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The Nation's Pulse
GM vs. GGP: Bankruptcy the Way It Ought to Be
On the surface, given the economic turmoil we've had, there was nothing that remarkable about the bankruptcy of shopping mall owner General Growth Properties (GGP). About two weeks ago, GGP filed for Chapter 11 bankruptcy, an action that some had been expecting for months due to its debt of almost $25 billion.
GGP was the second largest mall owner in the country -- with properties including Chicago's Water Tower Place and the D.C. area-Tyson's Galleria -- and filed for what has been described the biggest U.S. real estate bankruptcy ever. Yet the bankruptcy barely made a ripple in the stock market, which ended up for the day on April 16th, when GGP announced its Chapter 11 filing. Visiting Chicago this weekend, I watched shoppers go in and out of Water Tower Place as if nothing had changed. And this was the story with many of GGP's malls throughout the country, according to various local press reports.
Yet, in another way, the fact that this bankruptcy has so far gone off so smoothly is itself remarkable. Given the stretched definition of "systemic risk" and firms "too big to fail," GGP would seem to meet that definition, at least as much as General Motors and Chrysler do. After all, thousands of stores and restaurants are anchored at malls, and if their landlord has cash flow troubles, these businesses and their employees could certainly suffer. For months, there had been talk that commercial real estate was next on the list to be bailed out.
But perhaps sensing the "bailout fatigue" of American taxpayers and the strings attached to money received from TARP, GGP's owners and creditors decided to take the road less traveled. Or rather, the road most often traveled by failing firms until the federal government opened its spigots last year. They filed for an old-fashioned Chapter 11 bankruptcy. And except for bankruptcy court costs -- minimal in comparison to the billion-dollar bailouts -- there is no taxpayer money involved.
Because of various raps against bankruptcy rather than bailouts, it's worth studying the mechanics of the GGP bankruptcy, to show how they disprove them. One argument that has been made against a car company bankruptcy is that in these times of tightened credit, it would be impossible to get debtor-in-possession, or DIP, financing. DIP is necessary to finance a company's operating costs while the court is reorganizing the company under the Chapter 11 proceedings. Yet GGP shows that large amounts of DIP financing are available -- for a price.
According to the New York Times, "General Growth will pay 12 percent over the London interbank offered rate, a commonly cited reference rate for bank lending." The DIP loan is coming from Pershing Square Capital Management, the hedge fund run by William Ackman. And the cost of this financing -- though steep -- is one that GGP shareholders and creditors see as well worth the price, given that it could facilitate a successful reorganization of the company that would be in everyone's interest.
Ackman has been most often been noted for betting against companies in the real estate boom -- and being spectacularly right. As I wrote recently in Reason, Ackman "provided some of the earliest warnings about flaws in mortgage lending, securitization models, and the credit ratings process." One of the ways Ackman would make his bets was by both shorting the stocks of financial firms and buying the much-derided credit default swaps that pay off in the event of firms' default. Those swaps paid off handsomely when firms went belly up.
Ackman also bought swaps against GGP, and there has been criticism implying that some creditors pushed the company into bankruptcy so that the swaps would pay up. Not mentioning Ackman by name, columnist Daniel Gross writes in Slate about the supposed "scary rise of the empty creditor," arguing that "if a lender or creditor believes it can profit more from a complete failure -- i.e., if it has an insurance policy that pays off only in the event of utter devastation -- that creditor might be more inclined to push a company toward bankruptcy." Echoing an earlier assertion by the Financial Times that "CDS holdings were … a factor in the default and filing for Chapter 11 protection" of GGP, Gross claims that "the logic of empty creditors may similarly have been a reason why [GGP] ended up filing for Chapter 11."
But there are a couple problems with these complaints, in particular if they are directed at Ackman. One is that, according to the SEC filings as reported by the investor website SeekingAlpha.com, the GGP swaps Ackman holds don't appear to be actual credit default swaps. Instead, they are based on "share price performance" of the company's common stock. So an actual bankruptcy wouldn't have made as much of a difference as a low share price.
