Jan. 8 (Bloomberg) -- On a sweltering day in September 2006, almost a year before the collapse of the housing market and the ensuing credit crunch, Paul Singer, the founder of hedge fund firm Elliott Associates LP, took the podium at a New York financial conference to give a speech called ``Complexity Made Simple.''

The complexity he was talking about was contained in collateralized debt obligations, or CDOs -- packages of debt that bundle subprime mortgages, bonds and other loans.

Singer, 63, told the 325 money managers who had crowded into the auditorium that investors who were buying CDOs were making a serious error. ``It is still surprising how many investment fads have elaborate spindrifts of ethereal logic which, when stripped away, are really dumb,'' he said.

Singer urged his audience to shun subprime investments and buy credit-default swaps -- instruments that rise in value as the risk of default increases -- on mortgage-backed securities. ``It was a $100 million gift,'' says James Grant, editor of financial newsletter Grant's Interest Rate Observer, which had hosted the conference. ``Singer laid out a strategy of how to take advantage of the CDO mess.''

Singer took his own advice. New York-based Elliott Associates, with $9.8 billion in assets, gained more than 30 percent after fees in 2007 -- its best performance ever -- on bets that the housing boom would falter and die. And 2007 was no fluke. Elliott Associates hasn't had a losing quarter since 1998.

14.7 Percent Return

Since its launch in January 1977, the hedge fund has returned an average of 14.7 percent a year after fees compared with 12.6 percent for the Standard & Poor's 500 Index. Elliott Associates is the name of both the firm and the fund; the firm also runs Elliott International, which makes the same investments and caters to non- U.S. investors.

``He's on top of his portfolio, and if you're an investor, that's what you want,'' says Ralph DellaCamera, founder of DellaCamera Capital Management, a New York-based hedge fund firm, who worked at Elliott for 14 years and left in 1999. ``He's one of the best fund managers in the business.''

Singer is also one of the most controversial. Normally shy of publicity and cameras -- the photo of Singer accompanying this article is the first he has ever agreed to sit for -- Singer put himself in the limelight in 2007 when he became the top fund- raiser for presidential candidate and former New York Mayor Rudy Giuliani.

He made headlines again in September when he was revealed to be the mystery donor behind a move to change the way presidential electors are chosen in California -- which the Democratic Party calls an effort to ``rig'' the November 2008 vote in the Republicans' favor.

Distressed Investor

Singer's principal investing strategy is to buy distressed debt at a discount and then demand full payment, going to court to collect if necessary. He also purchases stock in companies slated for acquisition and demands a higher price. His techniques have pitted him against organizations from Cincinnati-based Procter & Gamble Co. to the governments of Argentina and the Republic of Congo.

Singer has repeatedly been labeled a ``vulture investor'' by the emerging-market countries whose bonds he has bought and by development organizations such as Oxfam International that back forgiveness of poor countries' debt.

``Elliott's actions are amoral,'' says David Skeel, a University of Pennsylvania law professor who specializes in bankruptcies and emerging-market debt. ``They've taken a number of actions designed to make a profit, without worrying about the potential consequences for the country involved.''

Paulson Comment

U.S. Treasury Secretary Henry Paulson, former head of Goldman Sachs Group Inc., has joined the campaign to forgive poor nations' debt. In testimony last June before the House Financial Services Committee, Paulson said, ``I deplore what the vulture funds are doing.''

Singer says all the name-calling is unfair. First, he says, the emerging-market debt Elliott holds represents 2 percent of its assets. And he says he doesn't buy debt from the poorest of the poor.

``We never had a dispute with a sovereign which could not pay its debts,'' he says. ``Our disputes have always been with sovereigns who can pay but refuse to do so.''

Singer is an opportunist. Just two days after Pakistani President Pervez Musharraf declared a state of emergency, suspended the constitution and disbanded the Supreme Court in November, Heather McGill, a researcher at Elliott, was looking for investment opportunities in that country, according to an e-mail she sent around the globe.

Looking at Pakistan

``We are trying to better gauge the situation in Pakistan and are interested in building our network of consultants on the ground there,'' McGill wrote. As of mid-December, Elliott hadn't bought any Pakistani debt and wasn't pursuing investments in that country, a spokesman said.

