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May 5, 2010

Financial Regulatory Overhaul Bill Drops Fund
to Shut Failed Banks

Leaders of the Senate Banking Committee said yesterday that they had
reached an agreement to limit the likelihood that big banks would be
bailed out by taxpayers, but Democrats said that they also would push
aggressively for an array of proposals that could force some of the
nation?s biggest banks to reduce their size, the New York Times
reported today. The tentative agreement to limit the chances of future
bailouts came as the Senate delayed for another day its initial votes on
amendments to legislation to address the causes of the 2008 financial
crisis. Aides to committee chairman Christopher J. Dodd (D-Conn.) and
Richard C. Shelby (R-Ala.) said that the two senators had agreed to
scuttle a $50 billion fund proposed by Democrats. The fund, which was
opposed by the Obama administration, drew criticism from Republicans who
had warned that it would promote rather than prevent taxpayer bailouts
of failed financial companies. Under the deal, the Federal Deposit
Insurance Corporation would finance the liquidation of failed financial
companies, using a new credit line with the Treasury Department backed
by the failed company?s assets. The money would be recouped later
through the sale of assets, with shareholders and creditors forced to
take losses.
href='http://www.nytimes.com/2010/05/05/business/05regulate.html?ref=business&pagewanted=print'>Read
more.

Startech Gets Interim Approval to Tap
DIP 

Startech Environmental Corp. will fund its operations with a $750,000
debtor-in-possession loan from prospective purchaser Champion Energy
Inc. as it moves to eventually auction itself off as a going concern,
the Deal Pipeline reported yesterday. Bankruptcy Judge Alan
H.W. Shiff yesterday approved the environmental technology company's
request for interim use of the financing and tentatively scheduled a
final DIP hearing for May 18. Wilton, Conn.-based Startech, known for
its development of a plasma processing technology known as the Plasma
Converter, sought chapter 11 bankruptcy on April 28 after ceasing its
operations in January and terminating the employment of a majority of
its employees in October.
href='http://pipeline.thedeal.com/tdd/ViewArticle.dl?id=10005423650'>Read
more. (Subscription required.)

Crisis Panel to Probe Banks' Bookkeeping
Techniques

The Financial Crisis Inquiry Commission will take a hard look at a
range of maneuvers at a hearing today that help banks dress up their
financial statements, raising some uncomfortable questions about banks'
bookkeeping, the New York Times reported today. The Financial
Crisis Inquiry Commission is expected to focus most sharply on the way
banks slim down their balance sheets before reporting their results and
on loans they receive from entities like special-purpose vehicles and
hedge funds, which are allowed to operate with little public disclosure.
The big question is the extent to which other major banks used, and
still use, creative financing techniques, and whether they, like Lehman,
broke any rules. The Securities and Exchange Commission is currently
examining the borrowing practices of nearly two dozen financial
companies.
href='http://www.nytimes.com/2010/05/05/business/05repo.html?ref=business&pagewanted=print'>Read
more.

Commentary: Los Angeles Is on the Brink of
Bankruptcy

Los Angeles is facing a terminal fiscal crisis and it will likely
have to file for bankruptcy between now and 2014 if the city does not
take drastic steps to improve its finances, according to a commentary in
today's Wall Street Journal by former Los Angeles mayor Richard
Riordan and Alexander Rubalcava, president of Rubalcava Capital
Management. According to the city's own forecasts, in the next four
years annual pension and post-retirement health-care costs will increase
by about $2.5 billion if no action is taken by the city government. Even
if Mayor Antonio Villaraigosa and the City Council were to enact drastic
pension reform today, the city would only save a few hundred million per
year. Los Angeles's fiscal woes, according to the commentary, can be
traced to two numbers: 8 percent and 5,000. Eight percent has been the
projected annual rate of return on the assets in Los Angeles pension
funds. Five thousand is the number of employees added to the city's
payroll during Villaraigosa's first term as mayor. Pension officials
have played accounting games, like smoothing the investment return over
seven years rather than five years. This is designed to dilute the
near-term effect of the financial meltdown at the expense of much higher
payments later. Read the
href='http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html?mod=WSJ_Opinion_LEFTTopOpinion'>full
commentary. (Subscription required.)

U.S. Trustee Objects to Fee Claims in
Extended Stay Bankruptcy

U.S. Trustee Diana Adams objected to $9 million in fees and
expenses claimed by professionals employed by bankrupt hotel chain
Extended Stay America, Reuters reported yesterday. She asked the court
to impose certain fee reductions, saying that approving the full amount
would be premature at this point. 'A plan has not yet been confirmed in
this case. Consequently, the ultimate benefit to the estates for the
services rendered by the professionals simply cannot be assessed at this
time,' she said in court papers. Extended Stay, the largest owner and
operator of mid-price extended stay hotels in the United States, filed
for bankruptcy protection in June, unable to service more than $7
billion in debt. The case is In re Extended Stay Inc., U.S.
Bankruptcy Court, Southern District of New York, No. 09-13764.
id='lg7d' title='Read more'
href='http://www.reuters.com/article/idUSSGE6430K820100504'>Read
more.

