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Brokedown Palace: The Undermining of Property Rights in America

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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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Sun, 10/18/2009 - 11:14 | Link to Comment Gwynplaine (not verified)
Sun, 10/18/2009 - 11:24 | Link to Comment Client 9 (not verified)
Sun, 10/18/2009 - 12:57 | Link to Comment Gwynplaine (not verified)
Sun, 10/18/2009 - 13:20 | Link to Comment AN0NYM0US
AN0NYM0US's picture

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

http://baselinescenario.com/2009/10/17/who-is-carlos-slim/

Sun, 10/18/2009 - 23:26 | Link to Comment Anonymous
Sun, 10/18/2009 - 12:31 | Link to Comment SWRichmond
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.

Sun, 10/18/2009 - 12:47 | Link to Comment spekulatn
spekulatn's picture

OUTFRIGGINSTANDING stuff here, Client 9.

"MARK IT ZERO,DUDE"

Sun, 10/18/2009 - 13:30 | Link to Comment . . .
. . .'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.

 

Sun, 10/18/2009 - 13:58 | Link to Comment Client 9 (not verified)
Sun, 10/18/2009 - 14:52 | Link to Comment KeyserSöze
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

 

 

 

 

 

Sun, 10/18/2009 - 17:44 | Link to Comment ZerOhead
ZerOhead's picture

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

Good job.

Sun, 10/18/2009 - 17:55 | Link to Comment McGriffen
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).

Sun, 10/18/2009 - 14:05 | Link to Comment Anonymous
Sun, 10/18/2009 - 17:51 | Link to Comment ZerOhead
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.   :-) 

Sun, 10/18/2009 - 22:14 | Link to Comment Anonymous
Mon, 10/19/2009 - 14:26 | Link to Comment ZerOhead
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.

Sun, 10/18/2009 - 18:04 | Link to Comment Anonymous
Sun, 10/18/2009 - 18:12 | Link to Comment AN0NYM0US
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.

Sun, 10/18/2009 - 21:17 | Link to Comment Anonymous
Sun, 10/18/2009 - 14:54 | Link to Comment Anonymous
Sun, 10/18/2009 - 22:17 | Link to Comment Anonymous
Sun, 10/18/2009 - 15:04 | Link to Comment Anonymous
Sun, 10/18/2009 - 21:35 | Link to Comment Yankee
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.

Sun, 10/18/2009 - 21:36 | Link to Comment Yankee
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.

Sun, 10/18/2009 - 15:41 | Link to Comment Careless Whisper
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.

Sun, 10/18/2009 - 23:59 | Link to Comment Anonymous
Mon, 10/19/2009 - 00:59 | Link to Comment Anonymous
Mon, 10/19/2009 - 01:14 | Link to Comment Anonymous
Sun, 10/18/2009 - 17:37 | Link to Comment Anonymous
Sun, 10/18/2009 - 23:47 | Link to Comment Anonymous
Sun, 10/18/2009 - 19:16 | Link to Comment brodix
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.

Mon, 10/19/2009 - 00:12 | Link to Comment Anonymous
Sun, 10/18/2009 - 19:17 | Link to Comment AN0NYM0US
Sun, 10/18/2009 - 23:28 | Link to Comment Anonymous
Sun, 10/18/2009 - 21:49 | Link to Comment Anonymous
Sun, 10/18/2009 - 23:39 | Link to Comment Anonymous
Mon, 10/19/2009 - 00:10 | Link to Comment Anonymous
Mon, 10/19/2009 - 01:13 | Link to Comment Anonymous
Tue, 10/20/2009 - 02:54 | Link to Comment Anonymous
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