March 15, 2010

With Financial Reform Bill, a Test for Congress

Senate Democrats will press forward this week on legislation to overhaul the nation?s financial system in a critical test of whether Congress can pass reform, the New York Times reported today. The bill that Senate Banking Committee Chair Christopher J. Dodd (D-Conn.) will introduce today appears written with the goal of forging a consensus that can overcome partisan division, with provisions that incorporate ideas from both Democrats and Republicans. Among the most recent provisions in the bill to emerge is one that would curb Wall Street?s influence over the Federal Reserve Bank of New York. Its president would be appointed by the president of the United States, not by a board that includes representatives of member banks. Another rule would ban bank officers from sitting on the New York Fed?s board, meaning that Jamie Dimon, chief executive of JPMorgan Chase, would probably have to leave the board. The legislation would create a consumer protection agency within the Federal Reserve to write rules governing mortgages, credit cards and other financial products. Read more.

Congoleum Wins Approval for Disclosure Statement 

Bankrupt flooring maker Congoleum Corp. will head to confirmation on June 7 after winning approval on Friday of its disclosure statement from U.S. District Judge Joel A. Pisano, the Deal Pipeline reported on Friday. Incorporated in the plan is a settlement agreement through which the insurers would pay Congoleum $100 million to settle certain policies and end litigation. Congoleum had previously struck deals to receive $75 million in payments to settle other insurance policies. Of the latest $100 million provided by insurers, $97 million would be available for asbestos claimants through a trust, while the remaining $3 million would go toward paying non-asbestos claims. Proceeds from the previous asbestos settlements, and a pending $25 million settlement with affiliates of Travelers Cos., would also be funneled to the trust. Read more. (Subscription required.)

Commentary: The Fed?s Responsibility on Credit Cards

Congress passed legislation last year intended to protect consumers from the credit card industry?s most deceptive and unfair practices, but the Federal Reserve still has to write new rules intended to stop companies from charging customers fees for late payments, with charges for exceeding the credit limit or with ?any other penalty fee or charge,? according to a New York Times editorial today. Some of the Fed?s proposed rules would give consumers additional protection. Fees for exceeding the credit limit would now have to be proportional to the infraction ? no more $39 fees for going $10 over your limit. The new rules would also ban pernicious ?inactivity fees,? which charge people for not using their cards. However, other draft rules are far too weak or ambiguous, according to the editorial, clearing the way for further abuses by companies. The proposed new rules would require card issuers who have raised interest rates since Jan. 1, 2009, to evaluate whether the reasons for those increases are still valid and to reduce the rate where appropriate. The Fed needs to make clear exactly when and under what conditions a rate reduction is in order. Read more.

WaMu Reaches Deal to Lead Path to Possible Bankruptcy Emergence

Washington Mutual Inc. said on Friday that it reached a deal that will bring it roughly $6 billion and help resolve its bankruptcy, Reuters reported on Friday. The company, which is tied to the biggest bank failure in U.S. history, will gain ownership of a bank deposit that is worth about $4 billion. JPMorgan Chase & Co. also had claimed the deposit. It also agreed to split two potential tax refunds worth a combined $5.6 billion with JPMorgan and the Federal Deposit Insurance Corp. While the transaction brings the three parties into agreement for the first time after 18 months of legal battles, it sets up the next likely fight: the deal depends on the disallowance of billions of dollars in claims by holders of bonds issued by Washington Mutual Bank. The company recognizes $7 billion in general unsecured claims stemming from Washington Mutual notes, although more than $100 billion of claims have been lodged. The money brought into the estate will go to paying off creditors. Read more.

