Joining Microblogging World

I am going to try microblogging on Twitter (you can check me out at http://twitter.com/LDLoeb).

I consider this an opportunity to share shorter thoughts/ideas, while I will continue to use this blog to post more fully considered thoughts.

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Quick Update on My Last Post

In my last post, I noted that over 11 hours transpired after I had left a comment on the DealBook blog - and it was still "Awaiting Moderation."

After 24 hours, that comment, and one that I made about my post are now up.

From what I understand, many people that are involved with DealBook are on vacation. I guess my comment, and several others, fell through the cracks.

Just figured I'd provide an update.

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I Expect Better of The New York Times

7/8/09 1:30 PM Update

After 24 hours, my comment has been posted.

From what I understand, many people that are involved with DealBook are on vacation. I guess my comment, and several others, fell through the cracks.

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I don't know.

I grew up with The New York Times asserting itself as THE newspaper of record. And even though a decision was made to reduce the scope of "All the News That's Fit to Print," I continue to have great respect for the paper (and I've been a daily subscriber for longer than I can remember).

I was quite surprised, when they published an article last night (later picked by Felix Salmon), a version of which was also posted on their DealBook blog that discussed some of the specifics of Judge Gerber's GM decision, but referred to the wrong Lionel bankruptcy (Lionel, LLC).

As many readers know, the case that Judge Gerber was referring to involved Lionel Corporation, not Lionel, LLC. In re Lionel Corp. is the seminal case in relation to Section 363(b) sales (see page 3 of Section 363 Issues–Acquiring Troubled Companies and Assets (Part 1) from the American Law Institute / American Bar Association site for Continuing Legal Education and page 1651 [15th page in the pdf file] of AN EFFICIENCY MODEL OF SECTION 363(b) SALES from the Virginia Law Review). That Lionel case was decided in 1983.

Lionel has been discussed on many of the blogs discussing the appropriateness of using Section 363(b) for both Chrysler and GM. I mentioned it in this blog. Steve Jakubowski (who is representing five accident victims in GM) wrote in great detail on all the legal issues on his Bankruptcy Litigation Blog, including Lionel, in a series of posts here, here, and here (the second post discusses Lionel).

The case cited by the NY Times (I am pasting a copy of the original article at the bottom of this post) was from 2008.

I notified Michael de la Merced (whose Twitter commentary on the hearings was great reading) about the mistake after I read the article online at approximately 12:00 AM on Tuesday morning. Mr. de la Merced was listed as a contributor to the article. He wrote back (around 9:00 AM Tuesday morning) "Yikes! Apologies for that, Larry. Thanks for the link to your post." Unfortunately, he apparently was unable to correct the error (by the way, I strongly recommend reading his pieces in the paper and on DealBook).

When I saw that there was no update to the story, I wrote a comment on the DealBook blog. That comment, which I submitted at 11:58 AM, is still "awaiting moderation" at 11:08 PM (I think 11 plus hours to moderate a comment on the blog of a major publication is a bit long - at least five of those hours were during the business day). Here is what I wrote:

YOUR COMMMENT IS AWAITING MODERATION.

This post refers to the wrong Lionel case (as does the article in today’s paper).

The Lionel case that Judge Gerber referred to in his decision is In re Lionel Corporation, 722 F.2d 1063 (2d Cir.1983), (you can see the case at: http://bulk.resource.org/courts.gov/c/F2/722/722.F2d.1063.83-5060.517.html).

The analysis in this case has defined almost all 363(b) sales (of substantially all of a business) since it was published.

I discussed much of this in relation to the Chrysler case on my blog (blog.lawrencedloeb.com).

— Lawrence D. Loeb

Here is the article from the July 7th edition of The New York Times, with the reference to Lionel in bold:

July 7, 2009
Automakers’ Swift Cases in Bankruptcy Shock Experts
By MICHELINE MAYNARD
DETROIT — That didn’t take long.

In fewer than 45 days each, General Motors and Chrysler swept through government-sponsored sales in bankruptcy court — quick tours that most people in the legal community thought impossible not long ago.

The swift action has riveted bankruptcy lawyers and law professors, who say the cases will be widely studied this fall when law students return.

“It is remarkable,” said James J. White, a professor at the University of Michigan Law School in Ann Arbor, who is planning a three-day seminar on the cases in his bankruptcy class.

