Felix Salmon

Otiose trustee of the day: US Bancorp

By Felix Salmon
September 10, 2009

About a month ago, I got an advance copy of this paper, in which Lee Buchheit — the godfather of the sovereign bond markets, and good friend to sovereign issuers around the world — essentially apologizes for two things he did during the Ecuadorean debt restructuring of 2000 and in many other sovereign bond issues to boot: dropping the restriction on the issuer repurchasing defaulted debt; and including boilerplate trusteeship language in the bond documentation rather than something stronger.

This paper is essentially the formal version of the remarks that Buchheit made at EMTA in June. And like he was then, Buchheit is clear that a large amount of blame can be laid on the shoulders of the “bovinely passive” trustee of those Ecuador bonds. Buchheit’s a wonderful writer, and you should read the whole thing, but here’s a taster:

The movement toward the use of trust structures for emerging market sovereign bonds was not intended to dilute creditors’ legal rights, but merely to centralize those powers in the hands of a trustee who would exercise those rights for the ratable benefit of all creditors. Naturally, this approach assumed that the entity appointed to exercise these centralized powers (the trustee) would, if and when necessary, acquit itself of its duty to preserve, protect and defend the interests of the bondholders.

These assumptions, and this legal architecture, were tested for the first time in connection with Ecuador’s 2008 default… As things turned out, the assumptions proved to be fragile and the legal architecture failed in its principal purpose…

Even though the issuer had publicly repudiated the instruments (it’s hard to imagine a more serious provocation), the trustee did not exercise its discretion to accelerate either series of bonds or to commence an enforcement action..

This much seems certain — the closing of the cash buyback represented the first, the best and perhaps the only opportunity for the creditors to recover a sizeable portion of their claims. The trust indenture deprived the individual bondholders of their ability to pursue legal remedies on their own; they were thus wholly reliant on the trustee’s vigilance and enterprise to protect their interests.

Buchheit never actually outs the trustee, but I can tell you that it’s US Bancorp. I can also tell you that I forwarded the article to US Bancorp as soon as I received it, to get their side of the story. In the weeks since then I’ve called and emailed multiple times — probably two or three times a week, depending on how busy I was — and have heard nothing back from them whatsoever. “Bovinely passive” is one way of putting it; I’d say that they’re positively aggressive in their inaction.

It’s notoriously difficult to get a fiscal agent to do anything on behalf of bondholders — that’s one of the reasons why the structure was switched to using a trustee instead. But the lesson of Ecuador is that even though the trustee works for bondholders and not for the issuer, they’ll still do nothing to protect the bondholders’ interest, when push comes to shove. Hell, it’s a miracle if they even so much as return your phone calls.

5 comments so far | RSS Comments RSS

A moderator didn’t consider relevant, my comparison of the Bovine passivity of US Bancorp to the passivity of State Street vis a vis Reserve Primary/Lehman?

(Previous message was deleted)

http://www.bloomberg.com/apps/news?pid=2 0601102&sid=aLhi.S5xkemY

http://economistsview.typepad.com/econom istsview/2009/09/the-real-villains-in-th e-credit-crunch.html

[flag for archive]


Nice use of otiose (http://www.onelook.com/?w=otiose).

Posted by Al Gebraic | Report as abusive

UBMG, it wasn’t deleted, you just left it here by mistake.

Posted by Felix Salmon | Report as abusive


Lee Buchheit has been involved in creative international finance for quite a while!

Philipine investment notes back in 1987:

http://news.google.com/newspapers?id=rWw VAAAAIBAJ&sjid=gwsEAAAAIBAJ&pg=6676,2394 832&dq=lee-buchheit

Google news loses track of him between 1988 and the year 2000, and then again between 2002-2003.


Yep, agreed on the locution. Thumb up.

As for USB, I hate ‘em. Their subsidiary (Elan Financial, ugh) purchased my credit union’s credit card portfolio. They have been so deeply incompetent to make me miss not only the kind efficiencies of my old credit union card, but also unkinder yet adequate card issuers of yore.

When you can make me miss Wells Fargo, you really suck.


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