Goldman Sachs Conspiracy Theories Begin To Manifest In Reality

The folks over at Zero Hedge are in the midst of either going down the gutter of the lunatic fringe into Alice's rabbit hole or they are in the midst of breaking an industrial espionage case at Goldman Sachs. This ties in with severa prior datapoints that they have been tracking, including the cessation of high frequency trade reporting by the NYSE (a ranking which Goldman has completely dominated) and further ties into a trading scandal Matt Goldstein at Reuters is breaking.

Somewhere, a crazy Congresswoman named Maxine Waters is smiling...

The Fed Holds Nearly One Billion Dollars Of Extended Stay's Recently Bankrupt Credit

This was first reported a few weeks ago, but since Extended Stay has now officially filed, we thought it was important to review the fact that the Fed, through its Maiden Lane I (Bear Stearns) portfolio, holds nearly one billion dollars (face) of Extended Stay credit. Given the Fed has been holding that aggregate Maiden Lane I portfolio at only a modest discount to par, we suspect they have not yet revalued this POS.

The WSJ article linked above states:

Creditors who are not so lucky include some of the country's biggest banks and possibly U.S. taxpayers since one of the lenders was Bear Stearns, whose stake was assumed by the Federal Reserve after Bear collapsed in March 2008. As a result, the Fed had $744 million in face value of various junior classes of the debt on Extended Stay; it also held $153 million in the senior debt that was packaged and sold as bonds. A New York Fed spokeswoman declined to comment.

While the senior debt may have a decent recovery, depending on how it was structured, the bulk of the Fed's holding are in junior classes which are massively at risk.

Now that We The People are one of the major pre-petition creditors in a sizeable bankruptcy (with CRE implications, no less), it will be interesting to see how We behave.

Our long held conviction here at TILB has been that the next sector to be attacked under our Grand Unified Conspiracy Theory framework would be healthcare. However, perhaps we will backdoor our way in to the CRE or hotel and leisure industries first.

We already run the Lincoln Bedroom seven star resort, why not pick-up 680 properties around the country as well?

SHOCKER! U.S. Treasury (I Mean "God") Forced Chrysler Into Fiat's Hands

The WSJ is on fire today (see TILB's recent post on the slap fest between The Sheila Bear and The Panda Bear).

They are now reporting internal emails that disclose a juicy back and forth between The Administration and Chrysler. Perhaps not surprisingly, this is perfectly consistent with our Grand Unified Conspiracy Theory.

Click here to read some of the source document emails.

So, let's see:

• Chrysler has unanswered worries about Fiat's health;


• Fiat basically would not cooperate with Chrysler's efforts at due diligence. In fact, a mere "eight days before President Barack Obama announced his support for the alliance in an April 30 speech, Chrysler officials were still bristling over what they considered Fiat's unwillingness to provide even basic information about its finances";


• Chrysler executives referred to The U.S. Treasury as "God" in email (perhaps TILB's Borg references are more accurate than many people think);


• The appeals process, which has been railroaded, still ended with this great CYA quote from one of the appellate court judges, "[the Supreme Court should have] a swing at this ball."


• Government lawyers are now referring to dissident lawyer Tom Lauria as a "terrorist"


• Nardelli confirmed Fiat's role as playing a core piece in our Grand Unified Conspiracy Theory when he worried "that the introduction of Fiat in the U.S. 'may have a negative impact' on General Motors and Ford." [shocker]


• Chrysler advisory team members openly worried that "'Treasury/Chrysler' was 'in bed with a shady partner [Fiat].'"


• And, finally, we learn that Chrysler's advisor from Capstone struggles to master even the very basics of English. This gem says it all, "These washington guys want to show the market (gm, delphi....) that they can be tuff. We are the gueni pigs unfortunately."

This is all very sad. Further proof that the entire Chrysler "process" was nothing but a traveshammockery.

The Grand Unified Conspiracy Theory - Part I

We here at TILB have been referring to our Grand Unified Conspiracy Theory for well over a month now. What follows is the first in a two part series on The Grand Unified Conspiracy Theory. Part I outlines The Theory. Part II will show its applicability to nearly every government intervention to date.

As previously discussed on TILB, many of the governmental actions to date have the strange feeling of a coordinated effort to disembowel corporate America while burking free will into its perverted death throes.