Judge Robert E. Gerber of United States Bankruptcy Court in New York approved the G.M. sale late Sunday, although he issued a four-day stay that blocks final action until Thursday.

The sales, handled under Section 363 of the federal bankruptcy code, raised the profile of a tactic once used primarily to shed failing plants or unneeded equipment, and was not considered until a few years ago as a substitute for a complete restructuring.

“Twenty years ago, you would not have been able to do a 363 sale of an entire company,” said Mary Joanne Dowd, a partner in the financial and bankruptcy restructuring practice at Arent Fox in Washington.

While the cases are not likely to bring about the end of old-style restructurings, the sheer scope of G.M. and Chrysler show a Section 363 sale can apply to companies of any size, lawyers say.

For businesses that follow similar legal strategies, the G.M. and Chrysler cases could pave the way for a faster trip through court. For creditors, it could mean less time to reach a deal, especially in situations where companies face strict deadlines from lenders, as the two carmakers did with the government.

In such cases where the government plays a major role, lawyers are likely to feel they have less control than in traditional bankruptcies.

“I don’t think the government pressures judges as much as it pressures everybody,” said Professor White.

In fact, a government-imposed deadline for concluding the G.M. case by the end of this week helped the court work through 850 objections in three days of hearings last week. Normally, such issues could take weeks.

The haste drew skepticism from Michael P. Richman, a lawyer who represents three dissident G.M. bondholders.

At last week’s hearings, he urged Judge Gerber to “call the bluff” of the government deadline and take a more deliberate pace. (On Monday, Mr. Richman said his clients would likely not challenge the sale approval, citing the “enormous costs” that an appeal would incur.)

Obama administration officials say the legal community need not expect a wholesale shift in bankruptcy law. The G.M. and Chrysler cases were unique situations, they note, in which the president wanted to make sure that a crucial American industry survived.

Under the terms of the deal, G.M. would sell its most desirable assets, including the Chevrolet and Cadillac brands, to a new company owned largely by the American and Canadian governments and a health care trust for the United Automobile Workers union.

Over the last decade, Professor White said, companies already have been shifting toward a broader use of Section 363 sales as a quicker approach for restructuring than the usual Chapter 11 process.

In his order approving the G.M. sale late Sunday night, Judge Gerber cited instances involving Lionel, the maker of toy trains, which emerged from bankruptcy last year; Trans World Airlines, which was absorbed by American Airlines in 2001, and other similar cases as justification for his decision.

But none involved government financing, and thus moved far less quickly. The most recent Lionel case took three and half years; a case involving United Airlines took just over three years, and the case of the Delphi Corporation, G.M.’s former parts supplier, has been in court since 2005.

By contrast, G.M. and Chrysler sales beat even the government’s aggressive timetable.

The Treasury Department initially said it expected the Chrysler sale, which required 42 days, including an appeal to the Supreme Court, to be approved in 60 days. It said the G.M. sale would require 60 to 90 days of deliberations; as of Monday, the case has been in court for 36 days.

The speed is even more remarkable given that as recently as mid-March, when the Treasury’s auto task force retained bankruptcy counsel, it was not clear the cases would wind up in bankruptcy court, a senior administration official said Monday.

At that time, G.M. was still resisting a bankruptcy filing and a case did not seem likely at Chrysler, which had Fiat standing by, prepared to assume management control. Fiat officials eventually signed on to the need for a quick bankruptcy filing, which helped Chrysler shed plants, dealers and suppliers.

By mid-April, G.M. came around to the idea of a conventional prepackaged bankruptcy case, which still could have taken months, the official said.

Treasury officials pointedly told G.M. executives that the government, which was financing the company’s stay in bankruptcy, did not have the patience or resources for a long case, and would only provide financing under a Section 363 sale.

The administration official also said that G.M.’s case moved so quickly in part because it had the benefit of an “icebreaker” from Chrysler’s quick tour through bankruptcy.

In his 95-page opinion Sunday, for example, Judge Gerber repeatedly cited the discussion of issues from the opinion by Judge Arthur J. Gonzalez, who approved the Chrysler sale last month.

Professor White said the Supreme Court’s ruling against pensioners from Indiana, who sought to block the Chrysler sale, also was likely to deter similar actions in the G.M. case.

