DealBook: Bank of America Raises 1ts Settlement 0ffer

Photo Rebecca Mairone, a former manager at Countrywide, led a mortgage-writing program nicknamed the "hustle."Credit Joshua Roberts/Bloomberg News, via Getty Images Related Links

Bank of America and federal prosecutors have accelerated their negotiations to resolve an investigation into the bank's sale of toxic mortgage securities before the financial crisis. The two sides, however, remain far apart on crucial issues and a settlement remained elusive late Wednesday, even after the bank significantly raised its offer.

The bank's lawyers and Justice Department prosecutors met in Washington on Wednesday to discuss the size of a potential cash penalty, a major sticking point in the settlement talks, according to people briefed on the meeting. Heading into the meeting, the Justice Department was demanding roughly $17 billion to settle the case, more than $10 billion in the form of a cash penalty and the rest in so-called soft dollar payments to help struggling homeowners.

The bank was offering a total of $13 billion, the people said, including $4 billion in cash. The bank narrowed the gap on Wednesday, the people said, raising its cash offer to about $7 billion and its total proposal to roughly $14 billion.

But the Justice Department, which has measured the success of its mortgage cases largely on the size of cash penalties, has balked at the offer. If a deal is not reached in the coming days, the Justice Department might announce a lawsuit against the bank.

Underscoring how little leverage the bank has in fighting the Justice Department, Judge Jed S. Rakoff of the Federal District Court in Manhattan ordered Bank of America on Wednesday to pay a nearly $1.3 billion penalty in another federal mortgage case. The ruling comes nine months after federal prosecutors persuaded a jury to find Bank of America liable for selling questionable loans to Fannie Mae and Freddie Mac, the government-controlled mortgage finance giants, before the financial crisis. Bank of America refused to settle the case and went to trial, a roll of the dice that came back to haunt the bank and could now bleed into negotiations in Washington.

That case, and the separate mortgage settlement talks underway in Washington, further tarnish Bank of America as a symbol of all that was bad in the mortgage market leading up to the foreclosure crisis. Many of the problems stem from Countrywide Financial, the large subprime lender that Bank of America acquired in early 2008.

The case in Manhattan exposed fraudulent practices in one of Countrywide's lending programs nicknamed the hustle. Federal prosecutors in Manhattan had argued that the hustle program, which linked bonuses to how fast bankers could originate loans, led Countrywide to "cut corners" as it installed "unqualified and inexperienced" loan processors and tore down internal controls that were in place to root out risky borrowers.

"It was from start to finish the vehicle for a brazen fraud by the defendants," Judge Rakoff wrote in a 19-page opinion, "driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole."

The ruling from Judge Rakoff, an outspoken critic of financial fraud and the government's uneven efforts to punish it, came as Bank of America and the Justice Department tried to hash out the broad parameters of a possible deal on Wednesday.

The two sides also gathered for a lengthy negotiating session on Tuesday that focused on the homeowner relief portion of a potential deal and a statement of facts that would outline the bank's misconduct related to the sale of mortgage securities, the people briefed on the matter said.

The discussions, the people said, focused partly on how to distribute the soft dollar payments. The payments would flow to some familiar causes.

Bank of America, like Citigroup and other banks that settled mortgage security cases, would lower the balances of existing mortgages and help restore vacant properties. But the money would also flow to some more novel ones.

The Justice Department, for example, suggested steering some relief to pension funds and other public investors that suffered losses on the mortgage securities, while the bank has floated a plan to buy back more than 150,000 troubled mortgages from investors.

Buying the mortgages would theoretically give Bank of America more control over how it could modify the loans to help struggling homeowners. The move would allow the bank to get around federal rules that often restrict principal reductions on mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration.

On the surface, the proposal might seem like a costly concession for the bank and a victory for the Justice Department. The bank would plan to resell many of the loans after it modifies them, a person briefed on the matter said, but for a time it would be saddled with an influx of delinquent loans, potentially totaling billions of dollars.

The proposal also seems meant to mollify critics of the Justice Department, who have charged that previous mortgage settlements with banks have fallen short of providing meaningful relief to homeowners.

