Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Rules of Law Apply to Indentures as Well as Torture

May 3, 2009
2 Comments

Harvard Law School Professor Mark Roe made some extremely thoughtful observations in a Friday “Op Ed” piece in the Wall Street Journal (“A Chrysler Bankruptcy Won’t Be Quick”). Central to his discussion are the following key questions:

• Are Chrysler’s secured lenders receiving fair value for their claims as is their legal right in bankruptcy?
• Was the 70% lender vote to accept $.32 on the dollar valid or was it coercively tainted by government influence on banks who had received TARP funds? The law requires a 2/3 vote of secured creditors to accept a settlement. TARP banks make up the vast preponderance of the lenders who accepted the govenment’s proposal. Non-TARP lenders can reasonably ask if TARP lenders would have voted to accept if the government did not have an ability to influence their operations.

Professor Roe makes it clear that there is a reasonable basis for lenders to resist the settlement “mandated” by the Obama Administration. If so, creditor claims may make the final outcome less than clear and the process long and contentious.

What is not said but also must be considered is the generally heavy hand of the government to obviate the contractual rights of secure lenders. This does not begin to address the issue of unions gaining majority control of the Company.

The overall process raises significant and pernicious issues for our national economic future. If lenders rights are not protected, the appetite for U.S. corporate debt will diminish significantly. This will have severe adverse implications on economic growth, employment and our national standard of living. We have already seen how unilateral government interference has caused a significant measure of investor reluctance to play in TALF programs to buy “Toxic Loans”. The Chrysler bankruptcy could make matters worse. Fears of government intervention against indenture terms will not necessarily be reduced by higher interest rates, though higher rates will be one possible outcome. They will more than likely result in reduced lending until fears abate. The government will find that it has a hard time forcing lending by any institution that it does not control (ie foreign banks etc). If the over arching goal of Treasury policy is to get credit flowing, the government’s role in Chrysler is a major step backward.

Just as the American government was wrong in condoning torture against the laws of the nation and the civilized world, so too are actions which disregard freely negotiated loan terms which are critical to financing American industry. If we learned anything from the disastrous policies of the Bush administration, we need to understand and believe that our laws can’t be selectively followed or enforced.

http://online.wsj.com/article/SB124113528027275219.html


Assessing Krugman’s Take on Toxic Asset Plan

March 23, 2009
2 Comments

Regardless whether one agrees or disagrees with Paul Krugman’s op ed in today’s New York Times, it is hard to disagree with his agrgument that the the plan is largely a subsidization of banks and/or a low risk option for investors. What he fails to point out is that, because of his points, that it is a huge subsidy, banks ought to rush to sell as much as they can of their toxic paper. Without the low interest rate, non-recourse government loan (means that the government can’t go after the new investors for any more than the underlying assets), the assets would almost certainly sell at lower price levels. Krugman argues that this is a failure to recognize the loss. He probably is correct but such recognition won’t get capital flowing or move the process forward. This government/private investor investment is effectively another capital injection into the banks. What Krugman also fails to note is that the subsidy should help facilitate trading in the aftermarket for these assets, if for no other reasons than the fact that there will be an auction to determine value. If nothing else, and maybe only for today, the market seems to like the plan. This evidenced by a huge rally led by the financial sector. I am sure that even Prof Krugman agrees that it is hard to ‘fight the tape”.

http://www.nytimes.com/2009/03/23/opinion/23krugman.html?ref=opinion

http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/”>


About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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