In fact, so far only one lawyer has challenged Judge Gerber’s approval of the sale: Steve Jakubowski, who represents five accident victims. And even he will not ask to delay the closing of the G.M. sale, unlike the Indiana state funds that objected to Chrysler’s turnaround plan.

“I personally didn’t have any problem with the speed of it,” he said of the two cases. “The fact is, the companies were dead.”

Michael J. de la Merced contributed reporting from New York.

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Will The Big Money Post a Comment About Their Big Mistake?

I finally accessed the comments section on The Big Money blog. I left a comment about the post by Matthew DeBord in which he asks for the names of the dissenting bondholders and complains "Why can’t we learn the identities of these three holdouts?" He despairs that, "Whenever I see one of these reports, I’ve trained myself to expect this question to come up. But I’m getting tired of asking it."

The question he is referring to is the title of his blog post, Please Name Dissident GM Bondholders, Please.

As I noted in my last post, and in the comment that I left on The Big Money blog, the rest of the world has had the information he requested since June 6th.

The comment is awaiting moderation.

As I've noted before, I moderate comments on this blog. I believe it's the best way to maintain a civil conversation. That said, I've only rejected one or two comments in the 23 months that I have maintained this blog.

By the way, I'd appreciate any comments you might have.

We'll see if my comment is posted by The Big Money Blog soon (?).

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Slate & Reuters Blow it

Matthew DeBord, who - according to Slate - " has written about the auto industry for the Washington Post, the Los Angeles Times, the Huffington Post, and Car Design News," posted an item on Slate's "The Big Money" blog today entitled "Please Name Dissident GM Bondholders, Please" and refers to a July 2nd post by Michael J. de la Merced.

Reuters then picked up that posting here.

In that post (in addition to the comment in the headline), Mr. DeBord wrote "Isn't this a transparent Chapter 11 proceeding, funded by, um...taxpayer money? Why can’t we learn the identities of these three holdouts?"

What is remarkable is that Patton Boggs, the law firm representing the bondholders (and mentioned in the NY Times post), filed the names of their clients on JUNE 9TH! This filing, required under Bankruptcy Rule 2019, is available on the public docket (paid for by GM) here.

Patton Boggs then filed an amendment to that filing, including details of their clients' trades, on June 26th - also available on the public docket here.

I don't know what to think about Slate. I tried to sign up to make these comments on their site, but they have not sent the promised password. After more than an hour of waiting, I decided to post my comments on this blog.

I am puzzled, however, about why Reuters, which is - deservedly - considered one of the most prestigious news organizations in the world, posted this story.

One of their reporters has been live blogging the GM proceedings on Twitter (some of which is here). They discussed the tribulations of one of the bondholders who is representing himself and seem, generally, to be on top of what is transpiring in the case (by the way, Mr. de la Merced has also been providing courtroom updates on Twitter).

Mr. DeBord, if you read this, you might want to use the resources available to you before posting such nonsense. Most news organizations subscribe to PACER, a paid service that provides subscribers with access to all court records for the Federal Judiciary (including the bankruptcy courts). For those of us who aren't willing to pay $0.50 per page, most large bankrupt companies retain a claim service firm that provide a website for posting relevant documents.

By the way, just to answer your question, the names of Patton Boggs' clients are Harold A. John, Mark Modica, and Wade McGee. If you need to harass them (although I don't know why any sane person would), their contact information is disclosed in the first filing.

The main site for obtaining information about the General Motors case (including the docket), is available at http://gmcourtdocs.com/.

Perhaps the editorial staff at Slate and Reuters don't review blog posts from "The Big Money" blog; or perhaps they were distracted by the Fourth of July holiday. But I expect more from them.

We all await Judge Gerber's decision. Whether or not he provides it before Monday, we know that he (and the lawyers on the case) have been working hard this holiday weekend.

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Some Final Thoughts on Chrysler

Over the last two to three months, I have written extensively about the Chrysler bankruptcy. Now that the operating company has been purchased by Chrysler Group, LLC, I would like to summarize my thoughts about the case, and clear up any misconceptions that I may have created through my comments.