Since the depths of the foreclosure crisis, consumer advocates, Wall Street watchdog groups and some members of Congress have pushed the banks to forgive more mortgage principal — a move that can bring immediate relief to underwater borrowers.

Yet as of Wednesday, the buyback idea seemed like a long shot. The Justice Department has pointed out a number of practical hurdles to the mortgage buyback plan, the people said, including whether the bank can actually track down all of the homeowners and whether the government can make sure the bank pays a fair price in acquiring the loans.

In some cases, the Justice Department noted in discussions with the bank, investors might not be willing to part ways with the loans, some of which may have been gaining in value as the housing market improves. And the bank could end up profiting if it buys the loans at a steep enough discount and then resells them later.

This week's discussions follow weeks when talks had essentially been frozen, while the Justice Department worked out a $7 billion settlement with Citigroup.

In that case, the Justice Department went so far as informing Citigroup's lawyers that it was filing a lawsuit after the bank refused to raise its cash offer. Citigroup's lawyers had argued that the cash penalty should be based on the bank's relatively small share of the mortgage securities market in the years before the financial crisis — an argument the Justice Department flatly rejected.

Tensions over the cash penalty have also shaped Bank of America's negotiations. The bank has balked at paying a large penalty for the defective mortgage securities sold by Countrywide and Merrill Lynch before Bank of America agreed to acquire the companies in 2008, according to people briefed on the matter.

But Judge Rakoff's ruling, which imposes a nearly $1.3 billion penalty on Bank of America for fraud committed by a Countrywide mortgage program, undercuts that argument.

"Today, Judge Rakoff imposed stiff penalties in a case brought by this office to punish and deter the fraudulent and reckless lending activities of a financial institution leading up to the financial crisis in 2008," Preet Bharara, the United States attorney in Manhattan, said in a statement on Wednesday.

In a statement about the ruling, Bank of America said: "We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America's acquisition of the company. We're reviewing the ruling and will assess our appellate options."

A version of this article appears in print on 07/31/2014, on page B1 of the NewYork edition with the headline: New Haste In Mortgage Settlement Negotiations .

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DealBook: S.&P. Says Argentina Has Defaulted

Updated, 6:37 p.m. |

The ratings agency Standard & Poor's has  found that Argentina has defaulted after it failed to make a $539 million interest payment due on its discount bonds.

The action came Wednesday afternoon as representatives for the country and New York hedge funds sought to reach a last-minute agreement on Argentina's debt. Yet after more than five hours of mediated talks on Wednesday, neither side appeared closer to a deal.

Late Wednesday, the court-appointed mediator to the talks, Daniel A. Pollack, said, "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default."

Mr. Pollack added:

Default is not a mere "technical" condition, but rather a real and painful event that will hurt real people: these include all ordinary Argentine citizens, the exchange bondholders  (who will not receive their interest ) and the holdouts ( who will not receive payment of the judgments they obtained in court). The full consequences of default are not predictable, but they certainly are not positive.

Earlier, Standard & Poor's lowered its rating on the country's debt to "selective default, " noting that Argentina had a 30-day grace period following the June 30 scheduled interest payment date to make payment.

It is the latest development in a multiyear battle that stems from 2001, when Argentina defaulted on tens of billions of dollars of bonds. It later exchanged those bonds for discounted ones with most of its bondholders. But a small group of investors –including Paul Singer's Elliott Management — refused to take the new bonds.

Those investors, led by  NML Capital, an Elliott affiliate, sued the government, seeking full payment and interest.

The case wound its way through the United States courts until 2012, when a federal judge in Manhattan issued a ruling that said Argentina could not make payments  to exchange bondholders without paying the holdouts.

Argentina appealed and took its case to the United States Supreme Court which rejected the appeal last month. Argentina had until the end of the day to pay the holdouts or risk defaulting for a second time in 13 years.

For much of the day on Wednesday a makeshift stage with eleven cameras was set up in front of the building where the talks were taking place in midtown Manhattan in anticipation of an announcement.

At one point in the afternoon, an older man named Francisco Sobrero from Argentina, showed up to protest against the hedge funds, which have been vilified as vultures by the government in Argentina,  holding up two signs.

One read: "Vultures! Don't take our pound of flesh."