Singer says he invests in defaulted and distressed debt because he can be more certain of a good return for his investors than he could by playing the stock and bond markets.

``My job is to make sure we are protected from the predictable and the unpredictable,'' Singer says, speaking from a conference room in Elliott Associates' New York offices, located on the 36th floor of a building across Fifth Avenue from the Crown Building, with sweeping views of Central Park.

Nothing was more predictable, in Singer's view, than the collapse of the market for mortgage-backed bonds. ``One powerful measure of attractiveness of a trade is when there is the potential to make outsized gains for very little risk,'' he says.

`Extraordinary Mispricing'

As early as 2005, it was plain to him that the investment- grade ratings many CDOs carried bore no relation to the danger of default, Singer says as he leafs through a sheaf of charts and analysis prepared on the subject by his staff. ``What we found was an extraordinary level of mispricing of risk,'' he says. ``The ratings of the securities were extremely erroneous.''

Elliott, which employs 175 people in New York, London, Tokyo and Hong Kong, took a close look at the mortgages contained in some of the CDOs being marketed to pension funds and other institutional investors. CDOs are divided into slices, or tranches, with each tranche carrying its own risk of default.

Elliott found that a 4 percent decline in house prices over two years would be likely to wipe out 84 percent of the principal of a typical CDO. A 7 percent decline could destroy its value completely.

Elliott shorted the ABX index, the benchmark for mortgage- backed assets, and bet against the CDOs held by big banks, including Citigroup Inc. and JPMorgan Chase & Co., by buying credit default swaps tied to their debt.

Betting Against Subprime

``Never seen anything like it in 30 years,'' Singer says. ``Financial institutions did not check, and the rating agencies let them down.''

Losses from the falling value of subprime mortgage assets may reach $400 billion worldwide, Deutsche Bank AG analyst Michael Mayo said in a note to investors in November. Moody's Investors Service, the second-largest ratings company, downgraded more than $60 billion of mortgage-linked CDOs in October and November, and has $174 billion under review. Singer's success at exploiting those losses helped increase his assets under management by more than $5 billion in three years, to $9.8 billion in December.

With his thinning silver hair, white beard and the blue cardigan he sports for a rare interview, Singer resembles a literature professor. Friends say he is polite and soft-spoken. Yet his fund's investment style often involves hostile confrontation and years of litigation. ``We like situations where we can sit around a table and negotiate,'' he says. ``We like to control our own destiny.''

Profiting from Bankruptcy

As of December, Singer had already moved beyond the housing crisis to what he sees as the next phase of the U.S. addiction to easy credit -- corporate bankruptcies. He expects a wave of company failures in 2008 and '09 and is ready to take advantage by buying up the companies' debt at a discount. ``Our primary goal is to find bankruptcy situations where our ability to control or influence the process is the driver of value,'' Singer says. ``That's our favorite.''

Investors in Singer's fund say he's seldom wrong about an investment. ``He's able to take very complicated scenarios and find a way of making them pay,'' says Donald Sussman, owner of St. Thomas, Virgin Islands-based hedge fund firm Trust Asset Management, which manages $3 billion. ``He's one of the five to 10 best investors in our generation.''

Sussman once shared a midtown Manhattan office with Singer and was an early investor in his fund.

Harvard Law Grad

Singer grew up in the New York metropolitan area -- he won't say exactly where -- and his father owned a pharmacy on the west side of Manhattan. After graduating from the University of Rochester with a degree in psychology, Singer attended Harvard Law School in Cambridge, Massachusetts, and then worked for four years at two corporate law firms in New York.

In 1974, he joined investment bank Donaldson, Lufkin & Jenrette Inc. as an attorney in its real estate unit. Three years later, he set up Elliott Associates, with $1.3 million from friends and family. Elliott is Singer's middle name.

For the first 10 years of Elliott's existence, Singer mostly did convertible arbitrage, a hedge fund strategy in which he bought convertible bonds -- securities that can be exchanged for company shares -- while selling short the underlying stocks. Investors using this technique make money if the convertible is mispriced relative to the stock. The fund had better than 10 percent returns for eight of its first 10 years, including four with gains of more than 20 percent.