I may have given the wrong impression about some of the parties to this matter, and let me first clear those up:

Capstone / Robert Manzo

I believe that Robert Manzo and his colleagues at Capstone performed professionally and prepared a report that clearly set out their methodology and included appropriate caveats. They noted in their report that they were preparing a valuation based upon an orderly liquidation of Chrysler’s assets. They provided qualifications in their “Basis of Presentation,” including:

5. This analysis is hypothetical and subject to material variations which may arise during the course of the sale or liquidation of the 31 assembly and manufacturing plants. In an industry suffering from severe volume contraction, shifting consumer demands, tightening consumer finance and liquidity constraints, coupled with other large automobile manufacture[s] potentially disposing of similar assets simultaneously with the liquidation of Chrysler, actual recovery values may be significantly lower than the hypothetical values estimated herein.

and “General Assumptions” including:

4. This would be the first liquidation of a domestic OEM [Original Equipment Manufacturer] and there are likely significant risks that have not yet been identified or quantified. Additionally, the current state of the automotive market is unique and there is no historical reference to look to in assigning hypothetical liquidation values.

and:

9. Proceeds from asset sales are assumed to be depressed due to:

1. Limited potential buyers – domestic OEMs have limited resources and potential foreign buyers (TATA) have no dealer network in place.


2. The industry is plagued with overcapacity – the need for additional capacity doesn’t exist.


3. Re-launch could take 12 – 24 months – lost market share would likely require significant marketing and advertising expenditures to re-invigorate the brands.

In addition, the assumptions used to value each individual asset were clearly stated in the report. The documentation, thus, was clear and well presented.

In my comments on this blog, and elsewhere, I voiced my opinion that the findings reported by Robert Manzo and Capstone might well understate the actual values. I tried to make clear, in my comments, that it was difficult to come to any alternative conclusion from the available information. My belief is, and was, that certain of the stated assumptions in Capstone’s report may not stand up to scrutiny from another expert.

I cannot state, with any degree of certainty, that the valuation would not have withstood challenge.

As Judge Gonzalez noted in his opinion, the valuation prepared by Capstone was not challenged and, therefore, informed his judgment on the fairness of the compensation being proposed in the 363(b) transaction.

Robert Manzo, and his colleagues at Capstone, provided an analysis as requested by their client and they served their client well.

Greenhill

Greenhill provided a fairness opinion to Chrysler for the transaction that was included in the report. I pointed out that they specifically noted that they did not conduct any valuation work in connection with their engagement and that they specifically relied on the Capstone report in coming to their conclusions.

My comments in this regard were highlighting my belief that the investment bankers were not entirely comfortable opining on the liquidation value of Chrysler. They specified that their logic was that, given that the alternative was liquidation and that the proposed compensation was within the range of the potential liquidation values, the proposed transaction was fair.

You can argue with the legal interpretation used in coming to the conclusion (it would appear to be inconsistent with the findings in Associates Commercial v. Rash), but Greenhill is not a law firm.

From an investment banking point of view, their explanation and logic make perfect sense.

Judge Gonzalez

While I disagree with the Judge’s finding, the logic he used to arrive at his opinion makes sense. He relied on uncontested arguments from the debtor on valuation and, apparently, on the matter of who is paying the UAW VEBA.

Perhaps the Judge might have run his court differently under different circumstances, questioning matters from the bench. I do not believe that such actions are expected or required of a bankruptcy judge.

As I've noted, my disagreement stems from the valuation (which was uncontested) and the finding that NewChrysler was paying the $10.337 billion to the VEBA (apparently not contested).

Indiana Pensioners / Indiana Treasurer of State, Richard E. Mourdock

After the Non-TARP lenders withdrew their involvement in the case, the Indiana Pensioners were at a great disadvantage. Not only were they a tiny minority within the group of secured lenders (the others having accepted the proposed transaction), but they could not be expected to bear the significant costs of objecting by themselves (according to some sources, just the cost of retaining White & Case as legal counsel cost $2.0 million, and they had only invested $17 million to purchase their position!).

Without the budget to also retain a financial expert to contest Capstone’s findings; and given the limited time that they had (they did not retain White & Case until May 19th), they were limited to making legal arguments.

