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From the beginning, the Bush administration has managed the war in Iraq with constant allusions to September 11. Though progress on the ground in Iraq has been slow, what can only be described as a rare success for the Bush administration’s Iraq effort is being crafted across the street from the ruined footprint of the fallen twin towers. In a small corner office, 38 floors above Ground Zero, at Cleary Gottlieb Steen & Hamilton‘s Lower Manhattan headquarters sit hundreds of manila folders, each containing the file of a company owed money by Saddam Hussein’s government. Added together, the folders, which hold records from all over the industrialized world, represent $19 billion the government of Iraq owes to 456 creditors. For the past 20 months it’s been the job of a five-person team at Cleary Gottlieb, headed by partner Lee Buchheit, to expunge as much of that debt as possible. Cleary’s work is a key part of the largest sovereign-debt restructuring project ever undertaken. Criticisms of Buchheit and Cleary Gottlieb abound, mainly in the form of charges of brashness, arrogance, and unilateralism. But one criticism no one is leveling is that they have done a bad job representing their client. Many creditors are fuming at the settlements they’ve received, which mostly amount to 20 cents on the dollar paid out over more than 20 years. But it’s not just money that Iraq’s creditors are angry about. They say they were left out of the process, the terms of deals were dictated to them, and they had no choice but to accept what they view as paltry settlements. “It’s the nature of these things,” says Buchheit, speaking in a professorial tone with the confidence of knowing he is right — or at least will ultimately get his way. He usually does. He’s been through more than a half-dozen sovereign-debt restructurings, which nearly always end with the debtor state dictating terms to its creditors. He states his philosophy matter-of-factly: “We don’t haggle and we don’t negotiate.” “Cleary are brazen, and it works,” says John Dizard, a columnist who has written extensively on the war and Iraqi finances for the Financial Times. “They say sovereigns can do whatever they want. You can excoriate their principles,” he says, referring to the firm’s �do-as-we-say’ view of creditors, “but they did a very good job.” “He is a good lawyer who is zealously representing his client,” says Daniel Lucich, a partner at Akin Gump Strauss Hauer & Feld who represents a consortium of Korean companies owed money by the Iraqi government. It is about the only good thing he has to say about Buchheit or the debt-settlement process. RUNNING UP A TAB Long before the lawyers were called in, before American tanks rolled into Baghdad, and before Saddam Hussein was labeled international tyrant No. 1, Iraq was a wealthy, oil-rich nation with $40 billion in cash reserves. When Saddam took power in 1979, Iraq’s vast oil wealth made it one of the most financially sound governments in the region, a creditor country that extended loans to other Arab states. Then came the Iran-Iraq War, which blotted out the government’s black ink like a bottle of Whiteout. War spending depleted currency reserves, and Iraq was forced to borrow heavily to finance the war and spending at home. European banks such as France’s Union de Banques Arabes et Fran�aises and Italy’s BNL provided the Hussein regime with loans of hundreds of millions of dollars in the 1980s. Korean construction companies, led by Hyundai (which alone came to be owed $1.1 billion by the Iraqi government), poured into Iraq, working on projects with the expectation that Iraq was not that different from any other country. Toward the end of the 1980s the Hussein regime had racked up more than $120 billion in debt; it would be a long time before anyone saw a single dinar. By 1988 the Iran-Iraq War had ended in a stalemate, but the damage to Iraq’s economy had been done; the debt Saddam had amassed during the war paralyzed the country. He urged Saudi Arabia, and, particularly, Kuwait, which Iraq owed more than $14 billion, to forgive its debt. In 1990, after Kuwait twisted the knife by raising its oil production, causing the price of crude to plummet and furthering the precariousness of Iraq’s economic condition, the Iraqi army moved into Kuwait City. It was one way of addressing the debt issue. Almost immediately, the United Nations placed sanctions on Iraq, effectively sealing its borders to foreign businesses but also halting any mechanism for Iraq to repay its foreign debt. The sanctions were never meant to last 13 years, but they stayed in place after the first Gulf War and throughout the 1990s. Only once sanctions were lifted, after the 2003 ouster of Saddam and the American occupation of Iraq, did the repayment of the debt become plausible. Though the situation on the ground remained shaky, the Bush administration quickly made the elimination of Iraqi debt — something that could be negotiated in air-conditioned boardrooms far from the urban battleground Baghdad was fast becoming — a top priority. “Everyone knows the presidency rises or falls on how Iraq goes. This was something that was in their control, much