Brokedown Palace: The Undermining of Property Rights in America

Anonymous's picture

Zero Hedge recently highlighted the TPG raid on CDOs.  This action puts into focus the alarming trend of the undermining of creditor rights.  When even the Courts are in on the gang bang, what hope do we have?

The battlefield: CDOs, mortgages, corporate debt
The players: hedge funds, management teams, elected officials, lobbyists, unions
The weapons: loopholes, new precedents, bankruptcy court, political pressure

The Chrysler debacle was stink enough, but the trend of collateral tampering is an outright stench today.  Property rights have allowed the U.S. to flourish.  They are bedrock of our economy.  They allow facilitate the spread of credit and economic growth that some other countries cannot match.
In Chrysler we saw legal precedent created where a *secured creditor* received less on its contracted collateral than unsecured creditors.  In one fell swoop, we saw fiduciaries abscond, “disinterested” advisors incented to rubber-stamp, and the Courts join in on the rubber stamping party (more on this later).  Most importantly, we witnessed a government that not only sanctioned this egregious behavior but astonishingly pushed for it.  The Government actually labeled those who filed objections to the deal as “terrorists” (you can’t make this up).  The Government actually vetoed Chrysler's offer to give secured creditors additional consideration.  Our lawmakers were so involved that Chrysler's own attorneys tried to block discovery of their communications with Washington (the attorney’s clients were Chrysler, not Washington).  We must never forget Obama’s alleged threat of using the “White House Press Core” to weaken what little opposition remained (who exactly were the terrorists?).

Chrysler is not the only company to pervert Chapter 11 for the purpose of disenfranchising creditors.  The briefs filed in Charter Communications are full of shenanigans.  The DIP roll-up drive-bys of 2009 rewarded handsomely those with the means to literally 'stick up' a Court.  Case in point: Lyondell.  Ask yourself, does a company with $27BN of assets really only realize at the last minute it must file for bankruptcy?  Lyondell was amazingly such a company.  And immediately after filing, Lyondell's equity owners, cavorting with a select group of creditors, proposed a DIP Roll-up as the only means of survival.  A DIP Roll-up allows stakeholders to provide critical new money financing -- in exchange for I) great terms on that financing, and II) swapping their existing claims for new super-priority claims.  What the equity owners of Lyondell did, however, was to only allow a club of creditors participate (those invited to the party).  Creditors not party to the deal get smooshed (their claims become subordinated to the new claims which they previously were equal to).  Creditors not only couldn’t participate in the financing, they barely had a chance to object to it – that is quickly the shakedown went down.  The original stakeholders clamor, “Mr. Judge, approve this financing, or be the Judge to liquidate the Company and terminate thousands of American jobs!” They might as well have worn t-shirts emblazoned “Stick'em up".

The stakeholders not invited to the party were supposed to have their own gun.  Their gun was supposed to be the Judge.  The Judge, who could have said, "wait a second”, “can you breakdown in detail where the all the money is going”, “can you explain in detail why this money can’t go out at the end of the week”, or ideally “can you try to structure this so more creditors can participate in this deal?”.   Unfortunately, these stakeholders were duped… their gun was a squirt gun.  Their gun was the Southern District of NY.

Is there any secret why a majority of Chapter 11 cases are filed in the Southern District of NY?  Equity owners and management choose their jurisdiction to be advantageous to them, and the Southern District has a track record of landing the big cases.  Courts compete for the big cases.  Chryslers own lawyers expressed concern at how quickly their Chrysler deal was proceeding in the Southern District of NY.  Creditors are lost in the shuffle.  If the Courts are not focused on protecting creditor rights, who is actually looking out for them?  We know it is not Washington.

That a mortgage "cram down" bill was even considered in D.C. is another clear attack on property rights by lawmakers.  Optimists may say the bill did not past.  Cynics would it was a narrow vote.  Realists should say even 1 vote for the bill is too much (we had 45!).  I can only imagine a world where you lent your friend $10 to buy a six-pack of beer and a Senator reduces it to $5 and then grabs a beer with my friend.  45 Senators look forward to that day.