 

 

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The Trade: Valeant’s Cost-Cutting Ethos May Yet Give Wall Street 1ndigestion

Updated, 6:33 p.m. |

Credit CNBC Related Links

Wall Street bulls love Valeant Pharmaceuticals' lean business model, but there are side effects they aren't aware of that might give them pause.

According to several current and former employees, Valeant's zeal for cost-cutting risked harming its relationship with the Food and Drug Administration and hurt its competitive position with the development of an important drug.

Formed through an aggressive series of mergers, Valeant rose from obscurity to become one of the largest pharmaceutical companies in the world with a market capitalization of $41 billion. Now it is embroiled in its biggest takeover battle, a hostile bid for Allergan, the $51 billion maker of Botox, which it is making in tandem with the hedge fund manager William A. Ackman.

The fight has gotten nasty, with Allergan accusing Valeant of questionable and opaque accounting — charges that have led to scrutiny of Valeant's business model.

Valeant contends that most pharmaceutical research and development spending is wasted. By acquiring late-stage products and companies with drugs already on the market, Valeant avoids frittering away money. Investors, enamored of the vision, have pushed the stock up 800 percent since the end of 2009 and made a Wall Street darling of the company's chief executive, J. Michael Pearson.

But inside the company in recent years, some executives have been more skeptical of the approach. One example they cite: the company's foot-dragging on an F.D.A.-required safety trial for a drug called Sculptra.

Sculptra is used for cosmetic touch-ups; an injection builds up collagen and reduces wrinkles. Valeant purchased the drug in 2011 from the Swiss pharmaceutical company Sanofi. Sculptra had originally been approved for H.I.V.-positive patients with facial wasting, and was later approved for cosmetic use in 2009, expanding the market opportunity. But the F.D.A. required a study to determine that the drug was safe for cosmetic use in patients who were not H.I.V. positive, and Valeant inherited the responsibility for conducting the study when it purchased the drug.

From the start, Valeant executives were concerned the study would cost too much, according to three current and former executives who spoke on condition of anonymity. The five-year safety study could cost $25 million to $40 million, according to Tage Ramakrishna, Valeant's chief medical officer.

According to the executives, the message was clear and emanated from Mr. Pearson: The company should try to avoid having to perform the study. Ryan Weldon, the head of Valeant's aesthetics business, said to one executive that "we're not going to spend money on that," referring to the study.

Phil Sturno, another executive, instructed executives to "do the minimal amount of work necessary to show progress" to the F.D.A., according to a former executive. Another former executive recalls being told, "Well, let's just take our time doing the study."

Mr. Weldon did not respond to calls seeking comment. The company declined to make Mr. Sturno available and he did not return calls seeking comment. The company provided an affidavit signed by Mr. Sturno saying that statements attributed to him "were not made."

Valeant said it did not delay or slow-walk the study. "We do run lean," Mr. Ramakrishna said. "That's our business model, but we do not put anyone at risk. We put no patients at risk."

Mr. Pearson, the chief executive, said in an interview on Tuesday: "We have a very constructive, positive relationship with the F.D.A. If you actually look at our track record and number of approvals and issues we've had, I'll match it with any pharma company." The company notes that it has received more than 50 approvals for drugs and medical devices from the F.D.A. over the last five years.

"From Day 1, certain things are sacrosanct," Mr. Pearson said. "The bucket of sacrosanct things is manufacturing, regulatory and ethics." The company said in a statement that "our commitment to patient safety and regulatory compliance is absolute."

In the case of Sculptra, even some midlevel executives thought the F.D.A. was being overly cautious. A long-term safety study of Sculptra in H.I.V.-positive patients, who have compromised immune systems, had not revealed any concerns, suggesting the treatment was unlikely to cause problems in healthy patients.

A team of executives came up with a Hail Mary strategy, as they openly called it inside the company. After a long delay, Valeant sent a request to the F.D.A. in March 2013 asking that the company be allowed to gather data from H.I.V.-positive patients instead of performing the larger study. The strategy was unsuccessful.

In June 2013, the F.D.A. put the company on notice, flagging the company's study with a "progress inadequate" designation on the agency's website. The company scrambled to respond, and the F.D.A. rescinded the designation a few months later.