Analysis: 'Cash for Keys' Aids Home Borrowers, Investors

Owners of bad loans are increasingly making deals with borrowers to avoid a foreclosure, which tends to reduce returns for investors and place a black mark on the homeowner's credit, according to a Reuters analysis on Friday. Lawmakers and regulators are becoming more accepting of these solutions even though they mean the borrower loses the home. The trend comes after more than two years of loan modification programs and foreclosure moratoriums that have produced mixed results, with many homeowners ineligible or defaulting again. Where a modification isn't feasible, the U.S. Treasury in April will begin paying borrowers who agree to a deed-in-lieu of foreclosure or short sale, where a home is sold for less than outstanding debt. Unlike most modifications, those actions erase excess debt and reset home values, solving the problem of underwater loans that are a top cause of defaults. More than 11 million properties with mortgages are 'underwater,' according to First American CoreLogic. Read more.

Creditors Oppose Extended Stay's $450 Million Bankruptcy Financing

Extended Stay Inc. creditors are blasting a bankruptcy-financing deal for the hotel chain that could allow an investor group to take full control of the company for as little as $320 million, Dow Jones Daily Bankruptcy Review reported today. A number of lenders are trying to block the financing, which calls for investment funds Paulson & Co. and Centerbridge Partners to commitment $450 million as part of the company's bankruptcy reorganization. The deal would give the investors a 22.5 percent stake for a $225 million contribution plus another 22.5 percent stake for backstopping a $250 million rights offering. Senior lenders would swap their debt for a 55 percent stake. However, the creditors, including the Federal Reserve Bank of New York, said in court papers filed on Thursday that the agreement also give Paulson and Centerbridge the chance to take full control for less money. If owners of Extended Stay's $4.1 billion in mortgage debt vote down the bankruptcy plan, Paulson and Centerbridge can invest $320 million for all the equity in the company. 

Judge Approves FairPoint's Disclosure Statement

Bankruptcy Judge Burton R. Lifland on Thursday signed off on FairPoint Communications Inc.'s disclosure statement and allow creditors to vote on the company's plan to exit bankruptcy by slashing $1.7 billion in debt off its books and handing control of the nation's seventh-largest phone company to its bank lenders, Dow Jones Daily Bankruptcy Review reported today. FairPoint, which filed for chapter 11 protection last fall, is asking creditors to approve its debt-for-equity swap with its senior lenders. Under that plan, FairPoint's secured lenders, led by Bank of America Corp. (BAC) and owed $2.1 billion, would trade their debt for a new $1 billion term loan and about 92 percent of the company's new stock. Unsecured creditors, including bondholders owed $575 million, would swap their debt for 8 percent of the reorganized FairPoint's stock and warrants to buy additional shares. Votes are due by the afternoon of April 28. Judge Lifland scheduled a hearing to consider approval of the plan for May 11.

Tavern on the Green Gets Interim Trustee

Jill Mazer-Marino, a counsel with Meyer, Suozzi, English & Klein in Garden City, New York, will oversee the liquidation of Tavern on the Green, Reuters reported on Friday. Last month, Tavern on the Green's unsecured creditors asked Bankruptcy Judge Alan Gropper to convert the case into a chapter 7, saying that efforts to liquidate the restaurant in a manner that could result in a material recovery had run into a 'brick wall,' largely due to 'pervasively pernicious conduct' by the City of New York. The order approving the conversion follows a decision by U.S. District Judge Miriam Goldman Cedarbaum, who ruled that New York City has the right to use the name 'Tavern on the Green' for its restaurant, rejecting arguments by the restaurant's outgoing operators that they owned the name. Read more.

AIG Keeps $21 Million in Bonuses

American International Group Inc. plans to hold back $21 million in bonus payments today to former employees, a move that could set the stage for more battles over employment agreements that have enmeshed the giant insurer in controversy for a year, the Wall Street Journal reported today. The hold-back comes as AIG will also pay out $46 million today to current and former employees of its financial products unit, the division responsible for the soured trades that precipitated the massive government rescue of the company in 2008. AIG executives hope that payout will represent the final round retention payments, or bonuses, arising from contracts with unit employees agreed upon before the company's bailout. About $105 million was paid out last month as mostly current employees agreed to accept a smaller amount in exchange for an earlier payout. Read more.(Subscription required.)

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