Running from Risk

Then came the 1987 stock market crash. Even though the fund made money that year, convertible bonds didn't perform well, Singer says. His conviction that traditional stock and bond investing involved too much risk was bolstered by the 1991-92 recession.

Elliott gradually shifted to its current strategy of investing mostly in bankrupt companies and sovereign debt. During the past decade, Elliott has profited from buying the bonds of a series of troubled companies, including Trans World Airlines Inc., telecom companies MCI Inc. and WorldCom Inc. and Enron Corp.

In a federal court case involving Owens-Corning Co. -- a building materials company driven into bankruptcy by asbestos lawsuits -- Singer succeeded in his effort to have a federal judge removed from the case for conflict of interest.

Elliott Associates is closed to new investors; the fund firm doesn't even have a marketing department. Until 2007, Singer was little known outside the investing community -- and he prefers it that way. That January, though, his name suddenly surfaced in connection with Giuliani.

Giuliani Money Man

The New York Daily News obtained a leaked 140-page strategy memo produced by the Giuliani campaign. Singer, described as the ``Republican George Soros,'' was listed as heading the campaign's efforts to raise cash from hedge funds and playing a key role in luring other backers. In the campaign hierarchy, Singer was eastern regional finance chairman.

Months later, the News' archcompetitor, the New York Post, was less kind in a story about Singer's foreign ventures. Its July 30 headline: ``Rudy's 'Vulture' $$ Man: 'Profits off Poor.'''

Singer should have been prepared to take some hits, says Scott Reed, campaign manager for former Senator Bob Dole, the Republican candidate for president in 1996. ``When you're fund raising for the front-runner, you're in the NFL,'' he says. ``You've got to put on your helmet and pads because it's rough out there.''

The Giuliani campaign has since cut back on Singer's role. By August, he was no longer regional finance chair. Giuliani spokeswoman Maria Comella says he's now a senior policy adviser; she refused to answer other questions about his role in the campaign.

Giuliani couldn't be contacted for comment.

Biggest Rudy Donors

Singer and employees of Elliott Associates remain the biggest donors to Giuliani; they gave at least $228,000 in the first nine months of 2007, according to the Federal Election Commission. Elliott Asset Management, one of Singer's private companies, also leased jets to the Giuliani campaign, according to FEC documents.

``I support Rudy Giuliani's candidacy because he is a strong, proven leader who turned around New York City after decades of mismanagement and decline,'' Singer says.

Singer is a longtime Republican activist. In the 2004 presidential campaign, he was one of George W. Bush's ``pioneers,'' meaning that he raised at least $100,000. He gave a total of $2.2 million to Republican causes, including $1.5 million to the Progress for America Voter Fund, a private group that sponsored ads opposing the candidacy of Democrat John Kerry. He also gave at least $5,000 to Swift Boat Veterans and POWs for Truth, a group of veterans that Democrats accused of smearing Kerry by questioning his Vietnam War record.

California Initiative

Singer was also the secret backer of a controversial move to change how California distributes its Electoral College votes. In July 2007, a group called Californians for Equal Representation (CER) filed papers with the state attorney general calling for a voter referendum that would mandate that the 55 votes be awarded according to Congressional district results. Today, California and every other state except Maine and Nebraska have a winner-take-all system.

``This is an attempt to rig the election,'' Democratic consultant Chris Lehane said after the initiative was launched. The measure would hand the GOP nominee 20 elecÔtoral votes from safe Republican districts, he says -- the equivalent of a state the size of Ohio.

The initiative, headed by Sacramento, California-based lawyer Thomas Hiltachk, needed 730,000 signatures by the end of November to get on the ballot. It failed to do so, despite a $175,000 cash infusion from a hitherto-unknown Missouri-based group called Take Initiative America.

`Credibility Matters'

The group's leaders refused to disclose where the money came from. On Sept. 27, Hiltachk and Kevin Eckery, a spokesman for CER, quit in protest. ``Credibility matters,'' Eckery said in a statement. ``There's no reason to be cute when it comes to reporting campaign contributions.''