Some may say it seems harsh to label this ugly trend a "conspiracy," yet it has many of the classic hallmarks. As Kurt Cobain said, sometime before hollowing out his head, "just because you're paranoid doesn't mean they aren't after you." While conspiratorial path began under President Bush, it has accelerated at a sickening pace under President Obama.

As with all conspiracies, the ability to decipher the actions begins with understanding the end goal.

We believe the goal is simple: control cash flows and direct them as desired to gain political ends. Whether or not it's a full fledged conspiracy, that goal seems obviously applicable and deceitful enough to create discomfort.

Working from the end forward, if we were conspiring to accomplish the aforementioned goal, we would want to do it in the least overt manner possible so as to maintain plausible deniability.

So the Chavez/Venezuela model, despite its appeal to ill-minded politicians, fails the basic sniff test of the average American and would be difficult to employ in The States. While that overt model meets the end goal, it does not fly in America, so we have to look for a path with lower resistance.

What if, rather than simply taking assets from owners against their will, we actually set up a structure that caused those owners to willfully surrender to our control?

That would seem to be the ideal.

As the legendary algebrist Jacobi is famed for saying, the secret to problem solving is to "invert, always invert." So, with our understanding of the end desires and a method that would work in America (get them to willfully give you their assets) well in mind, we can begin to imagine a means of accomplishing the goal:

1) Identify a big industry that is suffering from weakness, ideally a cyclical or temporary weakness. A lot of debt would be helpful as well. One final condition is key: many industry players need to be suffering from some weakness, not just one particularly poor player;

2) Identify the weakest sizeable player;

3) Deem that player "too important to fail" due to traits that are easily deliverable by the media and easily consumed by Joe Sixpack (e.g., "huge employer", statements of "systemic importance" such as "its collapse would cause the collapse of others", etc.);

4) Once we reach the brink of that important-but-weak company's collapse, step in as a funding provider of last resort in exchange for dominating control;

5) Prop up the failed company (FailedCo), disallowing its failure in a traditional sense thus preventing its competitors from absorbing the marketshare that would have been forfeit by FailedCo. This marketshare grab would have improved the health of all the remaining players but instead the opposite happens because...

6) ...the government, lacking a natural profit motive and supported by a theoretically infinite funding supply (a printing press and taxing authority), will operate FailedCo without a particularly profit driven motive. These non-economic behaviors harm competitors. Running the business in this manner will be easily justified with statements such as, "we need to ensure that FailedCo continues to operate at scale so that when we sell it back to private hands it generates enough proceeds to payback tax payers" or "we are not in the business of laying people off. We want to maintain the corpus of FailedCo until we find a permanent home for it." Countervailing voices can easily be surpressed with the mantra that they are greedy capitalists trying to benefit from the pain of the Average American.

7) In a world without interference in the markets when FailedCo actually failed, the competitors would have been strengthened in two ways: 1) marketshare grab from the disappearance or absorption of FailedCo; and 2) improved pricing as the surviving companies all endeavor to rebuild their balance sheets. However, in the conspiracy world, these participants continue to weaken as they compete with an overwhelmingly funded, non-economic competitor. This leads to the failure of the next weakest competitor (NextCo);

8) NextCo voluntarily comes to the government for its own bailout.

9) Rinse and repeat.

The process of having the government compete with private capital without a classic return-driven framework means that it will pound already weakened competitors into capitulation and these competitors will actually come to the government of their own volition for bailout, helping to further consolidate the government's power and control over cash flows.

This is elegant because most people will not be able to understand or simply will not believe the cause and effect.

While it has the exact same end game as simply nationalizing companies against their will (ala Chavez), it accomplishes that outcome in an obfuscated and seemingly voluntary manner.

Some people may say, "hey, TTB, that's ridiculous. Get off the Crazy Train."

In Part II of The Grand Unified Conspiracy Threory, we will address our sanity by walking through virtually every governmental interference in private companies and show its applicability.

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Let us know what you think? Are we crazy? If so, like a fox, or like a crazy person? If the latter, like John Nash or Kurt Cobain? If Kurt Cobain, like him before or after he off'd himself?

GM Prepares to Die...

...finally, at least almost finally, in a funny Chapter 11 bankruptcy sort of way...and, tomorrow, not yet today.

Tomorrow at 8 a.m. EST it will be final when GM admits to a bankruptcy judge what everyone and their mother (literally) already knew: GM is bankrupt.

Some quick notes on the filing and goals of The U.S. Treasury:

From BreakingNews.com. Click that link for the raw data.