Such a trial could have started enrolling patients in about three months, according to an internal document I reviewed. Instead, the company and the agency continued discussing how to design the study. The company "went back and forth and went back and forth" with the F.D.A. over the study, said Mr. Ramakrishna, the company's chief medical officer. Much of the delay, he said, was a result of a discussion of the complex protocol for the study, which the company said did not comport with how the drug was used in the real world.

The F.D.A. and the company completed the protocol in November 2013. After additional back-and-forth, the company said it received the approval letter to allow Valeant to start the study on April 23.

All the while, the company sold the treatment, and it ultimately never started the study. Now Valeant is selling the rights to Sculptra to a division of Nestlé, which will inherit the responsibility for conducting the study.

Running a tight ship has other downsides. Employees get laid off frequently, as Valeant integrates its latest acquisition, and high turnover reduces institutional memory. It also results in promotions of executives who are less ready to take on their responsibilities, current and former employees say, and executives are often reluctant to raise concerns about problems.

"Nobody will object to anything," said a former executive who requested anonymity to preserve her employment opportunities within the industry. "They are too busy. And they are worried about being laid off."

The company counters that its top management ranks are stronger than ever and that internal surveys show morale is high.

One victim of Valeant's thin staffing was Jublia, a drug to treat toenail fungus, the current and former executives say. The market for the drug is estimated to be worth as much as $800 million a year.

Jublia ran into manufacturing problems. Some bottles were leaking, and the F.D.A. was concerned. Again, Valeant took an aggressive tack with the regulator, playing down the severity of the problem, according to people I spoke with. In the middle of last year, the F.D.A. declined to approve the treatment.

Some executives say they believe that if the company had not been so thinly staffed, experts would have been able to find a solution to the problem more quickly or fix it before the F.D.A. turned down the application, resulting in a lengthier delay. "It's a prime example of not having a great set of expertise or enough time to look into the submission documents," a former employee said.

Mr. Ramakrishna said on Tuesday that there were "minuscule amounts" spilling out of the bottles, and that the concern was that it "could smear the label." Valeant executives noted that the drug had been approved in Canada, based on the same manufacturing data. They said the company did not play down the issues with the F.D.A., and that it did not have a dearth of expertise in manufacturing or regulatory affairs.

Jublia was finally approved in the United States in June, but the delay was significant. Valeant was racing to bring its drug to market ahead of a competitor, Anacor Pharmaceuticals. Anacor was able to close much of the gap, winning approval in July for its drug, Kerydin.

Wall Street loves companies that live fast and run thin. Some flourish, but many die young. It's not yet clear where Valeant will end up.

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Stocks Stable After the Fed’s Policy Move

By REUTERS July 30, 2014

The stock market was little changed on Wednesday after the Federal Reserve raised its assessment of the nation's economy while reiterating it was in no hurry to increase interest rates.

The central bank also, as expected, cut its monthly asset purchases to $25 billion from $35 billion.

"We got the taper as expected and the real viewpoint of the committee is they can keep monetary policy accommodative even after we reach our inflation and employment goals," said Art Hogan, chief market strategist at Wunderlich Securities.

That suggests "we are going to start raising rates but it's going to be some time in the first half of 2015 and that is consensus — and consensus gets you a market that rallies," Mr. Hogan said.

Interactive Feature | S.&P. 500-Stock Index

The Dow Jones industrial average fell 31.75 points, or 0.19 percent, to close at 16,880.36, according to preliminary figures. The Standard & Poor's 500-stock index edged up 0.12 of a point, or 0.01 percent, to 1,970.07. The Nasdaq composite index gained 20.20 points, or 0.45 percent, to 4,462.90.

The Dow and the S.&P. 500 both briefly traded higher after the Fed's statement.

Financial shares bounced, with the S.&P. financial index helping to support the S.&P. 500. Shares of Wells Fargo gained 1.1 percent to $52.10.

Biotechnology stocks lifted the Nasdaq for a second day. The Nasdaq biotech index gained 1 percent after Amgen posted better-than-expected earnings and raised its outlook, sending shares up 5.4 percent to $130.01.

Among other big gainers, Twitter surged 20 percent to $46.30 after reporting that monthly active users rose a better-than-expected 24 percent in the second quarter.

