February 62009

 

Analysis: Chapter 12
Bankruptcies Help Provide Small Glimpse for Mortgage Modification
Proposals

As the debate over mortgage cramdown proposals
continues on Capitol Hill, proponents can point to the creation of
chapter 12 bankruptcy in the 1980s to show that giving bankruptcy judges

the power to reduce onerous loans to reflect a steep drop in land prices

can be successful in helping families, the

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size='3'>New York Times reported today. While
the creation of chapter 12 by Congress in the 1980s helped resolve that
earlier crisis, many farmers still lost their farms or had to scale them

back. If a similar allowance is provided today for chapter 13 filings,
which could let bankruptcy judges cramdown the primary mortgage of a
chapter 13 debtor, bankruptcy courts could help a few million
homeowners. However, millions more would still face foreclosure,
especially if unemployment continued to rise. Credit Suisse, for
example, estimates that about 20 percent of an expected eight million
foreclosures could be avoided by letting judges alter the terms of home
loans. 

href='http://www.nytimes.com/2009/02/06/business/06lend.html?_r=1&ref=business&pagewanted=print'>Read

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Mortgage Initiative Mired in

Details

While senior Obama administration officials are
finalizing the central elements of their rescue plan for the banking
system, they are not as far along in working through the daunting
details of how to spend as much as $100 billion to help homeowners
facing foreclosure, the
face='Times New Roman' size='3'>Washington Post
size='3'>reported today. Obama administration officials view the
mortgage initiative as critical to turning the ailing housing market
around and making the politically unpopular bailout more palatable,
other sources said. Obama's advisers said there was merit to an idea
proposed last year by the Federal Deposit Insurance Corp., which called
for the government to absorb losses if lenders modify mortgages, for
instance by lowering the interest rate, and the homeowners end up
defaulting anyway, sources said. However, some of those officials also
think the program puts too much taxpayer money at stake for the amount
of help provided to homeowners. The new plan may be a hybrid that
includes elements of the FDIC idea as well as other proposals from
economists and government officials. A separate Treasury Department plan

developed last year to reduce the mortgage rate for new home buyers to
4.5 percent has stalled. Some government officials and lawmakers
including Rep. Barney Frank (D-Mass.) say that the approach is far too
expensive. Several Republican senators, however, continue to push the
idea, saying its cost could be capped at $300 billion. 

href='http://www.washingtonpost.com/wp-dyn/content/article/2009/02/05/AR2009020503590.html'>Read

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Analysis: Tight Credit
Prompts Companies to Enter Bankruptcy Earlier

The credit markets are so constricted that companies
are filing for bankruptcy as a pre-emptive strike, seeking protection
from creditors while they still have cash rather than waiting to later
wade into a quickly drying pool of financing, Dow Jones
face='Times New Roman'>Daily
Bankruptcy Review reported today. Nortel
Networks Inc. filed for bankruptcy last month with $2.4 billion in cash,

22 times the amount it needed to make the next interest payment on its
debt. The telecommunications equipment maker said it took action when it

did because it anticipated a future cash crunch and feared it
wouldn’t be able to secure financing. Other troubled companies
have made, or are contemplating, similar moves, knowing the market for
bankruptcy loans ranges from extremely tight to non-existent. Tribune
Co.’s cash allowed it to avoid having to immediately seek a
traditional bankruptcy loan when it filed for chapter 11 protection in
December. Instead the Chicago company, which finished 2008 with $500
million in cash, secured a loan backed by its accounts receivable and is

seeking to sell assets, including the Chicago Cubs baseball team, to
fund its restructuring. Even Clifton, N.J., retailer Linens ‘n
Things, which ultimately liquidated in bankruptcy court, sought chapter
11 protection last May, days before hefty rent payments were due so it
could hold onto the extra cash.

Autos

Court Filing Says Delphi
Low on Cash

Auto-parts maker Delphi Corp., which has been stuck in

bankruptcy since its reorganization plan fell apart last spring, said
that it is running low on cash and it may have to turn over part of the
company to bankruptcy lenders, the

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size='3'>Wall Street Journal reported today.
In court papers filed Thursday, Delphi said that its enterprise value
will be 'substantially below' $7.2 billion and 'may be equivalent to, or

even less than,' the amount of Delphi's post-bankruptcy obligations,
including its $4.3 billion bankruptcy loan and a $1.6 billion claim from

GM. 'There's not going to be a lot of value here for pre-petition
creditors,' said Delphi's bankruptcy attorney
face='Times New

