The recent news of TPG's efforts to strip CDO collateral is just another data point in this alarming trend.  TPG was involved in DIP roll-up discussions of its own in the Aleris bankruptcy.  This is not to single out TPG as many hedge funds have invited themselves to the party (e.g. Apollo has been a major player in the Apollo and Lyondell bankruptcies).

Who will put an end to this trend?  The Courts are compromised.  Hedge funds are capitalizing on the trend.  Lawmakers are legitimizing the trend (strengthening their political base in the process).  The populace still expects to get its money back in Chrysler.

There is one upcoming case that must be closely watched.  The Supreme Court has yet to receive all briefs related to the Chrysler shamsaction.  They previously declined in granting a stay of the deal, but an actual review is still possible.  Let us pray they have the wherewithal to grant a comprehensive review of the transaction.  A review would not only address the integrity of the transaction but the integrity of the court system itself.

Let us also pray that future creditors of the U.S. don’t become wise to creditor gang bang.  On second thought, screw’em!

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Gwynplaine's picture
Gwynplaine (not verified) Oct 18, 2009 10:14 AM

"The Government actually labeled those who filed objects to the deal as “terrorists” (you can’t make this up)."   Who actually said that these people were terrorists?  I'd like to quote your article on this, but I feel that no one would believe me without more specifics.   Could you cite a source on the terrorists remark?

Client 9's picture
Client 9 (not verified) Gwynplaine Oct 18, 2009 10:24 AM 

This is just one of many references to the "terrorist" comment.  The two infamous quotes cited in this article are:

"We’ve protected your management and board. And now you’re telling me to bend over to a terrorist like Lauria?"  (Lauria is Tom Lauria, the attorney representing the opposing Lenders).  Clearly the quote in its entirety is even more damning!

"It’s over…I am not talking to you"  (Government's response to Company potentially being able to give Lenders more value)

Gwynplaine's picture
Gwynplaine (not verified) Client 9 Oct 18, 2009 11:57 AM

Thanks Client9.

The term "terrorism" is on its way to becoming what "treason" was in the days of the American colonies (i.e. applied liberally to any sign of active dissent.)

AN0NYM0US's picture

check out Simon Johnson's latest  (I posted on a different thread) but for convenience here's the link:

Anonymous's picture

king george III called george washington and his merry crew,


isn't that special? isn't it interesting how these adjective nouns keep popping up from time to time. does anyone notice? does anyone really care? rule of law???? we have no rule of law? haven't had common law since the 1930's thanks to FDR....while johnny was fighting another unnecessary war, our property rights were being taken away and nobody seemed to care then either. too busy being "free" . well all of this sleeping by the watchmen on the walls for the last hundred years is now starting to really come back on us and in our face and again, nobody seems to care.......what they used to do, by being sneaky, they now do right in plain sight and they just don't care what we remedy in courts, no redress in congress....what country is this i live in now?

SWRichmond's picture

The sad and disjointed remnants of the old republic are now being shredded on so many fronts and at such a frenetic pace that resistance is almost futile, and that is undoubtedly the whole idea.  This government is operating like a Blitzkrieg; while it has "accomplished" very little legislatively, it has utilized diktat to great advantage.

spekulatn's picture

OUTFRIGGINSTANDING stuff here, Client 9.


. . .'s picture

Client 9, you are wrong on multiple points.

C9:  Zero Hedge recently highlighted the TPG raid on CDOs.  This action puts into focus the alarming trend of the undermining of creditor rights.  When even the Courts are in on the gang bang, what hope do we have?



You are talking nonsense on multiple counts, except with respect to Chrysler, and you are missing the mortgage mod safe harbor the big banks rammed through Congress to hurt creditors.

Regarding TPG, the senior tranche holders invested in preferred EQUITY, not DEBT.  They reached for extra yield by taking the extra risk of giving up the legal right to sue for fraudulent conveyance.

Regarding Lyondel, if you are griping for the unsecured bondholders getting a worse deal than the secured creditors.  Once again, they reached for extra yield by taking a worse position in the capital structure.  And the judge is letting them sue over the 2007 LBO, so their rights -- low as they are in the capital structure -- are being respected.

Regarding Chrysler, agreed, Rattner seemed to bend the bankruptcy rules beyond reason.