more so than if Al-Sadr can be coaxed into [being] a good guy,” says Akin Gump’s Lucich, who squared off against the Americans, the Iraqis, and Buchheit while representing the Korean Creditors Coordinating Committee, the largest group of private creditors. The committee is made up of large South Korean businesses, including Hyundai, Samsung, and Daewoo. In the summer of 2003, as Iraq was quickly destabilizing, the Bush administration began its political push for debt forgiveness. Richard Perle, then chairman of the Defense Policy Board and a staunch advocate of the administration’s Iraq strategy, called for the complete forgiveness of Iraqi debt in June 2003, saying that lenders should be taught a lesson about the “moral hazard . . . of lending to a vicious dictatorship.” (Perle’s call foreshadowed the Bush administration’s eventual 100 percent forgiveness of Iraqi debt held by the U.S. government.) By April 2004 the Iraqi Ministry of Finance — then basically an office operating within the Coalition Provisional Authority, as there was no functioning Iraqi government — issued a request for qualifications for a legal adviser to work on clearing Iraq’s private debt, which totaled $19 billion. That was just a sliver of Iraq’s total $120 billion debt load, more than 80 percent of which was owed to foreign governments. Nonetheless, clearing it represented a mammoth task. The selection process for firms to handle the debt issue raised questions about whether Iraq or the United States was in charge of the process — questions that continue to this day. For one thing, the selection process was to be governed by “Iraqi and United States law,” according to the April 2004 request for qualifications. The timing also raised questions: The terms of the Cleary deal were ironed out in June 2004, just as the CPA was handing over control of the country to the Iraqi Interim Government. The deal between Cleary and the Iraqi Ministry of Finance was finally inked on July 1, 2004, three days after the CPA transferred power to a newly sovereign Iraq. But Buchheit disputes any suggestion that the Americans were running the show. “The Americans were a major ally, but we take instruction from the Ministry of Finance and the [Iraqi] government and no one else,” he says. As for the selection of Cleary, nearly everyone involved with the debt issue says it was a no-brainer. “They’re the go-to people” for sovereign-debt restructuring deals, says the Financial Times‘ Dizard. Buchheit and Cleary represented the Russian and Argentinian governments, which, before Iraq, undertook the largest sovereign-debt deals of the past 10 years. WE’LL ALWAYS HAVE PARIS The name of the client on Cleary’s contract may have been the Iraqi Ministry of Finance, but the firm clearly had a pit bull in its corner in the form of the Bush administration, which willed Iraq’s Western governmental creditors, known as the Paris Club, into providing extremely favorable terms to the Iraqi government. Though the agreement, reached in November 2004, covered only Paris Club government creditors, it contained one key and extremely contentious provision that would define the terms of the fight over Iraq’s private debt — namely that no other creditor be granted better terms than the Paris Club governmental creditors. The terms that the Paris Club came to called for an 80 percent forgiveness of Iraqi debt. While the Bush administration had been pushing for as much as 95 percent debt forgiveness, 80 percent was still a number that the governments, which included Germany, Russia, and the United Kingdom, were loath to agree to. But with President George W. Bush having been re-elected just weeks earlier, it was ground that the European governments felt they could cede in an effort to mend fences with the United States. The agreement ultimately canceled $31 billion of Iraqi debt, but, more important, established that the Bush administration would go to bat for Iraq on the debt issue. With the ink dry on the Paris Club agreement, Buchheit began work on formulating a deal for Iraq’s private creditors. It offered private creditors similar terms to the 20 cents on the dollar the Paris Club governments received. The stipulation in that agreement’s comparability clause that forbade other creditors from getting better terms gave Buchheit leverage when justifying his 20-cents-on-the-dollar offer. But creditors say key parts of the comparability clause weren’t shown to them in full, making the entire foundation for the negotiations unfair. Indeed, though parts of the comparability clause were made available to the creditors in July 2005, it took an article in Euromoney magazine two months later to leak another key part of the clause. It showed that the Paris Club had wide leeway to enforce penalties against Iraq for granting better terms to other creditors. “No lawyer would ever be satisfied with �I’ll show you this one part of the agreement,’ ” says Lucich, who represented the Korean Creditors Coordinating Committee. “ They would not show the [comparability clause] and they would not share the reason why, but it’s apparent: They wanted to give a bad deal to the creditors.” “The Paris Club agreement was not a public document,” responds