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size='3'>Jack Butler, a partner at Skadden,
Arps, Slate, Meagher & Flom. Bankruptcy experts,
including John Penn of Haynes and
Boone LLP, say that Delphi's court filing sends a dire warning about the

company's desperate financial situation. Delphi's bankruptcy lenders,
led by J.P. Morgan Chase & Co., and GM are essentially left with two

choices: move to liquidate the company, or take an ownership stake in
the business. 
href='http://online.wsj.com/article/SB123388252195854983.html'>Read
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Lack of “Car
Czar” Stalls Progress on Automaker Bailout

The Obama administration's delay in naming a 'car
czar' is slowing the auto industry's progress in restructuring talks
with bondholders and the United Auto Workers union, the
face='Times New Roman'>Wall
Street Journal reported today. General Motors
Corp. and Chrysler LLC received a $17.4 billion federal loan commitment
in December. The funds came with a demand that the two companies submit
extensive restructuring plans and concession commitments from unions and

bondholders by Feb. 17 to a presidential designee or “car
czar.” Less than two weeks before the deadline, there has been no
appointment to the post. The delay has impeded the negotiations because
of a lack of clarity on the terms the Treasury Department is seeking.
Among requirements of the loans are reworking UAW contracts to address a

$1,300-per-car labor-cost gap with Japanese plants in the U.S., and
persuading banks and bond holders to accept stock in exchange for tens
of billions of dollars worth of GM and Chrysler debt. 
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In related news, Senators called on President Obama to

set up a manufacturing advisory group to help guide the restructuring of

the U.S. auto industry,
face='Times New Roman' size='3'>CongressDaily
size='3'>reported today. The letter from five senators led by Sen.
Debbie Stabenow (D-Mich.) comes less than two weeks before Detroit
automakers are required to give the government detailed plans proving
their financial viability. As a condition of the $17.4 billion in loans
provided in December, the companies must submit financial plans by Feb.
17. 'We urge you to create a group of advisers to oversee the loans and
provide the insight needed to steer our domestic automakers through this

unprecedented crisis,' the senators told Obama. The group 'should
provide expertise on the issues facing suppliers, labor unions, dealers,

shareholders and bondholders in order to complete a successful
restructuring that results in stronger, more viable companies,' they
said.

Recession Job Losses Hit 3.6

Million

U.S. employment plunged in January, a government
report showed, bringing total job losses since the recession started in
December 2007 to 3.6 million, the

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size='3'>Wall Street Journal reported today.
Nonfarm payrolls, which are calculated by a survey of establishments,
tumbled 598,000 in January, the U.S. Labor Department said today, the
most since December 1974. December was revised to show an even steeper
decline of 577,000. The government included revisions for all of 2008,
which showed that the U.S. lost about 3 million jobs last year, roughly
400,000 more than first thought. The economy has shed 3.5 million jobs
since January 2008, the largest 12-month decline since the government
started compiling those figures in 1939. 
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more. (Subscription required.)

States' Jobless Funds Run
Low

A growing number of states are running out of cash to
pay unemployment benefits, a sign of how far social-welfare systems are
being stretched by the swelling ranks of the jobless in the
deteriorating U.S. economy, the

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size='3'>Wall Street Journal reported today.
Unemployment filings have soared so high in recent months that seven
states have already emptied their unemployment-insurance trust funds,
which were supposed to see them through recessionary periods. Another 11

states are in jeopardy of depleting reserves by year's end, according to

the National Conference of State Legislatures, which published a January

report entitled 'The Crisis in State Unemployment Trust Funds.' So far,
states have borrowed more than $2.3 billion in emergency funds from the
federal government, money they are required to pay back. 
href='http://online.wsj.com/article/SB123384067190252139.html'>Read
more. (Subscription required.)

HomeBanc Converts Case to
Chapter 7

Lacking the resources and the backing to realize its
liquidation plan, stricken lender HomeBanc Mortgage Corp. has asked the
court to convert its bankruptcy to a chapter 7 proceeding,
face='Times New Roman'>
size='3'>Bankruptcy Law360 reported yesterday.

The company never solicited acceptances of the plan, which it filed in
April with the support of the unsecured creditors, because disputes over

the plan’s feasibility remained unresolved after numerous
hearings, the motion says. Atlanta-based HomeBanc estimated that the
proposed chapter 11 liquidation plan would provide some $5 million more
for distribution among creditors than chapter 7, the disclosure
statement said. Under the abandoned plan, holders of $223 million in
unsecured claims might have recovered between 1 and 10 percent, and all
equity interests would have been be canceled.
size='3'>  Bankruptcy Judge
face='Times New Roman'>Kevin J.

Carey scheduled the hearing for the chapter 7
conversion on Feb. 20. 
href='http://bankruptcy.law360.com/articles/86120'>Read more.
(Subscription required.)

Bruno's Supermarkets Files
for Chapter 11 protection

Bruno's Supermarkets LLC filed for chapter 11
protection in an Alabama court to restructure business operations, and
said it may pursue a sale of all its assets, Reuters reported yesterday.