Earlier Wednesday, government data showed gross domestic product grew at a 4 percent annual rate in the second quarter, above the 3 percent rate that had been expected and a sharp reversal from the weather-impacted first quarter, when the economy contracted a revised 2.1 percent.

Separately, the ADP National Employment Report showed companies hired 218,000 workers in July, below analysts' projections and less than June's total.

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DealBook: Bank of America 0rdered to Pay Nearly $1.3 Billion in Mortgage Case

Photo Rebecca Mairone, a former manager at Countrywide, led a mortgage-writing program nicknamed the "hustle."Credit Joshua Roberts/Bloomberg News, via Getty Images Related Links

A federal judge has ordered Bank of America to pay nearly $1.3 billion in penalties for its role in defrauding Fannie Mae and Freddie Mac into buying thousands of  defective mortgages.

The penalty handed down by Judge Jed S. Rakoff of the Federal District Court in Manhattan on Wednesday comes after a jury in October found Bank of America liable for selling the questionable loans to the government-sponsored entities in the run-up to the financial crisis.

The jury also found a top manager at Bank of America's Countrywide Financial unit liable for the sale of the loans, which were originated as part of a program nicknamed the "hustle," which linked bonuses to how fast bankers could originate loans.

The judge also fined the former executive, Rebecca S. Mairone, $1 million, for her role in the scheme.

Known for having strong views on financial fraud, Judge Rakoff issued a sharp rebuke of the bank's misconduct.

"It was from start to finish the vehicle for a brazen fraud by the defendants," he wrote in a 19-page opinion, "driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole."

The penalty, which the bank has been ordered to pay in full by Sept. 2, is another steep price to be paid by Bank of America as it tries to put its legal troubles behind it. It is likely to complicate settlement talks between the bank and the Justice Department to avoid another lawsuit over the sale of mortgage securities that led to billions of dollars in losses to investors.

In determining the penalty, Judge Rakoff said he did not calculate the amount based on how much Fannie Mae and Freddie lost from the mortgages. But rather on how much they paid for mortgages that prosecutors proved to the jury were defective – about 42 percent of a total of 17,611 loans.

Ms. Mairone,  the judge ruled, can pay the fine in installments over a period of time. That decision, he explained. reflected a concern that the government's demand for a lump sum $1.2 million penalty "would strain her resources to the limit."

Preet Bharara, the United States attorney in Manhattan who filed the case, cheered Judge Rakoff's ruling.

"Today, Judge Rakoff imposed stiff penalties in a case brought by this office to punish and deter the fraudulent and reckless lending activities of a financial institution leading up to the financial crisis in 2008," Mr. Bharara said in a statement.

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DealBook: Bond Default by Argentina Appears Likely

Photo Graffiti in Buenos Aires says, "No to the payment of the debt." Hedge funds have won court victories demanding full payment on the bonds.Credit Marcos Brindicci/Reuters

Updated, 6:38 a.m. | Barring a last-minute deal, Argentina will default on billions of dollars of bonds on Wednesday.

It would be Argentina's second default in 13 years. But unlike the last time, when scores of unhappy Argentines took to the street as unemployment rose to 25 percent and inflation soared, this default would look decidedly different.

Argentina's equity, bond and currency markets, which have been volatile in recent days, would certainly feel a jolt. The government and Argentine companies, which have been largely locked out of global markets since the last default in 2001, would find it even harder to raise money. And the economy, which has struggled with stagflation for years, would most likely slow further.

But the reaction will probably be muted because this default is not a surprise.

"This is kind of a chronicle of a default foretold," said Arturo Porzecanski, director of the international economic relations program at American University, referring to the novella by the Colombian writer Gabriel García Márquez, "Chronicle of a Death Foretold."

Photo "Enough vultures, Argentina united for a national cause" reads the sign in Buenos Aires.Credit Enrique Marcarian/Reuters

A default has been in the making since a group of New York hedge funds gained significant victories in American courts, where they are demanding that Argentina pay them in full on government bonds that defaulted in 2001.

As in Mr. García Márquez's books, the hedge funds' battle against Argentina is full of unusual twists.

