Offering Peace and Joy
Heading into the final weekend before Christmas we’ll take a brief hiatus from the economy and markets. We do so, however, with intent and purpose. Our principal objective is to offer peace and joy as you go about your merry way.
Unfortunately, Santa isn’t coming this year. Right after losing his behind in cryptos, he went all in with everything he had left on FANG stocks, margined up to his eyebrows. He trusted his well-worn ability to deliver the traditional “Santa Claus rally”, but was waylaid by the dollar-dissolving vampire bat Ptenochirus Iagori Powelli hiding in a snowdrift. He needs some time off to forget. [PT]
Who wants to contemplate the unemployment rate or the consumer price index while singing Silent Night at a candlelight Christmas Eve service? Who wants to chat about Fed policy or what exactly composes a high yield ETF over an Old Fashioned with their father-in-law?
A word to the wise: politics and religion at the dinner table should always be eschewed for NCAA football and new fishing gear. You may dislike Nick Saban. But everyone can agree that Tua Tagovailoa was outright robbed of the Heisman Trophy. Similarly, everyone can agree that freshwater fishing takes much greater skill than deep sea fishing.
Tua is taking the Heismann loss in stride. [PT]
But we won’t stop with just two innocuous conversation topics. We’ll go several steps further and do you a grand favor. For everyone likes a story about big time blunders involving possible improprieties. This is especially so when the characters travel within select inner circles, and the lines between heroes and villains are blurred beyond all recognition.
To appreciate the richness of today’s anecdotes several clarifications are in order. Namely, where the players come from and where they have traveled. To aid in this effort, we have drawn heavily upon a recent Bloomberg piece to pull together the following historical facts.
Sears chairman Eddie Lampert and Cyrus founder Stephen Freidheim both graduated from Yale University in the mid-1980s with degrees in economics. Over the years their paths have crossed like a Gordian Knot.
Stephen Freidheim has a kid brother, Scott Freidheim. Scott worked for Lehman Brothers from 1991 until its ignoble collapse in 2008. Incidentally, he was part of CEO Dick “The Gorilla” Fuld’s inner circle at the time of Lehman’s demise.
Lampert was a client of Scott’s while Scott was at Lehman Brothers. Lampert, from what we can tell, attended Scott Freidheim’s and Isabelle Dufour’s wedding in 2008. Dufour is a French equestrienne with an MBA from Columbia Business School. Dufour’s also a venture capitalist.
Eddie Lampert, warrior chief of Sears (Woebuck) [PT]
Stephen and Scott are the sons of Cyrus Freidheim. Cyrus is a former Booz Allen Hamilton vice chairman. He is also the former CEO of Chiquita Brands International.
After Lehman Brothers vanished, Scott Freidheim worked at Lampert’s company. He even became executive vice president of operations at Sears before leaving to be CEO for Europe of Investcorp International, a company that places big bets for institutional and private Middle Eastern investors.
Scott’s big brother Stephen, the guy who attended Yale with Lampert, is a well-recognized distressed debt buff. He once started the credit arm at Och-Ziff Capital Management. Och-Ziff Capital Management has several connections with Lampert.
For example, Och-Ziff Capital Management was co-founded by Dan Och. Dan was an associate of Lampert’s when they were at Goldman Sachs in the 1990s. The Ziff brothers – Dirk, Edward, and Daniel – are the sons of the late American publisher William Bernard Ziff Jr. The brothers inherited the family fortune in 1994 and formed Ziff Brothers Investments. Ziff Brothers have, at times, been investors in Lampert’s hedge fund, ESL Investments.
Stephen Freidman’s middle name is Cyrus, after his father. Near the turn of the new millennium, Stephen spun off his Och-Ziff credit unit into his own entity, Och-Ziff Freidheim. Then, in 2004, that firm became Cyrus Capital Partners.
From hero to zero – Sears Holdings under Downhill Eddie’s management. Over time, Lampert became bizarrely obsessed with what turned into his worst investment ever. Instead of cutting it loose and living to fight another day, he kept throwing good money after bad until Sears reached the point of no return. [PT]
The takeaway from all this is that Eddie Lampert and Stephen Freidheim know all the secret handshakes and fraternal chants of Wall Street’s highest order. They’ve come up through the ranks together. They’ve done business together for decades.
Merry Christmas Eddie Lampert!
Eddie Lampert is a cunning fellow. He holds his cards close to the vest and plays to win. He also knows the ins and outs of high finance better than just about anyone. For an outsider and casual observer, like your lowly editor, how he goes about his business is indecipherable. This has been particularly so over his 15 year run as CEO of Sears – a run that came to an end in mid-October when Sears filed for bankruptcy.
Without question, Sears is a 20th century dinosaur. A relic of a prior age. Lampert’s attraction to Sears over the last decade and a half has been a source for conjecture and speculation. Guesses have ranged from asset stripping to ownership of its vast network of real estate to some undefined nostalgia. Perhaps Sears provides Lampert a vehicle for financial maneuvering. We just don’t know.
Whatever you do, never try to get praised to the rafters on a Business Week cover. It’s practically a death sentence. [PT]
But strangely, several weeks after Sears’ bankruptcy filing, Lampert enlisted Stephen Freidheim and the resources of Cyrus Capital Partners to help buy Sears out of bankruptcy court. Apparently, Cyrus held positions in both debt and equity of Sears as it approached bankruptcy. Cyrus also apparently sold massive amounts of credit default swaps (CDS), wagering that Sears would keep paying off its debt.
After the bankruptcy, things went sideways. According to the Daily Herald:
“At one point, for instance, rival CDS factions battled over an unlikely prize: obscure Sears notes that are virtually worthless on their own. But those notes, it turns out, could hold the key to the insurance-like wagers in the CDS market. So Cyrus ended up paying $82.5 million to Sears to keep the debt from falling into the hands of funds on the other side of its trade.
“The deal handed Sears $82.5 million of cash just as the crucial holiday shopping season was getting underway. As part of the sale to Cyrus, Sears agreed not to auction any more of the notes that are so crucial to the CDS trades.”
Shenanigans in CDS land. 5 year credit default swaps on Sears debt in wild gyrations as Cyrus (friends of Eddie) are battling it out with other Wall Street punters over who gets to hold the underlying debt. The attempt to avoid a payday for CDS holders by buying up the debt did not sit well with the bankruptcy court. Oddly enough, bonus payments for Sears’ managers did. [PT]
No harm no foul, right? Wrong!
Yesterday [Thursday], Judge Robert Drain of the U.S. Bankruptcy Court in White Plains, New York, said, as reported by the Wall Street Journal, that he would consider unwinding the sale of the Sears notes that had been made to Cyrus.
According to the aptly named Drain, “the $82.5 million bankruptcy sale didn’t follow proper procedure and may have unfairly disadvantaged investors who bought insurance on the company’s debt.”
In other words, Drain is calling foul on Lampert’s and Freidheim’s secret handshake. Where this all leads is still uncertain; however, Cyrus could be left holding the bag. But in the meantime it is not all bad for Sears executives. Last week Drain signed off on Sears’ request to pay up to $25.3 million in bonuses to top Sears executives.
Merry Christmas Eddie Lampert!
Eddie’s bonus was not enough to cheer up the Sears Santa, who is suffering from a lack of customers. [PT]