The next day, Singer said he was the donor. ``I contributed to Take Initiative America because I believe in proportional voting in the Electoral College,'' Singer said in answer to an e- mailed question. In October, the Democratic Party filed a complaint with the FEC charging Singer with a violation of the campaign finance law that limits donations to particular candidates.

They contend the initiative originated in the Giuliani camp, which Giuliani's spokeswoman denies. Singer denies any wrongdoing. ``It looks like Singer's involvement killed the initiative,'' Reed says.

Minority Rights

Singer isn't shy about going head-to-head with his adversaries -- in politics or in business. ``We don't see many people willing to stand up for their shareholder or bondholder rights,'' Singer says. ``If you don't defend your rights, what do you have?''

He has joined activist investor Carl Icahn in several ventures, most recently by taking a 5.4 million-share stake in Motorola Inc. and demanding a management shakeup. On Nov. 30, Motorola CEO Ed Zander agreed to step down. Motorola shares closed at 15 Jan. 7, down 6 percent since Zander's decision.

For 30 years, Icahn, 72, has been buying stakes in companies, including Phillips Petroleum Co., Time Warner Inc. and Viacom Inc., and then agitating for change.

Singer has taken legal action to squeeze profits out of organizations as diverse as European phone service providers Colt Telecom Group SA and Telecom Italia SpA, P&G and the governments of Peru, Argentina and the Republic of Congo.

``He expects people to keep their word,'' says Kenneth Buckfire, managing director of Miller Buckfire & Co., a New York- based investment bank that has worked alongside Elliott in restructuring bankrupt companies. ``When he thinks he's being treated unfairly, he is extremely aggressive.''

Hair Care Fight

Elliott took on Cincinnati-based P&G in 2003, after the world's biggest consumer products company bid for Wella AG, a German hair care products company. P&G offered the founding family and Wella management, which held all of the voting stock, 92.50 euros ($133.40) a share, or $6.9 billion, to acquire the company.

The offer was 42 percent more than the 65 euros offered to holders of nonvoting, preferred shares. Elliott bought 10 percent of Wella's preferred shares after the announcement. ``I looked at it, and I said, I don't think they can do that,'' Singer says.

Elliott was soon joined by New York-based hedge funds Paulson & Co. and Perry Capital LLC in opposing the deal. Deka Investment, Germany's second-largest fund manager, also came on board. After Germany's financial services regulator, BaFin, approved P&G's takeover of Wella, Elliott sued BaFin to stop the merger, arguing that the regulator had failed to protect all shareholders.

A Win against P&G

German trial and appeals courts both upheld BaFin. Still, to prevent new litigation, P&G eventually raised its offer to nonvoting shareholders to 80 euros, and Singer and the others took the deal, according to German business magazine Wirtschaftswoche. Neither Singer nor P&G would confirm the number.

Elliott's activism can backfire. That happened in the case of London-based Colt Telecom. Colt's shares took a battering in the aftermath of the dot-com meltdown, falling 99 percent from their peak in March 2000 to 28 pence in October 2002. Its bonds were trading at about half of their face value.

In 2002, Highberry Ltd., a Cayman Islands-based subsidiary of Elliott Associates, acquired 75 million pounds ($117 million at the time) of the telecom's bonds at a discount. Then, in October of that year, Highberry demanded full payment, even though the bonds were not due to mature until 2006. When Colt refused, Highberry sued to put the company into bankruptcy and get a court- appointed administrator to run it.

A Loss in London

Colt was neither bankrupt nor in default on any of its bonds or loans. It had almost 1 billion pounds in cash and a market capitalization of 550 million pounds. Yet in London's High Court, Highberry argued that Colt, like other telecom startups, was losing so much money it was likely to face bankruptcy in three to five years.

In December 2002, Judge Robert Jacob threw the case out, issuing a sharp rebuke to Highberry. ``There is not, and never has been, any substance whatever in this petition,'' Jacob said. ``It should never have been launched. The purpose was very clear from the outset -- cash for Highberry.'' After he lost in court, Singer sold out his position. ``We were surprised at the approach of the court,'' Singer says. ``It was not a happy episode.''