In a pivotal ruling, Judge Thomas P. Griesa of Federal District Court in Manhattan said that Argentina could not continue to make regular payments on its main class of bonds — whose investors had agreed to accept a lower amount than they were owed — without paying the hedge funds. A payment is scheduled for the main class of bondholders on Wednesday. Argentina, however, has insisted that it will not cave into the demands of the hedge funds, which it has called vultures.

"It would be a shocking surprise," Mr. Porzecanski said, "if Argentina pulled out their pocketbook and paid" the hedge funds.

Photo Judge Thomas P. Griesa told Argentina and the hedge funds to meet "continuously until a settlement is reached."Credit Pablo Corradi/La Nación

But late on Tuesday night another unexpected twist occurred. A mediator appointed by Judge Griesa announced that Argentina's negotiators, led by the country's economy minister, Axel Kicillof, had held discussions with representatives of the hedge funds for several hours. This was the first face-to-face meeting between the two sides under Daniel A. Pollack, the so-called special master who was appointed by the court in June. "There was a frank exchange of views and concerns," Mr. Pollack said in a statement. "The issues that divide the parties remain unresolved." He added that it was not clear whether the two sides would meet again on Wednesday.

Argentina's main class of bond holders are most likely hoping that the last-minute talks might lead to a breakthrough that will prevent a default on their bonds.

The country's predicament today is inextricably linked to its default in 2001 and events after it. Argentina's economy in 2001 was in dire straits after four years of recession. Unable to continue making payments on loans from foreign creditors, it was engulfed in debt before it declared a formal default.

Photo Hedge funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.Credit John Minchillo/Associated Press

Through two restructurings, the government eventually struck a deal with a majority of its bond investors, who are now called exchange bondholders because they exchanged their bonds for ones that were worth as little as a fourth of the value of the original securities. The hedge funds, known as the holdouts, declined to participate in the restructurings. Instead, the funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.

Judge Griesa's ruling in 2012 was later upheld by the United States Court of Appeals for the Second Circuit. Then in June, the United States Supreme Court refused to consider Argentina's last appeal. Judge Griesa gave Argentina a 30-day grace period on a scheduled June 30 payment to its main exchange bondholders.

In defiance of Judge Griesa's ruling, Argentina in June deposited $539 million into the Bank of New York Mellon, the trustee handling the bond payments, in an attempt to meet its exchange bond payment.

But Judge Griesa ruled that if Bank of New York Mellon made the payment, it would be in contempt of court.

Argentina has also asked the judge for a stay on his 2012 ruling, arguing that a delay would help it to negotiate a deal. On Tuesday, a group of investors of Argentina's euro-denominated exchange bonds urged the judge to issue an emergency stay on his ruling. But this is unlikely to be granted unless the holdouts request it, analysts said, or the court-appointed mediator, Daniel Pollack, recommends it.

Photo President Cristina Fernandez of Argentina at a trade summit in Caracas, Venezuela, on Tuesday.Credit Fernando Llano/Associated Press

In depositing the next installment of bond payments, the Argentine government has said that a default would not be its fault, a claim that has gained it political mileage. In a speech last week, the country's president, Cristina Fernández de Kirchner, conveyed this belief. "They're going to have to come up with a new name," she told an audience, referring to the word default, "a new term that reflects the fact that the debtor paid and someone blocked it."

Also last week, Judge Griesa ordered the Argentine delegation and the holdouts to meet with Mr. Pollack and talk "continuously" until an agreement was reached.

The response from Argentina was tepid; the delegation met twice with Mr. Pollack last week before returning home to Buenos Aires for the weekend to consult with the government.

Argentina's lack of enthusiasm had prompted some lawyers and analysts watching the case to question whether Argentina actually wants to avert a default.

"If you're picking a default as a rational avenue, it is because you have decided two things," said Marco E. Schnabl, a partner at Skadden, Arps, Slate, Meagher & Flom who is not directly involved in the case. "One, that picking a fight with the American legal system is politically convenient, and two, that the cost of settling with holdouts and everyone else who still has unpaid bonds is vastly greater than the costs of having to take a default."

But even with that thinking, the picture is anything but clear because some of the legal theories behind the contracts governing Argentina's debt have not been tested.