Regarding legislation to allow cramdown legislation on residential mortgages, creditors have no gripe here.  In 2005 at the end of a 25 year credit boom, they changed the rules to make consumer bankruptcy much better for creditors and much worse for consumers.  If anyone changed the rules in the middle of the game, it was the big banks, not the left-wing democrats.  The banks overreached, and now they are going to face the consequences of a backlash.

If you want to gripe, gripe about the big banks ramming through mortgage mod legislation to give their servicer subsidiaries freedom from lawsuits.  This lets them screw over investors in senior mortgages (which the big banks mostly do NOT own), in order to help junior mortgages (which the big banks mostly DO own).  Here again though, the bondholders are partly to blame.  The big banks publicly lobbied for this legislation, and the funds sat on their asses and let it move along.  And by the time they decided to fight, it was too late.  The banks had drunk their milkshake.


Client 9's picture
Client 9 (not verified) . . . Oct 18, 2009 12:58 PM

Regarding TPG, one can peruse the more in-depth discussion at:   To quote Tyler Durden, "In essence TPG is providing tip value to the decision makers who don't care either way what the fate of the asset below above them is, so long as they get even minor compensation for an investment that had been previously considered a total loss. In this light, it is easy to see why holders of higher-rated CDO tranches should be very concerned about the confiscation of their collateral at bargain basement prices".  Your fraudulent conveyance question/comment in that post is a great one and warrants further investigation IMHO.

Regarding Lyondell, no I was not referring to unsecured bondholders.  I was referring to the secured lenders that were formerly pari-passu with debt that was rolled-up.  Lyondell was the first user of a partial roll-up. 

Regarding Chrysler, glad you agree.

Regarding pro-creditor legislation which I failed to list in the article, I appreciate your additions of any, and the many, which I failed to list.

Regarding anti-creditor legislation which I failed to list the in article, I am appreciative of your contributions of any, and the many, which I failed to list, especially a relevant one as you so mentioned.

Another example which I failed to mention are the cases where holding companies (with real assets) were given deminimus value at the hands of a pre-petition termsheet to which they were not a party to, and only upon expensive litigation were they able to get a seat at the table.  Where were their fiduciaries?  What were advisors thinking?  Are management teams oblivious or in on the pie-cutting party?  A recent bankruptcy case where this comes to mind is the Six Flags bankruptcy, which is still ongoing.

KeyserSöze's picture

I appreciate your article and the manner in which you handled your response. 

Your last comment above was right on.  More specifically as it relates to the pending CRE loan rolls and Bankruptcy Remote status  which served as HUGE cover to "secured" lender status in aggregated loan portfolios in which parent entities often have different funding sources for various types of flow through asset classes.  More specifically, many funds, PE firms and private CRE aggregated portfolio's with a variety of funding sources who successfully lent on cash flowing assets are now legally exposed to other asset classes and court mandated workouts that once seemed inconceivable. I don't think people fundamentally realize what a shit pickle this will cause in the next few years nor the truely amazing precedent that was set.  The pension funds that have allocated hsitoric amounts to the CRE sector are going to have their heads handed to them.

Thanks for you comments I hope you track this and can report on it later. Much appreciated. +10






ZerOhead's picture

I vote in on the pie-cutting party...

Good job.

McGriffen's picture

+1 on the TPG comments.  More information is needed, and distinctions drawn between the preferred equity TRUPs and the common analogous ABS/MBS backed CDO markets.  Per chance, it is not completely apples/apples.

To my knowledge, senior class holders in most ABS deals typically control voting rights (which as you highlight, isn't always brought to bear).

Anonymous's picture

The reason property "rights" are being undermined is something I've long pointed out on this site: its advocates have not done their legal homework. That is, they haven't shown why "property" is entitled to a level of scrutiny above "minimum" scrutiny. To do that, they have to pass the West Virginia v. Barnette test. They have to show that property is an "important" fact, which means that it is:

1. a fact of human experience
2. which history demonstrates
3. is unaffected by attempts to affect it.

In fact, Scalia and his crew of "property rights" advocates are such incompetent advocates of "property" that all they can come up with is that property is "natural law." Unfortunately, that concept is not cognizable under Supreme Court jurisprudence.

