Anytime there’s something big and complicated, there’s certainly a good chance of mispricing
Hello. My name is Barry Steinhart, shareholder from New York. My question relates to the Chapter 11 bankruptcy process.
I know you have been active in the past in some activity in the bankruptcy court. And if you had thoughts on possible reforms in that area, if you believe that any reforms are necessary?
Well, that’s a good question. Charlie is probably better qualified to answer than I am. I mean, we have bought Fruit of the Loom out of bankruptcy.
And we have had some involvement in owning junk bonds. You know, we get… we think about the bankruptcy process. But in terms of the practicalities of improving on it, what do you think, Charlie?
Well, I think much of that is pretty horrible.
You have a competition there, where the courts themselves have gone into bidding contests to get bankruptcy business attracted.
Meaning that the…
There are various courts that can handle bankruptcy cases. And they have found that if they develop a culture where they overpay a lot of people egregiously, they can attract more business: lawyers, trustees, consultants, et cetera, et cetera.
I find it so unpleasant to watch that I don’t pay as much attention to bankruptcy as I probably should. You know, I’m an old man, and I don’t like to have an upset stomach.
But we will… we look at… at least I do, I’m not sure about Charlie… but he… you know, bankruptcies will be something that we will… one way or another, over the next 20 years… we’ll have various ways of participating.
And we have bought… well, we bought certain of the bonds, for example, of Enron after they entered bankruptcy… we bought something called the Ospreys.
And a complicated bankruptcy can offer opportunities for profit. Now, there’s so many people looking at bankruptcies currently, or potential bankruptcies, it’s a field that I would say does not have a lot of promise right now, but it has had promise in the past.
We actually, in the Fruit of the Loom situation, I first went into that just by buying some Fruit of the Loom bonds, but… when I had no notion that we might conceivably end up with the company. But, you know, I knew enough about it to buy the bonds.
And Enron comes along, and it’s a big mess. The Penn Central came along 20-odd years ago, and it was a big mess, and there was a lot of money made in the Penn Central, simply because it was such a complicated mess.
So anytime there’s something big, complicated, there’s certainly a good chance of mispricing. Now, lately the mispricing may be more on the high side than on the low side. But, over time, you’re going to find some… there will be some attractive things to do in bankruptcy situations.
We’ve had other bankruptcy situations where we’ve gotten involved in the process and then been outbid. It happened at Burlington and it happened at Seitel. And… but we owned all the bonds at Seitel, so we came out fine.
It’s something to understand if you’re in the business of buying investments or businesses. And I would say that, you know, if we’re around for another 10 or 15 years that we’ll do something or other, maybe substantial, in the bankruptcy field.
The Enrons… the payment is still being made in various ways. But the Ospreys, which were kind of a complicated situation… the whole thing was complicated.
But, you know, we didn’t buy at the bottom or anything like that. But, you know, we considerably more than tripled our money in something that you could have put a fair amount of money in. So they can be interesting.
Charlie, do you want to…
Well, I remember the Eastern Airlines bankruptcy, where there were a lot of employees that would’ve… and communities that would’ve been affected. And the courts in that case, I would say, abused the senior creditors horribly.
And so you could have read a law book and reached one conclusion, and if you’d bought the wrong securities, why, you would have found out you’d guessed wrong. It’s a very interesting field.
Yeah. It… and it can be very unpredictable. In the Penn Central case, you had an incredible variety of claims. I mean, you had leased lines and you had all kinds of first and second liens and everything.
And the judge, as I remember… I may be wrong a little bit on this on the details… but as I remember, the judge just looked at this incredible… probably the most complicated bankruptcy that had come down the pike in the history of bankruptcy to that point… and he just said, “This is just too damn complicated. I’m just, sort of, going to ignore the various priorities and all this. I’m just going to”… perhaps you might call it substantive consolidation, or something… “I’m just going to put this all together, and I’m going to give you a quick, fast solution.”
And I think it was a very smart way to handle things, because otherwise I think Penn Central might still be going. But it wasn’t what the book said would be done at…
Judges can determine things in a very big way. I remember when we were in Cincinnati on that newspaper case I mentioned earlier, I said to Charlie… a judge had stayed an order, I think, for a week or something like that.
And I said to Charlie… I said, “How much power does a federal judge have?” And Charlie says, “Well, for a while, as much as he thinks he has.”
I learned a lot out of that.
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