Yves here. It is frustrating to see the Democrats dissipate energy on “Russian stooge” hysterics and fail to have a coherent approach for achieving their supposed aim of stymieing Trump. While only a small handful of Cabinet nominees in the modern era have failed to win confirmation, the hearings can still allow the opposition to set down some markers.
Mnuchin is one of Trump’s worst picks by virtue of being a bog-standard bankster-loyal Rubinite on macroeconomic policy (strong dollar, budget hawk), having a been the CEO of an unusually predatory mortgage servicer, yet unlike other members of the Goldman partner club that have been up for the Treasury, lacking relevant experience.
From what I could infer, the Democrats left much fewer marks on Mnuchin than they did on most of the other Trump nominees. Some of that may be that they feel they can’t object to Mnuchin saying that he will continue many of the Clinton-Obama finance-friendly policies, and Mnuchin is arguably no less qualified than the lackluster Jack Lew.
However, as Wolf recounts, Bob Menendez did get a few licks in on Mnuchin’s role at Sears, both as board member and investor, and how profitable asset stripping is putting taxpayers at risk in a pension restructuring.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
“You were a Director at Sears for 12 years where you had oversight over the administration and investment in the pension fund.”
That Sears Holdings will file for bankruptcy appeared to be taken for granted in the confirmation hearings before the US Senate on Thursday. And when it does file, it’s going to get very complicated for Steven Mnuchin, the Trump administration’s appointment for Treasury Secretary. But the most fascinating part, for us as a non-political finance and economics site, is the dissection of the whole Sears deal.
Senator Bob Menendez (D-NJ), as he proceeds with his questioning, lays out how Sears Holding’s CEO “Eddie” Lampert, his hedge fund ESL, and some other entities have worked hard to get their hands on the real estate, while the pension fund, when Sears Holdings goes through bankruptcy, will be left behind as a sinkhole that taxpayers might be shanghaied into filling.
I postulated at the end of December that Sears Holdings will try to stay out of bankruptcy at least through July to avoid running afoul of fraudulent conveyance provisions in the bankruptcy code. But after that, all bets are off. So this might transpire pretty soon.
The office of Senator Menendez emailed me the transcript of the hearings on the Sears situation. It’s posted below. The C-Span video clip (6 min) is at the bottom of the transcript:
Menendez: Thank you Mr. Chairman, you’ve heard a lot about pensions and I care about American workers and their pensions, and you served as director of Sears Holdings, which is the parent company of Sears and Kmart, for about 12 years, you served on the Finance Committee which was tasked with reviewing investment policies of the retirement plans of the Company and its subsidiaries, is that correct?
Mnuchin: That is correct
Menendez: And the Chairman and CEO of Sears Holdings is a gentleman named “Eddie” Lampert, who I understand is your former college roommate, correct?
Mnunchin: Yes and the benefit is he’s actually here with us today.
Menendez: Okay, good. So you’re also an investor in the hedge fund ESL Investments, which you are choosing not to divest yourself of as I understand from your disclosure. The hedge fund is also run by Mr. Lampert. You earned up to $26 million dollars from the hedge fund last year according to your disclosures. That same hedge fund currently holds 29% of its portfolio in Sears stock and Mr. Lampert himself effectively owns 49% of Sears’ stock according to public SEC filings. Is that all fair statements?
Mnuchin: I think actually I’ve invested close to $26 million, I didn’t make $26 million.
Menendez: Okay I won’t equivocate with you. Now Sears has been performing poorly and, as a result, forced to sell assets to cover operating costs and to contribute to its pension fund. Interestingly, several of the most valuable assets have been sold in part to Mr. Lampert’s hedge fund, including Lands End, Sears Canada, and most of Sears’ real estate.
The real estate was sold off to a different entity, whose largest shareholder is Mr. Lampert’s hedge fund. And that seems to have resulted in a shareholder lawsuit according to SEC filings.
The Pension Benefit Guaranty Corporation (PBGC) initiated an agreement with Sears to protect the pension benefits of the more than 200,000 plan participants after the real estate deal and significant cut to pensioners’ health subsidies that occurred during your watch.