Which reveals something about "property rights" advocates. They are not rights advocates. Their notion of property is that it is an indicium of POWER. What they really believe in is power--power as the means of power, power as the end of power, power for the sake of power, power as the definition of power, power as the proof of power, power as both its assumption and its conclusion. Power power power.

This psychosis is why courts are frightened out of raising the level of scrutiny for "property." They let the fox in the hen house once before: his name was Hitler. Indeed, while researching my book The Eminent Domain Revolt (which actually brought me into contact with some of these "property rights" clowns, such as the Institute for Justice and the Scaife Foundation), I realized that they hadn't even decided whether property is a fact or a doctrine!!

For those "property rights" advocates who are not lawyers, my advice is: get yourselves some new lawyers. Your current lawyers stink.

I'm not averse to raising the level of scrutiny for property, if you can meet the Barnette test. But property rights advocates are so hysterical, thuggish and ignorant, that they don't even know how to advance their own agenda.

You guys are pathetic scum.

ZerOhead's picture

Good post Mr. Anonynous.

We do appreciate additional deep insights such as yours... really. So get an avatar and straighten us out where needed.

P.S. All my ex-girlfriends have already informed me that I am pathetic scum so you are clearly wasting your valuable time revisting that thorny issue.   :-) 

Anonymous's picture

It's not a thorny issue. It's not an issue AT ALL. None of these ridiculously bad property rights advocates have managed to make a dent in the law. Check out the record of your boy Scalia. Quit whining and learn the law:

1 The Measure of a Justice: Justice Scalia and the Faltering of the Property Rights Movement within the U.S. Supreme Court
Hastings Law Journal, Vol. 57, No. 4, Winter 2006, Georgetown Public Law Research Paper No. 847666
Richard James Lazarus
Georgetown University Law Center
Date Posted: November 15, 2005
Last Revised: December 12, 2005
Accepted Paper Series

ZerOhead's picture

Always thought Scalia was a big advocate of property rights...

Sorry for the irritation... learning process to begin we'll see how it goes... thanks.

Anonymous's picture

"You guys are pathetic scum."

Oh snap, you'd think it was someone from ZH that gave your book it's lone Amazon review. Having read it (the review - I'm not a masochist), I see why your sloppy research earned you a generous TWO STARS. Looking on the bright side, you have lots of kindling for this winter!

AN0NYM0US's picture

That by chance wouldn't be you Mr. RysKamp, would it?  It's that final sentence of yours that tipped me off.  I understand why you are posting under the Anon Byline.

Anonymous's picture

You sir, are a Pudding Head. Clearly it is you who has not done his homework vis-a-vis the Supreme Court:
You actually think they are at all interested in upholding laws of this country. HA HA HA.

Anonymous's picture

the supreme court already destroyed property rights in kelo....everything else is just a mopping up operation....judges must be lynched, politicians burned, and the plutocrats guillotined....the laws are only for the little is time for the american revolution 2.0.....

Anonymous's picture

This ridiculous comment shows how little you know about the law. Bond dealers LOVED Kelo, and they have plenty of property. Ask Bill Gross!!

Bond dealers set the policy, buy the politicians to enforce it, sell the bonds and manage the proceeds.

Maybe you just don't have as much "property" as they do--but you CLEARLY don't know the law AT ALL.

Typical property rights advocate--ignorant, muddleheaded, fiendish, utterly ridiculous and clownish.

Anonymous's picture

This article tips into what really went wrong with the USA over the last 35 years, even more than the economic gangsterism - the crooked US courts and lawyers, most crooked of any developed nation in the world.

There is 'shock' because those who don't know US courts, have accepted the false media cover for them. - But the judges and lawyers are the real core US mafia, the real praetorian guard of the oligarchs. You can't even use your own name to write about these things.

Upper classes haven't been paying attention to crooked US courts, because most court corruption has historically been directed at jailing innocent minorities and political victims, along with robbing and defrauding lower-class people in divorce and other cases.