Argentina has said, for example, that if it agreed to a settlement, it could be on the line for as much as $15 billion in holdout investors' claims. That is because any deal would have to include all holdouts, even those not represented in the case.

In such a case, bondholders who exchanged their defaulted bonds for discounted ones might also have the right to demand the same compensation terms, according to a clause in the bond restructuring terms that expires at the end of this year.

On the other hand, if Argentina does default, it runs the risk of more lawsuits, said Siobhan Morden, head of Latin America strategy at Jefferies. In many ways, this is perhaps the most significant implication of a default.

If enough bondholders from one class of exchange bondholders agree, they have the right to "accelerate" their bonds after Argentina misses its July 30 payment. They could then pressure the government to pay the full amount of their discounted bonds quickly, Ms. Morden added. This could mean a payment of as much as $28.7 billion to those bondholders, according to estimates by JPMorgan.

"With acceleration, you know everyone has a gun," said Anna Gelpern, a law professor at Georgetown University. "The question is. Will they shoot?" But, she added, if Argentina agreed on a settlement with the holdouts, that could prompt lawsuits from exchange bondholders seeking the same terms. In that case, she said, "You don't know if there is a gun, but if there is, it is a bazooka."

Peter Eavis contributed reporting.

A version of this article appears in print on 07/30/2014, on page B1 of the NewYork edition with the headline: As Talks Falter, Bond Default by Argentina Appears Likely.

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DealBook: As Talks Falter, Bond Default by Argentina Appears Likely

Photo Graffiti in Buenos Aires says, "No to the payment of the debt." Hedge funds have won court victories demanding full payment on the bonds.Credit Marcos Brindicci/Reuters

Updated, 6:38 a.m. | Barring a last-minute deal, Argentina will default on billions of dollars of bonds on Wednesday.

It would be Argentina's second default in 13 years. But unlike the last time, when scores of unhappy Argentines took to the street as unemployment rose to 25 percent and inflation soared, this default would look decidedly different.

Argentina's equity, bond and currency markets, which have been volatile in recent days, would certainly feel a jolt. The government and Argentine companies, which have been largely locked out of global markets since the last default in 2001, would find it even harder to raise money. And the economy, which has struggled with stagflation for years, would most likely slow further.

But the reaction will probably be muted because this default is not a surprise.

"This is kind of a chronicle of a default foretold," said Arturo Porzecanski, director of the international economic relations program at American University, referring to the novella by the Colombian writer Gabriel García Márquez, "Chronicle of a Death Foretold."

Photo "Enough vultures, Argentina united for a national cause" reads the sign in Buenos Aires.Credit Enrique Marcarian/Reuters

A default has been in the making since a group of New York hedge funds gained significant victories in American courts, where they are demanding that Argentina pay them in full on government bonds that defaulted in 2001.

As in Mr. García Márquez's books, the hedge funds' battle against Argentina is full of unusual twists.

In a pivotal ruling, Judge Thomas P. Griesa of Federal District Court in Manhattan said that Argentina could not continue to make regular payments on its main class of bonds — whose investors had agreed to accept a lower amount than they were owed — without paying the hedge funds. A payment is scheduled for the main class of bondholders on Wednesday. Argentina, however, has insisted that it will not cave into the demands of the hedge funds, which it has called vultures.

"It would be a shocking surprise," Mr. Porzecanski said, "if Argentina pulled out their pocketbook and paid" the hedge funds.

But late on Tuesday night another unexpected twist occurred. A mediator appointed by Judge Griesa announced that Argentina's negotiators, led by the country's economy minister, Axel Kicillof, had held discussions with representatives of the hedge funds for several hours. This was the first face-to-face meeting between the two sides under Daniel A. Pollack, the so-called special master who was appointed by the court in June. "There was a frank exchange of views and concerns," Mr. Pollack said in a statement. "The issues that divide the parties remain unresolved." He added that it was not clear whether the two sides would meet again on Wednesday.

Argentina's main class of bond holders are most likely hoping that the last-minute talks might lead to a breakthrough that will prevent a default on their bonds.

The country's predicament today is inextricably linked to its default in 2001 and events after it. Argentina's economy in 2001 was in dire straits after four years of recession. Unable to continue making payments on loans from foreign creditors, it was engulfed in debt before it declared a formal default.