• We The People will supply another $30 billion (initially) on top of the $20 billion we already have lent.
• Goverments of Ontario and Canada will combine to lend $9.5 billion.
• GM will have been lent $60 billion in the last six months, which is fairly amazing.
• Restructuring to breakeven in a 10mm cars sold a year (domestically) environment (we're annualizing nine and change right now, which is down from about seventeen million at peak, I believe).
• Will close 11 plants. Will idle 3 additional plants.
• Will attempt to 363 to assets in a quick sale to strip liabilities and form GoodGM. Will be harder to do than in Chrysler given so many more constituents, but given the Federalis are pushing it, "resistance is futile", as they say in our Administration.
• The Borg, I mean The Administration, has decided that future demand for cars will be smaller cars, so they'll be retooling to supply smaller cars.
• Will honor all warranties.
• UAW took a big haircut - allegedly even bigger than the Bush Administration was seeking (though the environment has worsened since then as well).
• Ownership:

• We The People: 60% plus appoint all the Directors other than the two (one
  each) Canadian and UAW appointees.

  Gov'ts of Ontario and Canada: 12% and a Director.

  UAW via VEBA: 17.5% (w/ warrants for 2.5%) and a Director

  Bondholders: 10% (plus warrants for 15%)

The goal is to have one of the cleanest auto balance sheets in the world and a highly competitive cost structure.

I'll go ahead and say it:

1. Sucks to be Ford (aka, "you next"); and
2. Everything about this is totally consistent with my Grand Unified Conspiracy Theory (it's almost done, I promise).

Reflections on Chrysler and the Adjustment of Creditors' Rights

In honor of GM's pending doom, what follows is an email forwarded to me from a friend of my older brother. He's an experienced restructuring expert. It takes a lot of the discussion surrounding the Chrysler "issue" and condensces it quite nicely.

Before we get to that, I will offer the one counterpoint that I've heard to all of this that at least gives me pause. The counterpoint is that, in the end, all of the creditors accepted the re-org voluntarily (defining "voluntary" in the broadest possible sense). Further, while there has been outrage about the UAW receiving 55% of the re-org'd company as a junior creditor, they in fact did not receive 55% as a junior creditor; in essence, the U.S. Treasury received it and chose to give it to the UAW which is completely within their rights.

Anyway, here's the excellent email I was referencing:

Friends,

I’m not sure if many of you have been closely following the developments in the Chrysler bankruptcy. As a restructuring professional, this is of tremendous interest to me and many others in my general line of work. Much has been made of one of the highest profile bankruptcies in history, especially the recent negative press surrounding a group of hedge funds and other lenders (collectively the Non-TARP lenders) that initially refused to accept the proposed pre-bankruptcy restructuring plan promulgated by Chrysler and the United States Treasury. Despite all the coverage, I fear very few people actually have a reasonable understanding of what is transpiring in the case. To a large degree I think the media is focused on the wrong aspects of this case. In light of that, I felt it was appropriate to share with you my views on this situation. Please keep in mind that these are solely my opinions and not those of my employer.

I believe the outcome in the Chrysler case is a national embarrassment and a major blow to creditor rights in this country. And while I’m sure the topic of “creditor rights” is not something near and dear to your hearts, creditor rights are incredibly important to the everyday mechanics of our economy. Anybody who borrows money to purchase a house or car, or uses a credit card, is impacted by creditor rights. The rights that creditors have against borrowers who cannot pay their debts are the underpinning of lending, and credit is the fuel of our economy.

I cannot understate my personal disappointment with what has happened in this case. While the proposed transaction is presented as a sale of Chrysler’s assets pursuant to Section 363 of the Bankruptcy Code, it is clear to me that this “sale” of Chrysler to “New Chrysler” is no sale at all but instead a sub-rosa plan of reorganization that violates the rule of absolute priority by providing a far lower recovery to secured creditors than they are entitled to under applicable law. Simply put, I believe the law is being subverted.

In terms of distributions of cash from the Chrysler estate, first lien creditors stand to get $2 billion in cash, or approximately a 29% recovery on their claim, while second lien creditors and third lien creditors (most notably the United States Treasury) receive zero recovery. It should be noted that Treasury injected $4 billion of TARP money into Chrysler on January 2, 2009 for that third lien claim. Within five short months, Treasury took a complete loss on that investment in terms of the recovery it will receive from the Chrysler estate.