Buchheit, adding that it had actually leaked out by early 2005. “The agreement bound Iraq [to settlement terms], not the [private] creditors. They didn’t have to take a settlement.” So why did they? Cleary’s leverage. Facing an iron-clad 20 percent payout and an unflinching Cleary Gottlieb, many creditors, including the Koreans, tried to go around Cleary, whom they saw as holding all the cards. They lobbied the International Monetary Fund and the U.S. government to intercede, all to no avail. Buchheit saw the move as an attempt to sidestep the settlement process, but Lucich sees it differently: “There was no end run” around Cleary and the settlement process, he says, because “there was no process for us to take part of.” Believing that a settlement based on the Paris Club framework was inherently unjust, Lucich constantly sought to negotiate directly with Buchheit, which was precisely what Buchheit would not agree to. With Cleary and Iraq determined to give private creditors the same terms as the Paris Club, there was virtually no room for maneuvering. On that much, Buchheit and the creditors agree. For all the bad blood between Buchheit and Lucich, the pair have never even been face to face. “I can’t say that I’ve ever met the fellow,” says Buchheit. “We must have written five or six letters saying �Let’s negotiate,’ ” says Lucich. “ We didn’t even get a return letter. He had the leverage; he used it.” Lucich says the closest Cleary came to seeking input from creditors was at a meeting in Dubai in May 2005. Creditors flew in from around the world — India, Germany, the United States — to give their input on a process from which they had felt excluded. If anything, the meeting reinforced the perception that the process was closed, says Lucich. “Think about it: A huge auditorium, angry and interested creditors, and the meeting lasted for about two and a half or three hours. And that was it. At this meeting were the accountants and Cleary Gottlieb saying, �This is what you’re going to get and there’s going to be nothing to talk about.’ As far as I know, there was not a single negotiation after that.” Buchheit maintains that he did solicit input from the creditors at the Dubai meeting, but only on the mechanisms of a deal. For example, he discussed whether the debts would be settled through cash payments or bond issuance. He also says that financial advisers for the Iraqis met with the Koreans in Seoul and in the United States. Lucich describes the meetings as “informational” and the advisers as “undeputized to do any negotiation.” But when it came down to it, the creditors realized they didn’t have much of a leg to stand on. The final terms of the offer? Large creditors owed more than $35 million were offered bonds worth 20 cents on each dollar they were owed. The bonds will pay out over 23 years. Smaller creditors will receive an instant cash payment worth 10.25 cents on the dollar. “There were a lot of people who were not thrilled with the offer,” says Buchheit, underplaying creditor outrage more than a little. But he points out that all of Iraq’s 33 major creditors accepted the deal and that 355 of the 423 small claimants accepted it, as well. Or as Lucich describes the process, “What we had was a cram-down.” The debt-settlement process is now all but over, with only a small number of claimants set to enter arbitration in June. Buchheit expects his work to be completely finished by the end of July. Creditors have been issued bonds, which are now even trading up on the debt market. The losers, of course, are the creditors, who will receive 20 percent of what they were owed by the Hussein regime nearly 50 years late. Lucich’s take on the deal, which his clients eventually accepted? “Everyone got shafted.” The big winners in the process? Clearly the Iraqis, who will wipe $14.8 billion of debt from their books. All this for the bargain price of $6.5 million in fees paid to Cleary through December 2005, according to records filed with the Department of Justice’s Foreign Agents Registration Act office. And while a $6.5 million client doesn’t represent the financial windfall that a single corporate litigation client can provide, Buchheit’s accomplishments are certainly something the firm can trumpet the next time a government is looking to clean up its books. But it’s not just Cleary that is celebrating its success. The Bush administration has scored a hard-to-come-by victory in the increasingly uncertain reconstruction of Iraq. So taken with Cleary’s work was the White House that it snagged one member of the firm’s debt team. Last week the Treasury Department named Jeremiah Pam, one of the four Cleary lawyers working with Buchheit, whose title on the Iraq debt project was chief of staff, as its new financial attach� to Iraq. Reached via e-mail, Pam declined to comment on his role at Cleary or at Treasury. “I’m not in a position to comment on Iraq’s debt restructuring or Iraq economic policy at this time,” he wrote. The work on shoring up Iraq’s finances, at least for one Cleary vet, will continue long after the last creditor has voiced his final complaint.
Andy Metzger can be contacted at [email protected].

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