Photo Hedge funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.Credit John Minchillo/Associated Press

Through two restructurings, the government eventually struck a deal with a majority of its bond investors, who are now called exchange bondholders because they exchanged their bonds for ones that were worth as little as a fourth of the value of the original securities. The hedge funds, known as the holdouts, declined to participate in the restructurings. Instead, the funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.

Judge Griesa's ruling in 2012 was later upheld by the United States Court of Appeals for the Second Circuit. Then in June, the United States Supreme Court refused to consider Argentina's last appeal. Judge Griesa gave Argentina a 30-day grace period on a scheduled June 30 payment to its main exchange bondholders.

In defiance of Judge Griesa's ruling, Argentina in June deposited $539 million into the Bank of New York Mellon, the trustee handling the bond payments, in an attempt to meet its exchange bond payment.

But Judge Griesa ruled that if Bank of New York Mellon made the payment, it would be in contempt of court.

Argentina has also asked the judge for a stay on his 2012 ruling, arguing that a delay would help it to negotiate a deal. On Tuesday, a group of investors of Argentina's euro-denominated exchange bonds urged the judge to issue an emergency stay on his ruling. But this is unlikely to be granted unless the holdouts request it, analysts said, or the court-appointed mediator, Daniel Pollack, recommends it.

Photo President Cristina Fernandez of Argentina at a trade summit in Caracas, Venezuela, on Tuesday.Credit Fernando Llano/Associated Press

In depositing the next installment of bond payments, the Argentine government has said that a default would not be its fault, a claim that has gained it political mileage. In a speech last week, the country's president, Cristina Fernández de Kirchner, conveyed this belief. "They're going to have to come up with a new name," she told an audience, referring to the word default, "a new term that reflects the fact that the debtor paid and someone blocked it."

Also last week, Judge Griesa ordered the Argentine delegation and the holdouts to meet with Mr. Pollack and talk "continuously" until an agreement was reached.

The response from Argentina was tepid; the delegation met twice with Mr. Pollack last week before returning home to Buenos Aires for the weekend to consult with the government.

Argentina's lack of enthusiasm had prompted some lawyers and analysts watching the case to question whether Argentina actually wants to avert a default.

"If you're picking a default as a rational avenue, it is because you have decided two things," said Marco E. Schnabl, a partner at Skadden, Arps, Slate, Meagher & Flom who is not directly involved in the case. "One, that picking a fight with the American legal system is politically convenient, and two, that the cost of settling with holdouts and everyone else who still has unpaid bonds is vastly greater than the costs of having to take a default."

But even with that thinking, the picture is anything but clear because some of the legal theories behind the contracts governing Argentina's debt have not been tested.

Argentina has said, for example, that if it agreed to a settlement, it could be on the line for as much as $15 billion in holdout investors' claims. That is because any deal would have to include all holdouts, even those not represented in the case.

In such a case, bondholders who exchanged their defaulted bonds for discounted ones might also have the right to demand the same compensation terms, according to a clause in the bond restructuring terms that expires at the end of this year.

On the other hand, if Argentina does default, it runs the risk of more lawsuits, said Siobhan Morden, head of Latin America strategy at Jefferies. In many ways, this is perhaps the most significant implication of a default.

If enough bondholders from one class of exchange bondholders agree, they have the right to "accelerate" their bonds after Argentina misses its July 30 payment. They could then pressure the government to pay the full amount of their discounted bonds quickly, Ms. Morden added. This could mean a payment of as much as $28.7 billion to those bondholders, according to estimates by JPMorgan.

"With acceleration, you know everyone has a gun," said Anna Gelpern, a law professor at Georgetown University. "The question is. Will they shoot?" But, she added, if Argentina agreed on a settlement with the holdouts, that could prompt lawsuits from exchange bondholders seeking the same terms. In that case, she said, "You don't know if there is a gun, but if there is, it is a bazooka."

Peter Eavis contributed reporting.

A version of this article appears in print on 07/30/2014, on page B1 of the NewYork edition with the headline: As Talks Falter, Bond Default by Argentina Appears Likely.

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