But now the US courts are going big-time into asset confiscation, and screwing upper-middle class and even upper class people who are not insiders. ... So finally, at last the upper crust is waking up, to find the courts are not like in Hollywood movies or in the corporate media articles -- something that American minorities and poor have known for decades. And it's too late to fix the system from within.

You can see the corruption just from the stats: Other countries imprison 1 out of every 700 to 1000 people - in the US it's 1 out of 140. - The US has around 2.4 million prisoners, 1 out every 45 working-age US males are behind bars, right now. That's 25 % of all the prisoners in the world, for a country with 5 % of the population. And the US still has tons of crime other nations don't - Hundreds of thousands of those US prisoners are innocent, or behind bars for trivia.

The corrupt courts have been the biggest-kept secret of the US corrupt media. The courts often immediately disbar or jail lawyers who try to fight the corruption, and the media slanders and smears critics of the courts, whom no lawyer will defend. Bloggers on this topic are threatened and blogs shut down.

Here's the story of a Harvard classmate of Ben Bernanke, critic of the US court system, political refugee from the US in Europe after US fed judges threatened to murder him - note the massive corporate media smear attacks, the US ordering Google to block his websites so people can't find his articles on US court corruption, or his self-defence against the media smear campaigns:

Yankee's picture

Are these jail birds counted as unemployeed?

I doubt you've been a businessperson - never been sued - cause corrupt or not, courts fuck up your day for days on end - you don't have to be poor to know this.

There are all kinds of refugees like Polanski and Bernake's friend outside.

Yankee's picture

Are these jail birds counted as unemployeed?

I doubt you've been a businessperson - never been sued - cause corrupt or not, courts fuck up your day for days on end - you don't have to be poor to know this.

There are all kinds of refugees like Polanski and Bernake's friend outside.

Careless Whisper's picture

Client 9, I know Eliot, Eliot is a friend of mine, and Client 9, you're no Eliot!

With regard to your analysis of mortgage "cram downs", you neglect to mention all the facts. Mortgage cram downs have been around for a long time for commercial properties and residential properties that are second, third, and fourth homes. The exception has been primary residences which do not allow the bankruptcy courts to impose a cram down. This was done, of course, at the request of bankstas.

The mortgagee almost always takes a loss in a foreclosure. A cram down simply imposes a loss sooner and allows the homeowner the opportunity to stay in the home. It also acts as a "circuit breaker" to the prices resulting from a distressed sale by the bank.

Banks are well aware of cram downs in commercial properties and it hasn't stopped them from lending. The cram downs from bankruptcy in commercial properties and second homes are simply a risk that is factored in to the loan -- no different than the risk of foreclosure.

The bankstas prefer to keep the defaulted mortgages on their books at fantasy prices that the cram down would uncover sooner rather than later.

Anonymous's picture

Opposing the cram down on the the 1st mortgage is another example of F-ing the little guy. Little guys can't defend their rights against Banking lobbyists like the the wealthier that have a 2nd and 3rd home and boats etc. Just another example of why we will eventullay have a "French Stlye Revolution" in this country someday. Only so much you can extract from the lower classes before you have a Bolshevik revolution. On second thought I think I do support Obama, let's redistribute the wealth. Look at the current wealthy and their lackys the US congress, capitalism had it chance an failed.

Comrade Fuck the Whole system.

Just kind of kidding. Where is the America of Justice and Property rights. WTF is with having any scrutiny test. Private property rights are F-ing protected in the Constitution, last I heard they were NOT open to interpretation.

I think I might emmigrate to China, I hear they still defend those who can't defend themselves.

Anonymous's picture

WILLIAM BLACK: It’s one of the proofs that the real economy and the finance world have been completely unhinged. Finance is supposed to exist for only one purpose: to make the real economy work better. But now finance simply works for finance, and in particular for the elites within finance. And they harm the real economy on a regular basis, and periodically, they come close to destroying the real economy.

Anonymous's picture

"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"

Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. "Born faced a formidable struggle pushing for regulation at a time when the stock market was booming," Kirk says. "Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves."