The company listed assets and liabilities in the range of $100 million
to $500 million in documents filed with the court. The company, which
owns and operates Bruno's and Food World grocery stores, also named Jim
Grady as Chief Restructuring Officer to replace former Chief Executive
Kent Moore, who resigned last week. Bruno's has a total of 66 locations
in Alabama and the Florida Panhandle, and employs about 4,200 people,
court filings showed. The case is

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size='3'>In re Bruno's Supermarkets LLC, No
09-00634, U.S. Bankruptcy Court, Northern District of Alabama (Southern
Division). 

href='http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSBNG43802220090205'>Read

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Fortunoff Files for
Chapter 11

U.S. regional retailer Fortunoff filed for chapter 11
protection yesterday and said that it will try to sell the business, but

if it cannot it will close its doors, Reuters reported. The company,
which sells jewelry, dinnerware and furniture in New York, New Jersey,
Pennsylvania and Connecticut, began suffering a 'severe liquidity
crisis' in January as it was trying to sell the company, according to
court documents. Dismal sales over the 2008 holiday season, weak
consumer spending on high-end furniture and jewelry, the costs of
expanding its jewelry line in Lord & Taylor stores and reduced
borrowing capacity all hurt operations, it said. In the filing, the
company listed both assets and liabilities within a range of $100
million to $500 million. Fortunoff said it has 20 stores open, four of
which carry its full line of merchandise.

href='http://www.reuters.com/article/domesticNews/idUSTRE5145RY20090205'>Read

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href='http://www.reuters.com/article/domesticNews/idUSTRE5145RY20090205'>

Financial Bailout Talks
Turn to More Equity Stakes

The Obama administration's financial-rescue plan is
shaping up to include capital injections with tougher terms than the
first round and an expansion of an existing Federal Reserve lending
facility that could potentially buy up toxic assets clogging the system,

the
size='3'>Wall Street Journal reported today.
While discussions are still fluid, efforts to create a so-called bad
bank to purchase distressed assets and to insure other assets against
future losses appear less central to the administration's thinking. To
deal with the toxic assets at the heart of the financial crisis, the
administration is considering expanding the Fed's consumer-lending
facility, known as the Term Asset-Backed-Securities Loan Facility. The
TALF was set up to spur the consumer-loan market by having the Fed lend
up to $200 billion to investors who buy securities backed by car loans,
credit card debt, student loans and small business debt. The Obama
administration is discussing expanding the TALF to provide financing for

other older assets, such as mortgage-backed securities. 
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more. (Subscription required.)

Senate Moderates Seek to
Make Cuts from Economic Stimulus Bill

A large group of Senate moderates gathered on Capitol
Hill to cut tens of billions of dollars from an economic stimulus bill
that now tops $900 billion, as wrangling continued over a package that
President Obama called vital to prevent the nation from falling into
potentially irreversible decline, the

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size='3'>Washington Post reported today. The
centrist group has identified at least $80 billion in recommended cuts
from the legislation, with a huge chunk of the recommended reductions
coming in education funds. In a late afternoon vote yesterday, senators
shelved a substitute stimulus plan offered by Sen. John McCain (R-Ariz.)

that would have cut the total cost to $421 billion. The vote along party

lines was 57-40 against waiving the Budget Act so that McCain's
amendment could go ahead. The Senate also voted 62-35 to reject an
amendment by Sen. John Ensign (R-Nev.) that would have provided federal
support for 30-year fixed home mortgages of 4 percent to 4.5
percent. 

href='http://www.washingtonpost.com/wp-dyn/content/article/2009/02/05/AR2009020501622_pf.html'>Read

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Regulator Says Bailout
Fund Is Misleading the Public

Watchdogs monitoring the government’s bank
bailout called for an overhaul at a Senate Banking Committee hearing
yesterday, with one accusing those running it of misleading the public,
while senators slammed the program as chaotic and poorly managed,
Reuters reported yesterday. Under the $700 billion TARP program meant to

stabilize the financial system, the Treasury Department has so far spent

nearly $300 billion to bolster financial institutions and automakers in
exchange for preferred shares and warrants. However, in buying those
securities, Henry M. Paulson Jr., then the Treasury secretary, misled
the public about how it was going to price them, said
face='Times New Roman'>
size='3'>Elizabeth Warren, a Harvard law
professor and head of the TARP oversight panel. Neil M. Barofsky, the
independent TARP inspector general at Treasury, raised concerns about
potential fraud in one of several programs financed by bailout money,
the Federal Reserve’s Term Asset-Backed Loan Facility.
“Treasury should consider requiring that some baseline fraud
prevention standards be imposed,” Barofsky said. 

href='http://www.nytimes.com/2009/02/06/business/economy/06tarp.html?ref=business&pagewanted=print'>Read

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