October 32008

 

Federal
Bailout

House Prepares for Second Bailout
Vote
The fate of an emergency economic rescue plan remains uncertain this
morning as the House

prepares for a midday vote, but both Democratic and Republican leaders
say they are optimistic

that they can marshal more support for the $700 billion bailout plan,
the Washington Post

reported today. The stock market's steep drop Monday to a failed vote of

the bailout plan

offered lawmakers a glimpse of the consequences they could face if they
don't approve the

bailout package. President Bush yesterday urged House lawmakers to 'get
this bill passed,'

warning that the financial crisis 'has gone way beyond New York and Wall

Street.' Rep. Eric

Cantor (R-Va.) said that the Senate's decision to add a package of tax
breaks worth $108

billion next year for businesses and families was attracting Republican
votes. However, only

about a half-dozen Republican names were circulating as likely
vote-switchers. Several

Republicans said they were contemplating withdrawing their support,
including Rep. Spencer

Bachus (Ala.), who was among the key negotiators on the bailout
measure. 

href='http://www.washingtonpost.com/wp-dyn/content/article/2008/10/03/AR2008100301108_pf.html'>

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Analysis: SEC's Rule Let Banks Pile Up

New Debt, and

Risk
The Securities and Exchange Commission had little idea of the financial
storm now

upon the United States when they met in 2004 to consider
an urgent plea by the

big investment banks who wanted an exemption for their brokerage units
from an old regulation

that limited the amount of debt they could take on, the New York
Times reported today.

The exemption would unshackle billions of dollars held in reserve as a
cushion against losses

on their investments. Those funds could then flow up to the parent
company, enabling it to

invest in the fast-growing but opaque world of mortgage-backed
securities, credit derivatives

and other exotic instruments. The five investment banks led the charge,
including Goldman

Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left

to become Treasury

secretary. One commissioner, Harvey J. Goldschmid, questioned the staff
about the consequences

of the proposed exemption. It would only be available for the largest
firms, he was

reassuringly told - those with assets greater than $5 billion. The SEC
decided in favor of the

change to the net capital rule, and the five big independent investment
firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer
in turbulent times, the

agency also decided to rely on the firms' own computer models for
determining the riskiness of

investments, essentially outsourcing the job of monitoring risk to the
banks

themselves. 

href='http://www.nytimes.com/2008/10/03/business/03sec.html?ref=business&pagewanted=print'>

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Wells Fargo in a Deal to Buy All of
Wachovia
Wells Fargo & Co. today said that it had reached an agreement to
acquire a rival, Wachovia

Corp., for about $15.1 billion, the New York Times reported.
The announcement came

just four days after Citigroup had agreed to buy Wachovia's banking
operations for $2.2

billion, or about $1 a share. However, Wachovia has now apparently
rejected that deal in favor

of one where the entire company would be acquired. Wells Fargo said that

the deal required no

assistance from the Federal Deposit Insurance Corp. or any other
government agency. The bank

plans to raise up to $20 billion by issuing new shares, primarily common

stock. Under terms of

the agreement, which has been approved by directors of each company,
Wachovia shareholders will

receive 0.1991 shares of Wells Fargo stock in exchange for each share of

Wachovia common stock.

The transaction, based on Wells Fargo's closing stock price of $35.16 on

Thursday, is valued at

$7 a share. Wachovia has almost 2.2 billion common shares outstanding.
The agreement requires

the approval of Wachovia shareholders and customary approvals of
regulators. 

href='http://www.nytimes.com/2008/10/04/business/04bank.html?_r=1&ref=business&oref=slo

gin'>Read more.

Delphi Seeking at Least $3.5 Billion
to Exit

Bankruptcy
Delphi Corp.'s executive chairman Steve Miller said that the company
needs $3.5 billion to $4

billion to emerge from bankruptcy protection, the Detroit Free
Press reported today.

The Troy, Mich.-based auto supplier, which has been restructuring in
chapter 11 for nearly

three years, is going to its current investors to refinance its existing

bankruptcy loans, as

well as third parties, Miller said. Delphi had previously sought a $6.1
billion exit loan. The

company needs to raise less money, in part, because GM boosted its
contribution to Delphi,

which includes shifting $3.4 billion in pension debt to GM. 

href='http://www.freep.com/apps/pbcs.dll/article?AID=/20081003/BUSINESS01/810030319'>Read

more.