It should also be noted that while secured creditors are significantly impaired, the Chrysler estate will be making significant levels of payments to a host of unsecured creditors such as vendors and dealerships that rank behind all secured creditors in terms of priority.

In order to consummate the purchase of the Chrysler assets and operate thereafter, New Chrysler will receive $6 billion in funded debt from Treasury in new senior secured debt. Aside from this debt, New Chrysler will also issue a note in an amount of nearly $4.6 billion to a Voluntary Employee Benefit Association (VEBA) of the United Auto Workers. The VEBA will also receive 55% of New Chrysler’s equity. Treasury and the Canadian government will receive 8% and 2% respectively.

While I am not advocating that Chrysler be liquidated, it certainly could be liquidated for more than $2 billion even under the worst assumptions, and generate a higher recovery for the first lien secured lenders. And if for some reason that wasn’t the case and the Chrysler assets are worth something less than $2 billion, then all of the following must also be true:

(i) It makes no economic sense for Treasury loan $6 billion to New Chrysler

(ii) Depending on the priority of the note in New Chrysler’s capital structure, the $4.6 billion note to the UAW’s VEBA may be worthless

(iii) At present, the equity to be held by Treasury and the UAW VEBA in New Chrysler following the sale must also be worthless

But the reality is that Chrysler is worth far more than $2 billion. Unfortunately, because of the way this transaction is being structured, the value of Chrysler that exceeds $2 billion is not being subjected to the typical waterfall of priority, where secured creditors are paid in full (beginning with the first lien lenders) before any significant recovery is provided to unsecured creditors. Instead, the assets of Chrysler are being stripped from the Chrysler estate for a price of only $2 billion, with a significant portion of that excess value flowing to unsecured creditors (most notably the UAW).

The Non-TARP lenders who hold first lien debt objected to this treatment, and in my opinion, rightfully so. In response to their protests, they have been repudiated by various members of the press and several politicians, including, most notably, our President. Rumors are rampant concerning a variety of threats that were levied at the Non-TARP lenders. Meanwhile, the other holders of Chrysler’s first lien debt, many of which received taxpayer money under TARP, have been lauded for consenting to this transaction. It strikes me as backwards to vilify those parties that are standing up for their rights under the law while other financial institutions, buttressed by taxpayer dollars, are so willing to consent to a far worse deal than they are entitled to under the law.

And try as I might, it is impossible for me to ignore the potential political ramifications of this transaction:
- Treasury is a multi-billion dollar secured creditor of Chrysler that will take a complete loss on the capital infusion it made into Chrysler earlier this year.
- Treasury has recently provided a multi-billion debtor-in-possession line of credit to Chrysler.
- Treasury was in the middle of all of the negotiations between Chrysler and the proposed “purchaser”, New Chrysler, and it would appear that Treasury had a significant role in arriving at the $2 billion purchase price paid to the Chrysler estate in return for Chrysler’s assets.
- Treasury is providing several billion in financing to New Chrysler.
- Treasury will have an 8% ownership stake in New Chrysler.

But the UAW, a huge political supporter of the current administration (and an unsecured creditor of Chrysler), somehow gets 55% of New Chrysler. I fail to see a contribution from the UAW that justifies receipt of a $4.6 billion note and 55% of the stock issued by New Chrysler when compared to what Treasury is receiving. However, I do see Treasury on all sides of this transaction with massive potential for conflicts of interest. One would think that with all these potential conflicts that Treasury would be steadfast in ensuring adherence to the law. Unfortunately that does not appear to be the case.

Given the fact pattern, I am inexorably drawn to a few depressing conclusions:

1) Treasury is orchestrating a public taking of the Chrysler assets from the Chrysler bankruptcy estate for far less than those assets are worth and transferring them (and their value) to a new entity which has as a principal stakeholder a union that is politically aligned with those who control Treasury.

2) It is unclear what it means to be a secured creditor if this kind of treatment can occur in bankruptcy.

3) This entire problem could have been easily avoided if Treasury and “New Chrysler” had just decided to pay a fair price for the Chrysler assets from the Chrysler estate and allow those proceeds to follow the applicable waterfall of absolute priority. Relative to the amount of money that has been spent or committed to date by the administration, paying an additional $10-15 billion is essentially a rounding error. One has to be very concerned that the administration would go to this degree of public trouble over an amount that could easily be otherwise swept under the rug. Which means…

4) They will do it again.