WaMu Noteholders Want Company
Liquidated

Noteholders of Washington Mutual Inc. asked a bankruptcy judge
yesterday to liquidate the company as its reorganization was on the
'verge of unraveling,' Reuters reported yesterday. The request, filed by
a group of 16 funds that hold $2.3 billion of Washington Mutual Inc
securities, was partly in response to a request by shareholders for an
examiner to investigate the company's collapse. The noteholders said
that the reorganization is being threatened by the possibility that
other parties will soon be able to file their own plans, by the
company's insistence that insiders be given releases from legal claims
and by shareholders' request for an examiner. Washington Mutual said in
a separate court filing that shareholders, who will get no recovery in
the company's proposed reorganization, were demanding an independent
investigation of the company's collapse in the hopes of getting a 'pay
off.'
href='http://www.reuters.com/article/idUSSGE64404S20100505'>Read
more.

Banks Join in Request for Investigation in
Taylor Bean Case

A pair of Wall Street banks suing Bank of America Corp. over their
soured investments in a mortgage vehicle created by Taylor Bean &
Whitaker Mortgage Corp. are seeking to look into the business
relationship between Freddie Mac and the failed mortgage lender, Dow
Jones Daily Bankruptcy Review reported today. BNP Paribas SA and
Deutsche Bank AG want to join in on a proposed probe of Freddie Mac,
initially requested last week by Bank of America. All three institutions
say they've watched Taylor Bean delay its own investigation for months,
despite being authorized by the court to subpoena Freddie Mac officials
and dig deeper regarding their business dealings with the Ocala, Fla.,
mortgage lender. Bankruptcy Judge Jerry Funk is set to consider
the request at a hearing on Friday.

Noteholders Seek to Block Spansion
Reorganization

Holders of Spansion Inc. convertible notes asked a federal court to
block part of the chipmaker's approved bankruptcy plan that would wipe
out their investment, Reuters reported yesterday. Under the plan, which
was confirmed last month, holders of secured debt would get cash and new
debt, while senior unsecured noteholders and holders of trade claims
would get stock. The plan would wipe out convertible notes, and holders
of those notes asked the U.S. District Court to block the distribution
of stock to senior noteholders. The convertible note holders said the
bankruptcy judge in the case failed to consider their alternative plan.
Under that plan, senior note-holders would be paid cash and holders of
convertible notes would receive stock. The convertible note holders said
they had financing for their plan.
href='http://www.reuters.com/article/idUSN0410044520100504'>Read
more.

Aleris Settles with European Lenders over
Chapter 11 Plan

Aleris International Inc. has struck a settlement with European term
lenders that previously objected to the aluminum maker's chapter 11
plan, clearing a potential hurdle to the company's exit from bankruptcy,
Dow Jones Daily Bankruptcy Review reported today. Under the
settlement deal, the European lenders will have the right to provide $50
million of a $690 million financing package that would fund Aleris's
exit from chapter 11. Investment firms Oaktree Capital Management LLC,
Apollo Management L.P. and Sankaty Advisors, which have committed to
backstop the $690 million debt-and-equity rights offering in which the
European lenders may now participate, also agreed to the settlement
deal. The agreement lifts a potential roadblock to confirmation of
Aleris's bankruptcy-exit plan. A confirmation hearing is scheduled for
May 13. 

Former Thornburg Executives Ask Court to
Dismiss Lawsuit

A handful of former Thornburg Mortgage Inc. executives are asking a
bankruptcy judge to dismiss a lawsuit accusing them of fraud in a
'multifaceted conspiracy' to secretly use the failed lender's employees
and assets to launch a new company, Dow Jones Daily Bankruptcy
Review reported today. Former Thornburg Chief Executive Larry A.
Goldstone and former Chief Financial Officer Clarence G. Simmons III are
asking the judge overseeing Thornburg's chapter 11 case to toss the
civil lawsuit filed by Joel I. Sher, the bankruptcy
trustee handling the lender's liquidation. Sher claims that the former
executives paid themselves excessive salaries while launching a start-up
company. Then, he says, with the help of partner at a big San Francisco
law firm, the two engaged in a grand scheme to cover up their actions.
The former executives, however, say that the trustee's suit is based on
a 'flawed factual premise,' namely that the executives should pay
damages for pursuing the purchase of a thrift that the struggling
mortgage lender had once considered but later abandoned before spiraling
into bankruptcy.

Pension Fund Cleared to Sue Ratings
Firms

A California state court judge rule that a lawsuit against the large
credit-rating companies filed by the California Public Employees'
Retirement System (Calpers) can proceed, Bloomberg News reported
yesterday. Calpers had sued Standard & Poor's, Moody's Investors
Service and Fitch Ratings saying that their faulty risk assessments on
structured investment vehicles caused $1 billion in losses. Calpers said
yesterday that a state court judge in San Francisco had rejected the
ratings firms' requests to dismiss Calpers' claims of negligent
misrepresentation. While the judge denied a claim of negligent
interference, he said that Calpers could renew that claim later.
Moody's, S.& P. and Fitch face similar suits by institutional
investors in federal court in Manhattan. The firms have denied
wrongdoing.
href='http://www.nytimes.com/2010/05/05/business/05ratings.html?pagewanted=print'>Read
more.

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