Unfortunately, the agreement with the PBGC puts the plan’s pensioners behind Mr. Lampert’s hedge fund in the ability to get assets from Sears in any bankruptcy proceedings. Because of this, because Sears has received at least $800 million in secured loans from Mr. Lampert’s hedge fund, some of them secured by Sears properties. The Sears pension fund currently faces a $2.1 Billion dollar funding obligation gap. Now I take these all from filings and public reports and I assume that that basically is a fair statement.
Mnuchin: That sounds about right but let me…
Menendez: Are you aware that if you are confirmed as Treasury Secretary, you would become one of three board members of the Pension Benefit Guaranty Corporation that has the power to either accept or deny a pension plan termination application, such as could occur with Sears bankruptcy, making the Federal Government cover Sears’ pension tab? Do you recognize that you’re going to be part of that board?
Mnuchin: Yes
Menendez: You do? Now, so here’s where my concern is and maybe you can elucidate it for me. You were a Director at Sears for 12 years where you had oversight over the administration and investment in the pension fund. That pension fund has been underfunded, its benefits were cut during the time period you were there, it now faces a $2.1 Billion funding obligation gap.
Sears has sold off some of the most valuable assets while you’ve been on the board. Your college roommate’s hedge fund has large interests in the properties sold, numerous secured loans with Sears and owns a controlling share of Sears’ stock shares. You earned up to $26 million last year from your shares in that hedge fund and you’re refusing to divest yourself of the hedge fund.
Should Sears go bankrupt and you if confirmed as Treasury Secretary, are a PBGC director who would have a role in the Pension Benefit Guaranty Corporation’s attempts, as an unsecured creditor, to recover $2 Billion for the unfunded liabilities in the Sears pension fund while simultaneously trying to not lose money in your hedge fund investments in Sears that you hold with your college roommate who is the CEO of Sears. How is it that you’re going to do that?
Mnuchin: So let me just correct again because you said again that I made $26 million which I didn’t, I invested 26 million, so I just want to make sure that the record stated that. Let me first say that my original involvement with Mr. Lampert was with Kmart coming out of bankruptcy. Where all the professionals thought that Kmart should be liquidated, and Mr. Lampert… working for him saved tens of hundreds of thousands of jobs.
Sears when he bought it was already a failing issue and he’s contributed, the company’s contributed multi billion dollars to that pension fund which were pension issues beforehand. I’m well aware of the pension issues and something that when I was on the board we were very cognizant of, very significant contributions. As it relates to your answer, obviously I will recuse myself in any way as it relates to being on the board if indeed there ever were an issue with Sears, whether I had an investment in ESL or I didn’t have an investment in ESL, I would be concerned about any appearance of conflict. So I would recuse myself.
Menendez: Well we’ll have to look at the consequences of any such recusal because there are 3 members of the board who get a vote and if you recuse yourself under those set of circumstance I’m not sure that the remaining 2 can ultimately make a decision on such a case that involves 200,000 peoples’ pensions. So it’s a serious issue and I urge your attention to it in terms of thinking about how this very well may happen because those pensions were underfunded and now we’re going to have a set of circumstances at some point where we’re going to have to deal with it. So I bring it to your attention because I think it’s a serious challenge.
Mnuchin: Again I will work with the Ethics Office and the General Counsel to work through that, and again I would just comment that Sears inherited, when it was purchased, underfunded, and has contributed billions of dollars to this along the way. Thank you sir.
Menendez: It may have inherited it, but by the same token it continued to underfund it.
So, after years of disappointment, Sears doom-and-gloomers might finally approach the end of their long wait. Read… Is the 2nd Half of 2017 when Sears Finally Kicks the Bucket?
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The democrats are even more in bed with wall street looters than the republicans, if that’s possible. A few senators may hector munchkin for appearance’s sake, but they probably figure if they reject him they’ll get somebody worse. Anyway, it takes a thief to catch a thief and the same with these guys. Maybe the Munch-man will do all right in the job in a quest for redemption from all his previous wrongdoing. Who knows?
LOL … that’s an amazingly optimistic prediction/hope, specially considering your handle EndOfTheWorld :)
I’m betting that the asset stripping will move to a much bigger league now (e.g., US govt assets).
Hope springs eternal that a bankster will reform and do good once in power. Trump selected him to assist with orchestrating the grand loot, whichever form it takes according to Trump’s feared imagination, or to have a prominent someone to say “you’re fired” to when the heat is on.