Commentary: Is Credit Default Swap
Litigation the Next Big

Thing?
Legal executives are expecting that the banking industry's recent
implosion means that banks

with a piece of the $43 trillion credit swap market are likely to sue to

recoup their losses,

according to a commentary in today's American Lawyer. Robert
Claassen and Keith Miller

of Paul, Hastings, Janofsky & Walker  said that banks might
engage in suing each other

over these unregulated financial instruments. Banks typically don't like

to sue other banks,

and they particularly don't like the law firms that get in the middle of

such disputes. Miller

speculates that firms outside of New York that don't ordinarily
represent the big banks will

have real entree here, just as they have in signing up the hedge fund
clients that are already

active plaintiffs against banks. 

href='http://www.law.com/jsp/law/LawArticleFriendly.jsp?id=1202425000825'>Read

the full

commentary.

Fannie Mae Drops Plan for a Fee
Increase
Fannie Mae canceled a planned increase in fees that would have raised
costs for home-mortgage

borrowers, the Wall Street Journal reported today. The move
announced yesterday is the

first in what may be a series of concessions to be announced by Fannie
and its main rival,

Freddie Mac, since their regulator seized control of the
government-backed mortgage companies

in early September. The companies' regulator, the Federal Housing
Finance Agency, and the

Treasury have been pressing executives at Fannie and Freddie to find
ways to make home loans

more affordable in a bid to boost the housing market. Fannie is
canceling an increase in its

'adverse market delivery charge' that had been due to take effect Nov.
1. That increase,

announced in August, would have raised the charge to 0.50 percent of the

loan amount from 0.25

percent. Fannie now will leave the fee at 0.25 percent. 

href='http://online.wsj.com/article/SB122298506968699833.html'>Read

more. (Subscription required.)

Analysis: Short-Sellers Potentially
Bet Against States'

Debt
While regulators were sprinting to save the financial system last month,

someone was making a

lot of money - by betting against the State of New Jersey, the New
York Times reported

today. While it was not clear who, trading records suggest that in the
panicked days when

exotic derivatives were bringing the American International Group to its

knees, traders were

using the same kinds of derivatives, called credit-default swaps, to
profit from New Jersey's

rising tide of red ink. This form of market betting could force local
governments

to confront long-simmering problems instead of sweeping them under
the rug. However, it

could also increase the cost of raising money or, in an extreme case,
drive investors away

entirely if a city's finances are perceived as shaky. Already, the
housing slump has left some

places struggling to balance their budgets as revenues dwindle and the
credit crisis takes its

toll. 

href='http://www.nytimes.com/2008/10/03/business/03swap.html?adxnnl=1&ref=business&adxn

nlx=1223038809-wAHn9Rl7O6f5XF2EfwfOsw&pagewanted=print'>Read
more.

Judge Denies Asbestos Claimants'
Appeal of Dana's

Reorganization Plan
A U.S. judge has dismissed objections to Dana Corp.'s chapter 11
reorganization, ruling that

the asbestos claimants' personal injury claims are not impaired by the
auto parts maker's plan,

Bankruptcy Law360 reported today. Judge Paul A. Crotty of the
U.S. District Court for

the Southern District of New York on Tuesday granted Dana Corp.'s motion

to dismiss the

asbestos personal injury claimants' committee appeal of the debtors'
plan, which had been

approved in December. The committee appealed the plan in January
primarily because it assigned

asbestos personal injury claims to Class 3, a different class from other

creditors. 

href='http://bankruptcy.law360.com/articles/71332'>Read
more. (Subscription

required.)

Asarco Pushes for Discovery in Bid for

EPA

Records
Asarco Inc. is fighting the U.S. Environmental Protection Agency's
request for summary

judgment, asking a district court to commence discovery on the company's

claim that the agency

withheld information that could affect a $187.5 million settlement of a
Superfund case,

Bankruptcy Law360 reported yesterday. Responding to the EPA's recent
push for summary judgment,

Asarco argued on Wednesday in the U.S. District Court for the District
of Columbia that the

motion was “procedurally improper” and that the agency's own

affidavits confirmed

that there is a credible and factual dispute over the way it handled the

company's Freedom of

Information Act request. Federal officials testified in court that the
recontamination data in

question did exist, but one of them later argued that his testimony was
based on misunderstood

questions, Asarco said. 
href='http://bankruptcy.law360.com/articles/71320'>Read

more. (Subscription required.)

Lehman Moves to Sell Off Energy Co.
for $230

Million
Bankrupt Lehman Brothers Holdings Inc. is seeking court approval to sell

Texas-based power

supplier Eagle Energy Partners LP, which it purchased in May last
year, saying a sale was

vital to ensure that the energy company continued operating,
Bankruptcy Law360

reported yesterday. In a motion filed Wednesday in the U.S. Bankruptcy
Court for the Southern

District of New York, Lehman said it had entered into a $230 million
purchase agreement on

Sept. 26 with the U.S. subsidiary of French energy provider EDF. The
investment bank told the

court that Eagle, which supplies, transports and stores natural gas and
electricity across the

U.S., relies on Lehman for credit extensions to fund its operations and
currently owes Lehman

more than $660 million. R
href='http://bankruptcy.law360.com/articles/71364'>ead more.