The argument, used in bankruptcy court, to oppose the valuation was based on trying to convince Judge Gonzalez that Robert Manzo, and Capstone, were biased by the compensation included in their retention agreement that provided for a $17 million bonus when the deal was completed. Judge Gonzalez, reasonably in my view, rejected this argument since the motion to retain Capstone (Docket 174) was uncontested.

Unfortunately for the Indiana Pensioners, legal arguments alone were not sufficient to derail the momentum of the 363(b) sale.

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The President’s speech, demonizing hedge funds and other investors for opposing the sale was the catalyst for my writing about this case.

I am greatly troubled by how the Executive Branch used populism to bully secured lenders into giving up their contractual rights.

If this ends up being, as many have stated, an isolated and unusual case that will not be repeated; then there should be no long term impact from this behavior. If, however, this situation recurs, there will be a clear need for financial market participants (banks, institutional investors, etc.) to increase the cost of lending and limit the availability of credit (shutting off credit to other potential beneficiaries of Executive interference, such as companies with union work forces).

I wish the new company the best of luck and hope that it prospers, and I hope that this is not a prelude to more government interference in business.

It is one thing for the Government to step into the breach as a last source of funding for, what many believe is, a critical participant in the economy. It is another to attempt to force an outcome inconsistent with the rule of law (which I believe happened in this case).

The rule of law is the basis for the success of capitalism. Any behavior by the Government that attempts to override the law could have a catastrophic long term impact on the markets and the economy.

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Did I Upset Felix Salmon?

UPDATE 10:13 AM 6/11/09
My comment has, finally, appeared on Felix's site, so perhaps I didn't upset him.

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ORIGINAL 1:47 AM 6/11/09

In my last post, I discussed a post that Felix Salmon put on his blog at Reuters and included a comment that I had submitted in relation to that post, which, I noted, was awaiting moderation.

I moderate comments on this blog, so I have no problem with that approach, particularly when it involves a blog published by a large news organization like Thomson Reuters.

Interestingly, to me anyways, my post has not been posted yet. I wrote the comment at 7:19 PM EST (23:19 GMT) and two comments posted after mine have been posted, including this one, which I think would be rejected before mine (given that it's simply an insult):

June 11th, 2009 2:55 am GMT[permalink]

Hey Reuters, How much are you paying Felix Salmon to post idiotic remarks on your website? - Posted by Felix' Mom

There are rules for comments on the blog, discussing the criteria by which comments are judged worthy. These are the rules (unedited) from Felix Salmon's blog page:

Post Your Comment

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House Rules:

• We moderate all comments and will publish everything that advances the post directly or with relevant tangential


• We try not to publish comments that we think are offensive or appear to pass you off as another person, and we will be conservative if comments may be considered libelous.information.

I'm curious as to what in my post may have violated these rules.

Relevance
In my opinion (which is certainly biased), my comments were relevant to the post and, I believe, advanced the discussion by pointing out some facts Mr. Salmon seemed unaware of.

Given the volume of information about the Chrysler bankruptcy, both on the docket and in the news, it is easy to understand how these things could be missed. The Bankruptcy Code are also not always consistent with general intuition.

Having followed, and blogged about, the Chrysler case since the beginning I am very familiar with the specific facts that I cited.

I've also taken classes on bankruptcy law and have consulted with lawyers who specialize in bankruptcy (including Steven Jakubowski who practices bankruptcy law at The Coleman Law Firm and maintains The Bankruptcy Litigation Blog and Professor David Skeel, the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania, who teaches bankruptcy law also maintains a the Less than the Least blog). I have also consulted with friends in the restructuring and distressed investing space (I believe they would prefer to remain anonymous). I also benefit greatly from the occasional counsel of one of my former business school professors, Ed Altman (the Max L. Heine Professor of Finance at the Stern School of Business, New York University). This has assisted me in becoming very familiar with the legal aspects that I pointed out.

Offensive, Libelous, and/or Passing as Someone Else
I submitted the entry under my own name (and posted it on this blog).

I don't believe anything I wrote was libelous or offensive (particularly when considered next to the comment that I referenced above).


Now, it's possible that short comments can be approved by junior staff at Reuters but longer posts require the approval of Felix Salmon, himself. On the other hand, he submitted two posts to his blog between 12:03 AM EST and 12:26 AM EST (04:03 and 04:26 GMT).

Why do you think Felix Salmon is holding my comments?

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