Mnuchin: So let me just correct again because you said again that I made $26 million which I didn’t, I invested 26 million, so I just want to make sure that the record stated that. Let me first say that my original involvement with Mr. Lampert was with Kmart coming out of bankruptcy. Where all the professionals thought that Kmart should be liquidated, and Mr. Lampert… working for him saved tens of hundreds of thousands of jobs.
Tens of hundreds of thousands of jobs. That would be more than a million or perhaps millions of jobs? Ambiguously imprecise when just previously going on record to be precise. Almost like he didn’t know how many employees Kmart actually had, or that he could not care less and made up some gibberish to impress the rubes.
I bet he knows to the penny, how much is in his wallet, right now
Bernie Sanders: The business of Wall Street is fraud and greed.
Go Bernie!
This made me think of a related issue. I recently read that FHA mortgages are having a high default rate. That means lots of foreclosures going to HUD, where once upon a time they were then sold one at a time as “HUD Repos” at humble prices to usually humble first time homebuyer wanabees.
Ben Carson is now in charge! Maybe he’ll “bundle” the homes in big quantities at a big discount for Wall Street and other big RE people? That would help keep his work load down, as he doesn’t seem all that quick.
FDR made Joe Kennedy head of the SEC. People asked why he had made such a crook the head of a regulatory organization. Roosevelt replied: “Takes one to catch one.” Old Joe was later widely praised for his work therein. (Info from Wikipedia.)
That was the good old days when a financial crisis was viewed as a bug, not a feature. It is reversed now where a financial crisis is now an opportunity to divert funds from the public to the 1%.
That same Wikipedia article says that Joseph Kennedy had hoped for a cabinet post, so I think that maybe he tried to do a good job at the SEC so he might be promoted. He never did get a cabinet post, although he spent a couple of years in the very prestigious role of Ambassador to Great Britain. In the 1930s, the SEC primarily protected the interests of the wealthy and the upper middle class. Nobody else owned stocks and bonds. It would have been very damaging socially for Kennedy if he had been involved in scandals at the SEC which cost his wealthy acquaintances money.
Far more Americans are dependent on good Treasury policy in 2017 than were dependent on good SEC policy in the 1930s. Can we afford to take the risk that an ethically questionable person such as Steven Mnuchin will fail to do a decent job? Have we learned nothing from the Great Financial Collapse?
There must be something about the guy that Trumps likes. To me he seems utterly lacking in charisma. Anyway it looks like he will be the new Secretary of the Treasury, for some reason.
Probably. But if enough people make phone calls to their Senators’ offices in opposition to Mnuchin, a few Republican Senators might decide to vote against him, and that would prevent him from becoming the Secretary of the Treasury. We can be willing victims, or we can fight back.
Munch will have to watch his step if he gets the job. If he continues support of pension thievery, etc. the public outcry will force him to resign. I think Trump wanted him there because he’s smart and knows the system. Trump will be the boss, IMHO.
Maybe Ben will stuff those HUD MORTgages into that pyramid of his .. along with all his ‘bread’ futures ….
“Pay attention to what we do, not what we say” as RMN said in the days of my youth. The vote against the Sanders/Klobuchar amendment tells me all I need to know about the “Democratic” Party.
Thug lite.
Most of the Democrats voted in favor of the Klobuchar/Sanders amendment, and most of the Republicans voted against it. What does that tell you about the Republican party? Here’s the roll call vote:
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=115&session=1&vote=00020
GOP shoot you in the face. Dems stab you in the back.
That’s quite true about some Democrats. People need to let the Democrats who voted against the Klobuchar/Sanders amendment know that we’re paying attention. People also need to thank the Republican Senators who voted in favor of the amendment.
I knew that Sears has had problems for years, as the store in my neighborhood declined and was closed. Even worse than I suspected. Thanks for the post.
Yet the fact that Democrats want to attack pensions for teachers and firefighters indicates to me that neither party is blameless here.
I won’t even mention the Grand Bargain.
But Yves is right in the comments up top: The Democrats could have inflicted a defeat here that might have been the first of the wakeup calls to Trump. But nothing will happen except some lawyerly lecturing.