Singer's notoriety is global. He's bought defaulted debt from a half dozen countries (he won't say exactly how many) and demanded full payment. In March 1996, Elliott Associates purchased for $11 million about $20.7 million of the debt of two Peruvian banks, Banco Nacion and Banco Popular del Peru. Peruvian President Alberto Fujimori was at the time in the midst of negotiations to exchange the country's old debt for new Brady bonds. Singer refused to sign on to the settlement with other creditors.

Four Years of Lawsuits

Instead, he spent the next four years suing Peru, first in the U.S. and then in Canada, Germany, Luxembourg, Belgium and the U.K. In June 2000, a U.S. District Court in New York gave Elliott Associates authority to seize Peruvian commercial assets.

Three months later, the hedge fund won a court order in Brussels preventing Euroclear Plc, a clearing house for internationally traded securities, from paying $80 million to Peru's creditors. Faced with the threat of default, Peru gave up and in October 2000 agreed to pay Singer $58 million in principal and interest -- giving him a 400 percent profit.

``Elliott is very determined,'' says Mark Cymrot, a partner at Baker Hostetler, the law firm that defended the Latin American nation. ``They are more persistent and original than other vultures.''

Kirchner Gets Tough

Singer has fought the same battle in Argentina and lost. That South American country defaulted on $82 billion in dollar- denominated debt and devalued its currency in 2002. ``The situation here in 2002 was one of total collapse,'' says Jorge Todesca, former deputy economy minister. ``It wasn't just an economic collapse but a political and social one as well.''

A Singer company, NML Capital Ltd., bought at least $182 million of the debt for 15-30 cents on the dollar. Talks with investors didn't even begin until 2005, when Argentine President Nestor Kirchner offered 30 cents on the dollar to buy back the bonds.

The Argentine government -- now led by Kirchner's wife, Cristina -- never raised its offer. In fact, in 2005, the legislature passed a law forbidding it from doing so.

Some 70 percent of the country's bond creditors have settled. Singer and others are holding out. Singer won a judgment for $284 million in the U.S. in 2006. That has prevented the Argentine government from issuing new global bonds, lest Singer go to court to seize interest payments. It also means Singer's return on his investment, for now, is zero.

Buying Congo Debt

Singer's battle with the Republic of Congo -- a country of 3.9 million people adjacent to the much larger Democratic Republic of Congo -- has been even more contentious. In the late 1990s, Elliott Associates, through another of its subsidiaries, Cayman Islands-based Kensington International Inc., bought $30 million of defaulted Congolese debt at a significant discount, according to legal documents filed by the Congolese government.

Kensington has since chased Congolese assets in courts around the world, arguing that Congo is fully capable of paying its debts from oil sales. Kensington scored $39 million in November 2005 when the U.K.'s High Court ruled that Glencore International AG, the world's largest commodity trader, should pay the company for two consignments of Congolese oil rather than pay a Congolese government-controlled company.

Congolese President Denis Sassou-Nguesso has fought back. He's spent an estimated $5 million hiring Washington lobbying firms to fight Singer, according to Chlopak, Leonard, Schechter & Associates Inc., Congo's Washington public relations firm. The country's law firm is the prestigious Trout Cacheris. Supporters of Congo argue that Singer is undermining a United Nations-backed effort to lift the burden of debt from the world's poorest countries.

Jubilee USA

Neil Watkins, national coordinator of Washington-based Jubilee USA Network, an alliance of organizations that campaigns for debt relief in developing countries, says even if there's rampant corruption in a country, that doesn't justify Singer's lawsuits.

``There are countries where the governments are not accountable to their people,'' Watkins says. ``I don't think it's better for the money to go to some guy on Wall Street.''

Singer says there's no reason to let debtor nations such as Congo off the hook. ``These are countries where the leaders are comfortable and there is poverty,'' Singer says. ``If somebody sits down and talks to you, then you make a deal. If not, you get a judgment.''

That kind of cool calculation was at work once again in mid- December, as Singer contemplated how to take further advantage of the collapse of subprime loans and CDOs. He wouldn't comment on how he's doing so except to say, ``It's the opportunity of a lifetime.''

Editor: Michael Serrill

To contact the reporters on this story: Kambiz Foroohar in New York at kforoohar@bloomberg.net.

Last Updated: January 8, 2008 10:45 EST