White & Case bankruptcy partner Tom Lauria (Tennessee BA ‘82, JD ‘86) has stirred up a hornet’s nest around the Chrysler bankruptcy and the Obama administration’s efforts to force creditors to participate.
Clusterstock’s John Carney (a former Skadden banking lawyer) picked up an interview Lauria did with a Detroit talk radio station. Lauria, pictured, reportedly said
“One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight…That was Perella Weinberg,”
After the jump, the background (including a juicy potential conflict of interest), backlash, and more on Lauria.
Not afraid to step further into the fracas, Lauria went on to name names. According to Andrew Ross Sorkin at Dealbook,
In a follow-up interview with ABC News’s Jake Tapper, [Lauria] identified Mr. Rattner, the head of the auto task force, as having told a Perella Weinberg official that the White House “would embarrass the firm.”
Sorkin, by the way, has been an M&A reporter for 10+ years now, although he’s never practiced in the field as either a lawyer or banker. He does have one nice legal connection, though. His father is Cahill Gordon antitrust partner Larry Sorkin (Brown BA ‘64, Yale LLB ‘67, LSE LLM ‘68 (Fulbright)).
According to Carney,
Perella Weinberg had been one of the firms that was resisting the Obama administration’s plans for restructuring, alongside Stairway Capital and Oppenheimer Funds. The group had argued that their position as senior creditors gave them legal rights to be paid in full before junior creditors were paid. They had put forth a counter-offer under which they would have received far less than the face-value of the debt they held, but more than the Obama adminstration had proposed. This compromise deal was rejected by the administration, and the holdouts were characterized by the president himself as unwilling to make sacrifices for the common good.
After intense political pressure, Perella Weinberg defected from the dissenters and agreed to the administrations plans. The majority of senior creditors, including several large banks such as JP Morgan Chase, had already agreed to the plan. Some critics charge that the administration used its leverage as the provider of TARP funds to force banks to comply. Lauria’s charges suggest that the administration had to get even rougher with financial firms that haven’t taken bailout money.
The banks supposedly were willing to come down from straight preference as the senior creditors, to taking 60 cents on the dollar, the countered the government’s offer of 29 cents with a further drop to 50 cents. I’m not sure how that qualifies as being “unwilling to make sacrifices for the common good,” considering they’ve got $6.8 billion of senior debt that is getting subordinated to levels pari passu with junior and unsecured creditors.
You’ll recall that the three men in charge of the government team on the auto industry bailout are Steve Rattner, Ron Bloom (an advisor to the UAW), and Matt Feldman (a former Willkie bankruptcy partner).
Rattner already has a strained relationship with the industry. He was a co-founder of private-equity fund Quadrangle Group, which hasn’t played nicely with Cerberus. The Deal summarized the conflict a few months ago when Rattner emerged as a frontrunner for the job:
Cerberus Capital Management LP, the current owner of Chrysler LLC, lent Rattner’s Quadrangle $125 million as part of the financing for the buyout of Maxim magazine and music publication Blender. As both titles limp through the drop in advertising revenue, Cerberus wants more capital invested to cover the debt levels, a request that Quadrangle has balked at. The two remain at loggerheads over the issue with Cerberus claiming the loans are technically in default.
As one source told the New York Post, “”Cerberus is about to foreclose on the loan to Quadrangle, and now Steve Rattner is going to be the boss of Cerberus.”
Did Lauria shine some daylight on animosity that was already seething?
AmLaw Daily saw the issue coming to a head last week, writing that Lauria claimed at the time that
the holdout lenders will challenge the planned sale of Chrysler’s prime assets to a new company controlled by the auto workers union and Fiat, according to Reuters. The lenders say the sale is an “end run” around established bankruptcy law that gives secured lenders priority over junior lenders (including the union) when it comes to getting repaid.
With Perella Weinberg defecting, that could be the beginning of the end for the holdout lenders.
The White House, of course, denied Lauria’s allegations:
“The charge is of course false as both parties who would know the facts have pointed out,” Bill Burton, a White House spokesman, told DealBook. “It is neither substantiated by people involved in the conversations nor by what has transpired over the course of the last couple of days.”
Now, Perella Weinberg is “DK”ing Lauria (for those who don’t get the reference, go see Wall Street).
Suggestions have been made that the Perella Weinberg Partners Xerion Fund changed its stance on the Chrysler restructuring due to pressure from White House officials. This is incorrect. The decision to accept and support the proposed deal was made by the Xerion Fund after reflecting carefully on the statement of the President when announcing Chrysler’s bankruptcy filing. In considering the President’s words and exercising our best investment judgment, we concluded that the risks of potentially severe capital loss that could arise from fighting this in bankruptcy court far outweighed any realistic potential upside.
We have a very specific mandate from our investors, and that is to carefully weigh investment risks and rewards. It is not our investment mandate to pursue political or risky legal campaigns with our investors’ money. This was our assessment of investment risk and reward, nothing else.
While we did and still do believe that the lenders would be justified in pressing their objections under conventional bankruptcy law principles, we believe a settlement would now be in the best interests of all parties in the context of avoiding a drawn out contested bankruptcy litigation proceeding, and we encourage our colleagues in the loan syndicate to pursue this immediately.
Lauria isn’t afraid to stir things up in big bankruptcies. He’s done it before, according to ALD
In the contentious Adelphia Communications bankruptcy, Lauria led a group of creditors that filed late motions calling for a special trustee to investigate whether each group of note holders was getting what they deserved, according to this 2006 story from the New York Law Journal. A judge dismissed his motion, calling it a “nuclear war button” that threatened to disrupt the planned sale of Adelphia’s prime assets to Time Warner and Comcast for nearly $18 billion.
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Lauria is just making noise since W&C has no other work and they are trying to keep W&C afloat on the basis of this high profile engagement. Once it fades away (hopefully today when the Supreme Court finally throws out Lauria's objection), W&C will collapse.