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Friday, April 10, 2009

Bailouts may lead to fiduciary troubles

Aaa The federal bailouts of General Motors, Chrysler, and various banks may raise some interesting questions of fiduciary duties. The Wall Street Journal is reporting today that the federal government is pressuring the automakers to reach deals with bondholders before the feds put the companies into managed bankruptcies. The Treasury is offering creditors 15 cents on the dollar, far less than the 70 cents some senior lenders think they would get in bankruptcy.

Aaa What’s interesting is that four TARP-funded banks are among GM’s biggest creditors. Among them, J.P. Morgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley own $4.3 billion of GM debt. Since taxpayers are on both sides of that transaction, it may not matter much to the public how much GM money gets transferred over to the TARP-funded banks. After all, if the banks get more money from GM, they’ll need less from Uncle Sam; if they get take less money, GM will need less federal money.

But while it probably makes little difference to taxpayers, it makes a huge difference to the shareholders of the banks and the automakers. The four banks’ shareholders, chief among whom is billionaire Warren Buffett, might get $645 million if they took the Treasury offer, but as much as $3 billion if they stick through bankruptcy.

Which leads to the fiduciary duty questions. The GM and Chrysler boards of directors owe fiduciary duties to their companies. But companies that approach insolvency also can acquire fiduciary duties to creditors.  So the GM and Chrysler directors will have to walk a fine line; helping the feds to force a bad deal on creditors might trigger fiduciary claims by creditors.

Meanwhile, the boards of the four TARP-funded banks have their own fiduciary duties. They’re obliged to act in their interests of their own institutions, and that generally means they should try to maximize the amount of money they get out of the car companies. If the banks let the feds talk them into taking less than they otherwise would have received, they may face their own fiduciary duty claims from shareholders.  Stay tuned for how this plays out.

[Frank Snyder]

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