The Chrysler Traveshammockery

It's been sold to America that Chrysler is of systemic importance. Countless articles have been written about the 40,000 direct job losses or the nearly 300,000 that would be lost systemwide due to job cuts that would occur as dealers, suppliers and suppliers' suppliers lay people off to adjust for lost business. These "facts" have been used as a justification for the Chrysler bailout; a sort of justification that has been used to mislead the public in virtually every bailout in government history (I make some minor exceptions during September of 2008). This is what is seen - the first order effect.

Like lambs to the slaughter, too numbed by all the horrifying governmental actions of the last year and the reasonable desire to believe in "hope" and "change", we have marched unquestioningly alongside our "leadership". However, common sense tells us that these job losses are an absolute sham. I honestly cannot believe that more folks haven't challenged this idiocy, though perhaps if the treatment of Chrysler's secured lenders is a guide, we are learning that challenging this Administration on the basis of legal rights or common sense put you on a fast train to publicity hell.

At The Investment Linebacker (TILB), we are willing to take the engineer's seat on that train: What is unseen are the jobs created and relative financial strength gained by Chrysler's competitors (esp. GM and Ford) if Chrysler had been allowed to perish naturally - the second order effect.

Chrysler, as an auto company, "creates" virtually no new demand. There are very few buyers that say to themselves, "gosh, I really don't need a new car, but I am so inspired by that Chrysler/Jeep/Dodge that I am going to go buy an extra car." As such, all Chrysler does is fulfill an existing demand for new cars. The evaporation of Chrysler would not at all eliminate that already existing demand nor would that demand lie fallow as some poor consumer demands a product that just cannot seem to be supplied. In fact, some other car company would certainly step into the breach and gladly fill that demand. This means that GM and Ford, two of Chrysler's most direct competitors would have been primary beneficiaries of a Chrysler liquidation. For those that don't know, GM and Chrysler themselves are struggling to remain solvent and would be strengthened by this market share opportunity - as would virtually all of Chrysler's competitors, making the entire industry more sound.

Jobs "lost" to Chrysler would have been jobs "created" (or retained that would otherwise go away) by other, stronger auto OEMs. GM, Ford and others would happily have purchased parts to make those incremental autos from suppliers, thus allowing those suppliers to "create" jobs that offset Chrysler suppliers' "losses". Those suppliers would have purchased inputs, materials, etc., etc. down the OEM foodchain. Back up the chain, GM, Ford and others would happily have employed people to assemble cars, trucks and SUVs for shipment to dealers. GM, Ford and other dealers would happily have sold those incremental cars on to end buyers at competitive prices, providing jobs at dealerships. The "loss" of jobs is quite clearly a sham as systemwide, there would not be jobs lost because there would not be a loss of aggregate demand or supply.

In fact, net, net jobs would have been retained and the employers providing those jobs would have been in a healthier position than they are today.

We can state with some certainty, the Chrysler bailout not only is a travesty to the perception of the soundness of contract law and the separation of private enterprise from unneeded public interference, it also weakens the overall automaker industry at precisely the moment they needed a boost. Conspiracy theorists might believe this is intentional as it increases the likelihood that the Administration (and the UAW) will control other domestic OEMs as well.

Since TILB is already engineering this train ride, we have nothing to lose: we will go ahead and note that in the long run, the OEMs that will suffer the most from this intervention are our higher cost-structure domestic OEMs - GM and Ford (see conspiracy theory above). At a moment when GM and Ford desperately need the breathing room afforded by absorbing some of Chrysler's 10% domestic market share, those already weak legends will in fact now be forced to compete with a government, UAW, and foreign (Fiat) owned competitor. A competitor with a questionable profit motive and a bankruptcy-assisted newly reduced cost structure. If AIG, FNM and FRE are any guide, Chrysler's prices will likely be so competitive that it will have the exact opposite impact on GM and Ford that would have occurred if nature had its way with Chrysler. Rather than gaining strength and breathing room, they will be increasingly impaired and short of financial oxygen. I suspect those two American Icons will find themselves stumbling hope-filled into the warm, loving, waiting, open embrace of the government.

Ironically (or perhaps not), this just finished playing out in the realm of life insurance as the government's ownership of AIG (and lack of profit motive in its insurance pricing) prevented a handful of already staggered competitors from raising prices and taking abandoned share in an effort to heal themselves. As such, they've just been welcomed into We The People's loving TARP program.

This whole affair absolutely and honestly saddens me.

The government's intervention makes a mockery of common sense and America.

It is a traveshammockery, but double the rage and minus the humor.