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.)