Hands, burnt fingers, and American mortgages

Terry Guy Hands has lost his lawsuit against Citigroup, wherein he accused Citigroup of defrauding his private equity group, Terra Firma Capital Partners, by lying about the number of competing bidders during the auction of the record company EMI, for which Terra Firma paid $6.8 Billion. This was one of those top-of the market deals (August 2007) that always goes pear-shaped. From the NYT :

That bad business decision has cost Mr. Hands dearly. The 113-year-old EMI, once home to both the Beatles and the Rolling Stones, has struggled mightily since it was bought by Mr. Hands. He testified that he had 60 to 70 percent of his wealth tied up in EMI. His fund, Terra Firma, has lost about $2.5 billion on the investment.

From a market participant’s point of view, this is something of a lose/lose outcome: it’s hard to see why IBs or investors would court the litigious and money-losing Mr Hands when he wants to raise capital for his next deal.

Nor is it so great for the sell side, as it draws attention again to the conflicts of interest inherent in the universal banking model (Philip Augar, FT):

The Citigroup-Terra Firma case is a timely reminder that a golden opportunity to address the problem has recently been missed…the banking architecture escaped major change in the Dodd-Frank Act of 2010.

Nor for EMI: as is the way with these value-destroying PE deals (for instance, the Rolling Stones were so unimpressed with Mr Hands that they quit the label, after, what, 40 years), EMI has devolved from a fabled recording company to a piece of unloved collateral. It is most unlikely to be managed with tender loving care.

There was, though, one other eyecatching detail in the NYT’s report of this battle between two equally unappealing Big Capitalists:

In his closing argument on Wednesday, Mr. Wells acknowledged that his client also got caught up in the frenzied boom-era deal-making by financing the EMI buyout, a transaction on which it earned more than $100 million in fees. But Citigroup has since written down the value of the EMI loans held on the bank’s books by $2 billion.

Well, that looks like exactly like a principal writedown to me.

“We should not have loaned” Mr. Hands the money, Mr. Wells said. “We have to live with our own bad business decision, and so does he.”

Now then, Citi, how about applying the same reasoning to your U.S. mortgage portfolio?

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  1. Cody Willard

    “We should not have loaned” Mr. Hands the money, Mr. Wells said. “We have to live with our own bad business decision, and so does he.”

    Uh, no. The American Taxpayer has to live with Citi’s bad business decision.

    1. Richard Kline

      Citi has to live with Mr. Wells’ bad business decision. the question is, why does Citi have to live with Mr. Wells? His crew took $2B of the shops money to turn $100M in fees, for which Mr. Wells and Co. gets to keep his bonus share even while Citi has to live with a loss (until or unless it bills the Treasury for it). So everyone here has to live with a bad business decision except Mr. Wells, for whom it was an excellent business decision no doubt, of the kind for which his looking to do more. Everyone looses but Mr. Wells keeps getting rich . . . .

  2. dejavuagain

    I wonder how many millions Mr. Wells client bankers will receives as a bonus this year – and how much they received in 2007, the year the deal was done????

  3. acat

    But, they worked so hard for that money and it is HARD to lose that much.

    The great skill and education of those that did the deal is surely under appreciated by the masses.

  4. JC

    To be clear: he bought a record company anytime after the advent of MP3, correct?

    And the bank actually extended credit to him to do this, correct?

    And no one in this process raised their hand and said, “You know why this looks like a really shit deal? . . . Because it is a really shit deal.”

  5. Paul Tioxon

    I guess everyone here must surely know that no one buys any music anymore. It is downloaded for free with peer to peer file sharing. Music simply is not a commodity, but is totally free and passed around as such. Only an idiot or someone over the age of 50 buys any recorded music, and then, only in a $100 definitive boxed commemorative set with book, poster and T-Shirt in yr size. Oh yea, country music fans are loyal purchasers, I mean, check out Taylor Swift, she just sold over 1 million actual CDs 1 week after it dropped. I mean, she’s like a video game for tweensters. What fucking asshole would buy a music recording company? The publishing rights are gone and touring is where the cash comes in from these days, the recording companies are hollowed out shells of a business in name only.

  6. rd

    He sued over being lied to about how many bidders there were? This was able to get to court?

    Every car on the lot is the “last available one” because of huge demand. There is always somebody about to make an offer on the house you want to buy. There is always another bidder on just about anything you want to buy and there is always another seller on anything you want to sell. You still need to look the horse in the mouth and make sure its worth the money.

    I am a big fan of the concept of 10,000 hrs of structured practice to become really good at something. It appears that many of our deal makers in the financial sector easily got 10,000 hrs of structured practice making, selling, and lending on crappy deals in the late 90s and 2000s and it appears that they have gotten very good at it. It is good to see that they are making millions of dollars to reward all ofeir hard work.

  7. Geoffrey Barraclough

    Operationally, EMI has been doing very well since Terra Firma took over. The problem, as with so many private equity deals at the time, is the sheer volume of debt.

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