Second, if Ackman wanted to profit solely from General Growth's poor performance, he could have simply walked away when the company filed for bankruptcy or the stock tanked. Instead, he is now betting that the company will have a successful reorganization by lending it money to facilitate an orderly bankruptcy. The loan may have lucrative terms, but Ackman is still taking a risk that the company will fail. He simply hedged his risks with some swaps.
The most important point is that Ackman, with 25 percent of the company's stock, as well as any other potential holders of GGP swaps, would not have been able to convince the major shareholders and creditors to go along with the bankruptcy unless it offered something beneficial for all parties.
What does bankruptcy offer GGP? What bankruptcy offers all filers: a chance to say "time out" to the creditors while the company is being reorganized. When asked if there was a danger that GGP would have to sell its properties at fire sale prices to rival firms, Ackman told Bloomberg News, "The probability of … the other mall REITs buying any of General Growth Properties on the cheap is zero. They're not going to be forced to do anything because they're in bankruptcy."
Isn't it ironic? GM takes billions in bailout money as a preferred alternative to a "disorderly" bankruptcy. Yet it now may end up closing its plants for several weeks. Yet not one mall has closed so far after GGP has taken the plunge into bankruptcy. This is in significant part because the bailout money for the car companies has actually been an impediment to effective restructuring.
As I have stated previously on the auto bailouts, "The prospect of an ever-increasing supply of tax dollars is leading parties with auto industry contracts -- unions, bondholders, dealers and others -- to play a game of chicken. No one wants to renegotiate a contract when they think the government will come in with more money to cover the losses." Though now with the Obama administration squeezing GM's bondholders in favor of the unions, many bondholders are probably wishing they had forsaken the TARP money, as Ford did, and taken their chances in bankruptcy court.
So kudos to Ackman and the other GGP parties for finding an innovative solution for bankruptcy and for commencing a restructuring without bailout money from taxpayers. And maybe if the option of bailout money is completely cut off, as it should have been in the first place, a private sector innovator like Ackman will emerge to lead an orderly reorganization of the auto industry.
(Seth Bailey, a CEI research associate, contributed to this article.)
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Pingback| 4.28.09 @ 7:30AM
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Robert Rosencrans| 4.28.09 @ 10:57AM
A beautiful example of why Washington is always in a turmoil, as opposed to an orderly procession.
JP| 4.28.09 @ 11:14AM
The biggest thing GGP had going against it was that it employed no union members. The bail-outs of the auto industry really are a bail-out of the UAW members. Chrysler will declare bankruptcy, but it has agreed to take pensions and retiree health care plans off the table. So bondholders and creditors will get maybe 20 cents on the dollar, but the UAW will continue on as before.
Paul from SA| 4.28.09 @ 11:25AM
I understand GM's Union workers at those plants that are being shutdown for the summer will continue to receive full pay and benefits.
What is GM spending our money on?
Where will they get the money to repay the loans?
I've said it before and will say it again -- and I hear the same sentiments throughout the internet on this same subject -- I will NEVER buy a union-made car. They're not getting any money from me to pay back the gov't loans.
Yes, management is ultimately to blame for agreeing to union contracts... but the unions are the problem. The unions are destructive, self-serving and anti-Republican. (And they do bad work.)
Pingback| 4.28.09 @ 12:08PM
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Pat| 4.28.09 @ 4:13PM
Interesting contrast but "apples vs. oranges" in terms of business analysis. Saving GM and Chrysler is purely a political issue now and has been since before the elections last fall. GM played out a little bedroom comedy with Chrysler during October, pretending to serious merger talks. Had they merged, the ensuing job cuts and restructuring would have been harsh. Both Obama and McCain fell for the scam and quickly promised to help the auto industry if elected -after the election, the merger talks died a sudden death.
It's politely called saving the American automotive industry and it is true that while GM and Chrysler have operations clustered mainly in the midwest, they also have plants and suppliers scattered throughout North America employing thousands of workers.
But an additional political theme underlying this effort is saving the legacy of the Democaratic Party. Detroit, and to some extent Michigan, is currently a poster child for a dysfunctional city and region. However, the boasts for the past several decades claimed this region as a shining example of Democratic social policy. Except things didn't work out that way and the various progressive social policies have turned an American region into a third world country.