Summers: Financial Train Wrecks Mark A Generation
By Laura Conaway

If you had any doubt that this is the Recession Generation, just take it from Larry Summers. The White House economic adviser is scheduled to address the Economist's Buttonwood Gathering in New York today. The White House sent over Summers' prepared remarks, including this bit (links added):

Think about it. The last generation has seen:
•The Latin American debt crisis
•The 1987 stock market crash
•The savings and loan debacle
•The Mexican financial crisis
•The Asian financial crisis
•The collapse of LTCM
•The bursting of the dot-com bubble
•And now the financial crisis that began in 2007.

One crisis every three years.
Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform.
In the prepared remarks, Summers goes on to praise the House Financial Services Committee for moving to regulate derivatives and makes no mention of the exemption for 98 percent of banks from independent exams by a new consumer protection agency.

Isn't this wonderful Larry Summers calling for new Bank Regulation. Who the F--K does he think he is kidding.

Anonymous's picture

Hey Client 9,

What part of "government backed fractional reserve banking cartel in a monopoly money" sounds like it should have any rights?

He who loots by government should not complain about being looted in turn.

What debt? There is no debt to be repaid. The purchasing power for fractional reserve loans is stolen from all money holders, including and especially the poor for banks, borrowers and the government.

Bankers are lucky their fraud and theft are protected by the government but if they wish to raise the stakes ...

Anonymous's picture

What part of secured creditor has anything to do with fractional reserve banking dumb ass. I don't care for insolvent banks still operating with taxpayer money in order to continue to fleece the same taxpayers but get F-in real, real people are getting F-d.

brodix's picture

Welcome to reality. 

The architects and contractors who build buildings and the demolition crews that take them down have different goals and operate by different standards. The fact is that there is an enormous bubble of notational wealth in this country and as it comes down, it is going to shake the foundations of civil society. In fact, society as we know it is the surface of this bubble.

Anonymous's picture

Interesting comments, can you expand on this?

Anonymous's picture

well let's see. its been a few months now. maybe its about time for another alex jones 250,000 dollar money bomb. i mean come on , the man has expenses living in that expensive house in that gated community.....

Anonymous's picture

"I can only imagine a world where you lent your friend $10 to buy a six-pack of beer and a Senator reduces it to $5 and then grabs a beer with my friend. 45 Senators look forward to that day."

Umm... what if that 6 pack was worth $5 only 5 years ago, but through systemic mainstream media goading and financial industry rhetoric rose to $10 beyond all reason and fundamental merit ?

Are you suggesting that the only tool with which to run an economy is to never depreciate anything, but for all boats to rise on any tide of financial sewerage?

Does anyone have that picture of a zimbabwe $100 trillion note handy?

Anonymous's picture

credit card banks, since about 1987 have been securitizing their credit card receivables. according to FASB 140, this process is tantamount to these banks selling these assets for cash to investors. yet when joe blow defaults on their credit card account, they are sued by the creditor as if the creditor still has possession of these assets when they do not. in law, this is becoming a hot topic now, as more and more people realize that the banks do not have standing to sue because technically they have sold these receivables to investors.

Anonymous's picture

Aren't the banks still representing the interest of the investor just a mortgage bank/servicer that also sold the loan, sues for forclosure and deficiency judgment etc?

Anonymous's picture

well you are talking about secured , vs. unsecured...
big difference in that respect, however it is very similar in the securitization process. the bank, in a mortgage lawsuit, if it has sold the loan through securitization has to be able to prove they have standing. in some states, they must show the original note to prove holder in due course vis a vis, the uniform commericial code. the question is do they still have the right to sue, if they indeed sold the loan to someone else and got funds for this transaction. same thing with credit card banks. already in a few actions, bankruptcy creditors have been unable to collect from the defaulting bank, on credit card receivables that the defendant bank has "sold" to credit card master trust etc.....if, and this is a big if, it ever is proven that the bank does not have standing to sue over default in a credit card case, this will be the shot heard around the world for all cases decided since the late 1980's. so one can assume that they would just as soon, keep that pandora's box closed as much as possible. one thing i cannot figure out, is this. why are these banks suing people who have no money, simply so they can get a default judgement. what good is a default judgement if the person has no money and perhaps never will? me thinks they are playing some kind of balance sheet asset game to massage the capitalization numbers.

Anonymous's picture

Thanks for the clarification. This would be very interesting to pay attention to.