January 23, 2009
Thain Craps Out
The news that Thain "resigned" from Bank of America is remarkable for its underlying text. First, why did Thain, a very smart fellow, give silly ammunition to those who want to attack his decisions. By buying a 35,000 dollar toilet on the company's ticket he gives an open option to those who want he out to embarrass him publicly. He could buy the toilet for his home and no one would have bothered him. Second, and more important, where are the lawyers who drafted the acquisition agreement? Apparently, Merrill traders accumulated losses after the deal was signed and before it was closed. Moreover, Thain pain bonuses to workers after the deal was signed and days before it was closed. Any decent acquisition agreement would have given Bank of America veto rights over major Merrill decisions from signing to closing. Why did BofA not monitor Merrill trading or Merrill compensation practice during this period and exercise its contract rights? Finally, we will wait to hear about Thain's buyout agreement and wonder about the TARP payment conditions that limit severance payments. Correction: I have been instucted in the comments that a commode is not a toilet; it is used to hold a camber pot.
January 22, 2009
Delaware Cases: A New Line of LLC Cases
The last several years of Delaware business cases had many cases on predictable issues -- merger approvals, compensation, fiduciary duty, executive defense expense indemnification, and inspection procedure. The surprise was the heavy number of cases on contract theory and its application to LLCs. It is clear that Delaware is now seeking to establish a leading position in the country with a strong pro-contractual view on LLC operating agreements, buttressed significantly by a strong view on the limits of judges in rewriting and modifying contract obligations and language.
Is the UK Bankrupt? Lessons
Just as the problems in the UK foreshadowed ours in the late 20s, do the problems in the UK now foreshadow ours? There is a serious debate about whether the UK, as a country, is bankrupt. It has poured money into the Royal Bank of Scotland. The bank is still unsound, full of bad assets that have yet to be accurately priced, and the country owns 70 percent of the stock of the bank. We have poured money into financial institutions that are still unsound and seem willing to put more in. One of the authors of the bailouts, Geithner is the new Secretary of the Treasury, who admits to some past mistakes (not his apparently) and, promises to do it better in future bailout packages (and in his future tax returns). We now learn that Barney Frank, and others (Ohio, NC, and Ala.), have directed bailout money to banks in their constituency base -- no based on their health but based on their location. Of course politicians will do this -- their incentives to do this are overwhelming. At issue ought to be whether bailouts are futile and inherently misdirected given political incentives.
January 21, 2009
Tracing Bailout Money in the Banks: the Journalists are Asking the Wrong Question
It is good sport to call someone at the large banks that have received government bailout money and ask: "Were did the money go?" The right answer to a physical tracing question is "I do not know." It is the wrong question. Cash is fungible and not sensibly traceable physically. Cash used for one purpose frees up cash for another. The right question has to be "What did the bank do once it received the grants that it would not have done had it not received the grants?" Once asked this way the questioner would get a reasonable answer. Banks worried about capital reserves would be folly to lend more money in high- risk consumer or business markets, increasing capital reserve calculation problems; they sensible would buttress capital reserve ratios by holding the cash (or securities that count as cash) or using cash to pay off liabilities that count against the capital reserve. Why pillory banks for doing what is prudent in a down economy? They have be critizied for making excessive risky loans to "people who could not pay" and are now lending very, conservatively. If the the government wants more risky loan made, the government will have to do it (nationalizing a private bank to use as a conduit or using the Treasure dollars or the Fed's reserves).
Geithner Takes a Cue From Obama: "We Will Have a Plan"
Geithner's testimony at his confirmation hearings was priceless. He announced a "bold" plan (ie. "not incremental") on a "dramatic scale" that "hopefully" would come in the "next few weeks." The plan, when it appears, will fix a multitude of problems, tight credit, foreclosures, bank insolvency, international confidence in our markets. Asked for policy principles or details he demurred, agreeing amiably with any Congressperson that had a thought. "Yes, we are considering that...(fill in the blank)." No-one asked the obvious: "How can you describe a plan as "bold" and "dramatic" that has not yet to be formed and that is "hopefully" soon to appear? Sounds like trouble brewing.
Chrysler "Alliance" with Fiat: Giveaway Funded by the US?
Chrysler is selling 35 percent of itself and a warrant for another 20 percent to Fiat. The price? No Fiat cash. Fiat puts in technology and new products. The warrant strike price is set at a measly $25 million. The government must put in another $3 billion to make the deal work. So, in essence, the government is paying Fiat $3 billion to take 55 percent of the company and see is they can make a go of it with their new products. Do we believe Fiat will save Chrysler's American jobs?
New York Times Finds a Sugar Daddy
Carlos Slim loaned $250 million to the New York Times to keep it going, for now. It was not much of a deal. The note pays 14 percent (three percent is optional pay-in-kind junk) and comes with warrants, convertible into common (I assume they are out of the money but I do not know). Slim already owns 6.4 percent of Times common (the limited voting stuff), for which he paid $128 million -- it is now worth $58 million. The messages?? 1) The private market would not take 14 percent notes? Whew. The New York Times is in deep trouble. 2) Foreign investors are suckers. When foreign investors appear to buy American name brand assets -- the Empire State Building, Pebble Beach Gold Course, the NY Times - they, like 60 year old rich folks buying old muscle cars from the 60s at Barrett Jackson auctions, lose their bearings and pay too much -- for the hobby of it all. We will wait in vain for the financial columnists of the NY Times to comment. Gretchen, got a view?
January 20, 2009
BofA's Deal for Merrill Awash with Questions
Bank of American closed its purchase of Merrill Lynch on January 1 of this year. BofA shareholders voted to ratify the deal on Dec. 5 of last year. We now know facts that we did not know at the closing and that the shareholders of BofA did not know when they voted to ratify the deal. At some time in early December, the CEO of Bank of America knew that Merrill's debts were worse than he had anticipated when he priced the deal. Paulson and Bernanke urged him to close anyway and, apparently, offered government support. Traders and shareholders knew none of this until mid-January. This is lawsuit heaven. The government will not get sued, of course, but Bank of America will -- for federal securities act violations and for breach of fiduciary duty. But the government's role will be an odd one; with government supporting confidentiality and the SEC floating around the lawsuits of lack of disclosure we will see some very fancy high stepping. This will take years to play out but it is well worth the watch. Once again Paulson comes up short in the crunch.