(Subscription required.)

AIG Plans Sale of Business
Units
American International Group Inc. said today that it plans to sell off a

number of business

units to pay off its massive government loan, while retaining its U.S.
property and casualty

and foreign general insurance businesses, the Associated Press reported.

AIG, one of the

world's biggest insurers, also said it plans to retain an ownership
interest in its foreign

life insurance operations. One unit that analysts have said could be
sold is the International

Lease Finance Corp., which leases out more than 900 aircraft with asset
values topping $44

billion at the end of the second quarter. Other businesses AIG operates
include life,

commercial auto and accident and health insurers. 

href='http://www.washingtonpost.com/wp-dyn/content/article/2008/10/03/AR2008100301053_pf.html'>

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Report: “Intentional
Wrongs” Malpractice Claims

Increase
A recent American Bar Association study showed that although the number
of legal malpractice

claims related to “client relations,” such as the failure to

obtain consent or to

follow clients' instruction, has decreased in recent years, the number
of claims arising from

“intentional wrongs” has reached its highest level since the

mid-1980s, Bankruptcy

Law360 reported yesterday. The ABA survey examines 40,000 claims brought

by 18 malpractice

insurance providers in the United States between 2004 and 2007. The
study reveals that the

number of claims arising in the client-relations group category has
declined from 14.5 percent

of all claims in 2003 to 11.2 percent in 2007, a downward trend that has

continued for the past

decade. By contrast, the number of claims arising from intentional
wrongs, including fraud,

malicious prosecution, libel, slander or violations of civil rights, has

jumped substantially,

increasing almost four percent from 10 percent in 2003 to 13.5 in 2007.
The ABA report also

said that this category had never before accounted for more than 11.9
percent of all claims, a

number that was last reached in its 1985 study. 

href='http://bankruptcy.law360.com/articles/71340'>Read
more. (Subscription

required.)

Tropicana Seeks to Regain Control of

New Jersey

Casino
Tropicana Entertainment LLC told a bankruptcy judge yesterday that its
Atlantic City, N.J.,

location is worth at least $950 million, and it plans to petition New
Jersey officials next

week to regain control of the property, Bankruptcy Law360
reported. The company said

that it will only ask the court to sell the casino if management
determines that a sale is the

best way to achieve the highest value for the property, according to the

filing, which outlines

the framework for its upcoming reorganization plan. Tropicana has been
struggling ever since

the New Jersey Casino Control Commission took away the gaming license
for the Atlantic City

Resort & Casino in December and appointed trustee Gary S. Stein to
arrange a sale of the

property. Read more. 

href='http://bankruptcy.law360.com/articles/71424'>(Subscription
required.)

Catalyst Energy Files
Bankruptcy
Natural gas marketer Catalyst Energy filed for chapter 11 bankruptcy
protection Wednesday after

its credit evaporated overnight, the Atlanta
Journal-Constitution reported yesterday.

Georgia utility regulators will begin deciding today if Catalyst can
continue to sell gas in

Georgia, as state law requires marketers to have enough credit to pay
for the gas they order.

Catalyst lost both that required line of credit and its contracted fuel
supply this week, as

the Wall Street crisis rippled into the energy industry. The company
said it has 30,000

customers in Georgia and liabilities of $20 million. 

href='http://www.ajc.com/services/content/business/stories/2008/10/02/catalyst_energy_bankruptc

y.html?cxtype=rss&cxsvc=7&cxcat=6'>Read more.

International

Italian Senate Passes Bankruptcy

Law for Alitalia
Italy's Senate passed revisions to the country's main
bankruptcy law that are

designed to clear the way for the sale of unprofitable state-owned
airline Alitalia SpA to

private investors, Bloomberg News reported yesterday. Prime Minister
Silvio Berlusconi's allies

in the Senate passed the measure, which now must be approved by the
Chamber of Deputies, as the

opposition parties abandoned the assembly. The government has already
implemented the changes,

through an Aug. 28 decree, and is now getting parliamentary approval for

the emergency measure.

Alitalia filed for bankruptcy under the new rules in August, and is
currently being

administered by the state. A group of private Italian investors led by
Roberto Colaninno is

seeking to purchase the profitable parts of the airline. 

href='http://www.bloomberg.com/apps/news?pid=20601092&sid=atwG2aKcEcLY'>Read

more.

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