Even before the 1967 race riots, the city of Detroit was a Democratic fiefdom what with the unions and the Catholic social welfare voters. Since 1967, Detroit has been an experiment in black empowerment, an experiment that has failed miserably. The Detroit Free Press recently ran an Op-Ed by a local black minister, Rev. Holley, lamenting the failure of black self-government - and the good Reverend could and did make accusatory claims no white critic would have dared voice.
Detroit is America's poorest major city, with a booming crime rate and leads the nation in murders. Population has steadily declined, currently almost a third of the city's geographic area is completel deserted, block after block of empty, run-down houses and decaying, abandoned factories. Detroit's schools graduate only about a third of high school students and the state of Michigan is threatening to take complete day to day control of the City's school system.
The state govt. has also been a captive of Democrats and resembles California in all the important social improvement schemes and high taxes. Kids in Michigan are getting their diplomas from the excellent, taxpayer supported state colleges and then bailing to other states so Michigan is losing population, including the next generation of educated achievers, as well as it's related political clout at the national level.
The Democrats have no desire to see S E Michigan and Detroit deteriorate further and in front of a national and international audience to boot. But given the region's dependence on one and only one industry, it's either save the automakers or admit defeat for a quasi-socialist form of govt. GM's bankruptcy will be closely monitored, guided and watched over by Obama's automotive flunkies, the chickens won't come home to roost if Washington can do anything to prevent it.
Mary| 4.28.09 @ 4:41PM
The Detroit Free Press recently ran an Op-Ed by a local black minister, Rev. Holley, lamenting the failure of black self-government - and the good Reverend could and did make accusatory claims no white critic would have dared voice.
Same in my area. Local radio talk show host said point blank: "we could take all of white folks money and in 50 years they'd have it all back."
Pingback| 4.28.09 @ 8:19PM
Cheap Insurance Auto - GM vs. GGP: Bankruptcy the Way It Ought to Be - Spectator.org links to this page. Here’s an excerpt:
Mike| 4.29.09 @ 4:05PM
There is a big difference between the two bankruptcies, most of the employees at GM & Chrysler work for Chrysler and the plants have to be shut down with no workers employed.
GGP owns the malls but the tenants, who are the ones conducting almost all of the "business activity", are not employed by GGP. GGP employs only senior property managers with the remaining support staff being 3rd party contractors from various companies. The core activity is retail stores that can operate whomever the owner of the mall is.
GGP can be in bankruptcy but the malls can still function properly. The overhead, oversight, and role of GGP is fundamentally different from Chrysler & GM. You could argue that the autoworkers are in essence 3rd party contractors from the union but in terms of how the auto plants function thats more a technicality than a reality.
Also the restructuring of GGP is far easier than the restructuring of the auto groups. GGP
s "operations" are functioning properly and are profitable. The problem is there is no commercial real estate financing market...its not the company's operational strategy it was the financing strategy that brought down GGP.
The auto groups had a flawed and non-competitive operational strategy as the primary problem, not their financing strategy.
Too much of an apples to oranges comparison.
Saleem | 4.30.09 @ 6:31PM
On a macro-level, as an owner and operator of retail store owned by GGP, GGP management is 100% responsible for downfall of the malls. For the past three years the mall management has done nothing to attract shoppers to the mall.
During the holiday season the mall is not decorated and what amazed everyone was the they had rock n' roll music rather than seasonal music. There are broken tiles all over the food court.
Now you will ask did you bring all this to the mall management notice; yes we did both nothing happened.
Presently, my store along with majority of the stores are down 31% in sales as compared to 2008 and 40% as compared to 2007.
A lot of tenants are behind on rent and several stores have closed including Limited, Lenin n Things, Gap, Ann Taylor, etc. The only thing GGP is doing is sending legal notices plus adding tot he fact that the mall's door are opened and things are normal.
Several of the tenants have asked for temporary relief in rent but zero relief.
The bottom line is that; the economy has not hit the bottom yet and it will not bounce until two more years.
The concept of mall is a dying concept. GGP should help those who have paid rent for years so that their BoD can enjoy life.
GGP needs to step to plate and play it fair with its tenants, this is moral high ground they should take.
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