the negotiation dynamics and the judicial environment.  Settlement was thus swift:


– that allows the country to pay its ‘holdout’ creditors, holders of its defaulted debt who rejected restructurings in 2005 and 2010.  


‘Restructuring,’ readers must bear in mind, is the Economist’s shorthand euphemism for ‘unilateral cut in proposed payments,’ and it was based on Cristina’s belief, which took a decade and a half to disprove, that she could cram whatever she wanted onto external creditors.


Previous AHI posts on Argentina’s defaulted bonds


November 13, 2012: Epic CAC

November 27, 2012: CAC-handed

February 19, 2013: Dictatorship is uneconomic

July 11, 2014: International law’s Tinkerbell moment 2 parts

March 14, 2016: The Rime of the Argent Manager, 6 parts


While that worked for most of the herd, there emerged a group led by Elliott Management, who for their defense of principle earned plenty of shallow editorial opprobrium, to which (fortunately) they were immune.



Your mud doesn’t stick to us


Having bought the defaulted paper at deep discounts, but nevertheless prices higher than Argentina was offering, Elliott set out on a hunt to close down the global capital markets against Argentina, and to invoke the capital markets and nail shut a financial blockade around the country:


In 2014 Elliott, a fund that owned debt on which Argentina had defaulted, sued in Nevada to compel Mossack’s local affiliate to provide information on shell companies, in the hope of discovering Argentine assets to seize.


Organizations headed by liars may in fact be staffed by non-liars, the unwitting truth-tellers providing so much useful camouflage.



It isn’t important that they know.

It’s only important that I know


On the other sidewalk of truth’s street, the best liars compartmentalize their lies: one set said here, another said there, and never the twain shall meet. 


The affiliate, MF Corporate Services, claimed – implausibly – that it was independent of Mossack.


Hence the enormous significance of prying open the US affiliate, as reported in CNN (April; 6, 2016; iris font)


Mossack Fonseca’s Nevada subsidiary, MF Corporate Services, is located in an office park near Las Vegas airport.



Cash your winnings here, sir?


And now it all makes sense.


Las Vegas Airport is located incredibly close to the Strip.




At the casinos, they are happy to exchanges your mountains of cash for chips, and later re-exchange those chips for a new stack of cash – larger or smaller depending on your luck.  It’s the perfect place not only to launder global money and then incorporate it into a shell company domiciled somewhere with strong privacy laws.


Many of the companies it helped create follow a similar pattern — they all list officers based in Panama, British Virgin Islands or Seychelles, places the European Commission has labeled as tax havens.


Forget the ‘tax haven’ aspect, which I suspect is a small fraction of the business – it’s the laundering of drug, terrorist, or dictator money that is the big business line for the micro-haven countries. 



Fly in with dirty money, gamble for a few days, fly out with clean money


The registration documents for some companies tied to MF Corporate Services list other corporations as company officers, and do not mention any individuals.


Once encased in a corporate shell located in a hard-to-crack country, the money can then be safely deposited in a big financial institution – New York, London, Frankfurt – for ready access when your need it most.


According to court documents, MF Corporate Services offered ‘kits’ that allowed clients to incorporate in less than 24 hours.  


Remember, Elliott’s pursuit of Mossack Fonseca long predates John Doe’s data dump of the Panama Papers – and it’s entirely possible that John Doe is in fact a Mossack Fonseca employee who became horrified at what he or she became aware of as the firm fought to defend its rights of secrecy:


In a series of legal skirmishes, Elliott and its lawyers from Dechert LLP established numerous links between the two: for instance, that the employment contract of MF’s sole employee was signed by Mossack partners.


That’s embarrassing.  So is this:


The Nevada subsidiary’s sole employee has testified that the documents were sent to Mossack Fonseca in Panama to be finalized, the documents show.


MF Corporate Services, in other words, was a one-person drop box for the collection of money that flew in, washed off its fingerprints, and then flew out again.


Emails among the Panama papers are said to show that the firm tried to hide evidence of its control over MF Nevada, and wanted its local representative to lie about the relationship.


(Mossack has denied this.)  



My reality is the only one that matters


One manager reportedly worried that “it could easily become clear that we are hiding something.”


A judge in Las Vegas ruled in March 2015 that Mossack and MF Nevada were one and the same.


That put a crack in the wall of secrecy around American shell companies.



What’s inside the shell?


And now the fun really begins.


Tune in tomorrow!


[Continued tomorrow in Part 2.]