“Menendez: Are you aware that if you are confirmed as Treasury Secretary, you would become one of three board members of the Pension Benefit Guaranty Corporation that has the power to either accept or deny a pension plan termination application, such as could occur with Sears bankruptcy, making the Federal Government cover Sears’ pension tab? Do you recognize that you’re going to be part of that board?
Mnuchin: Yes”
That’s reason enough not to let Mnuchin anywhere near the Treasury. It’s not like we have any shortage of possible choices for the position.
Besides, it’s supposed to be extremely difficult to shed pension plan liabilities in bankruptcy court. Many people think forming the Pension Benefit Guaranty Corporation was a big mistake. The taxpayer shouldn’t be guaranteeing what amounts to a Federal retirement plan to private sector corporations. When these bankruptcy cases either get fully liquidated (sell off the furniture) or restructured as surviving business entities, there is still a lot of “value” there. Usually the pension plan cannot just be waved away and remains the liability/responsibility of the surviving business entity. Otherwise it’s just another asset striping strategy the bankruptcy vultures capitalize on. Bankruptcy judges are supposed to be cognizant of this.
The PBGC is 100 percent funded by premiums paid by the insured plans it covers. This includes the cost of the operations as well as all insurance costs. There does not exist, in current legislation, any method for general tax revenues to get to the PBGC in the form of cash flow or loans from Treasury.
Terminating a plan in bankruptcy is adjudicated by the bankruptcy judge who must agree with the bankrupt company that it can no longer afford to fund the plan once the company is restructured. While the PBGC has an active role to play, often as the largest claimant in a bankruptcy case, it is often the case that the restructured company cannot sustain minimum funding required under the law. One of the interesting effects of being the largest unsecured senior creditor in a bankruptcy proceeding is that other creditors/claimants often want the plan to remain in place to avoid the deleterious effects of that claim on their recovery.
The PBCG is underfunded and there have been proposals to shore it up.
http://crfb.org/blogs/pension-insurer-expects-be-out-funds-2022
Even this anodyne document acknowledges that:
“Thus far, the PBGC has not depended on general tax revenue, but lawmakers could transfer money into the pension fund with offsets from other parts of the budget.”
I speak only to the existing legislation. The PBGC has from it’s first day received funding from only one source, premiums paid by insured plans. If you review the actuarial analysis published by the Agency you will indeed see that the Multi-employer system is dramatically underfunded and I would argue that the number they present understates the deficit by as much as 100 percent. The single employer system is likely to be adequately funded over time as a result of the systematic increases in premium increases.
There have been legislative proposals to fund the PBGC from general revenues and this has generally been unacceptable to Congress. MPRA legislation is the follow on to an attempt, years ago, by Earl Pomeroy to pass legislation that would support multi-employer plans with general Federal revenues. While it is always possible as the multi-employer system continues to fall apart that general revenues are used to support those plans, such as Coal Act revenues for the UMWA plan in recent proposals, precedents from history say it is unlikely.
All this talk about the problems ahead. How about a worst case scenario solution?
Seize and sell the real estate via a clawback to cover the pension obligations.
The idea that the Board of the PBGC has control of a plan Termination is incorrect. That authority, apart from political influence, lies with the presidentially appointed Director of the PBGC. Also, any reasonable analysis of fault for underfunding must recognize that funding is a function of tax policy and legislation and the vagaries of market returns. Sears has always made the required funding payments. Therefore, responsibility lies with the poorly written ERISA legislation, which defines any shortfall in funding as a senior unsecured debt obligation once an ERISA plan is Terminated, in or out of bankruptcy. And, funding requirements set in tax policy or funding relief legislation. Congress bears equal responsibility for allowing a corporate raider (smart investor) to put the pension plan in the position of having an uncollectable claim. The PBGC has a program to address this, the Early Warning program, the program that recently secured asset protection for Sears’ underfunded pension plan. This program works to protect plan participants and premium payers by pressuring underfunded plan sponsors to provide protections or funding in excess of legal requirements. Unfortunately, the PBGC suffers from two impediments in the Early Warning Program. One, the political pressure to not force companies to provide excess funding as their financial position deteriorates and their ability to maintain current levels of employment comes at risk. And two, a PBGC interpretation which inhibits A-4 Termination authority under ERISA brought on by a bias towards inaction and the aforementioned political pressure to prevent disruption of corporate plans. An A-4 Termination action, as used a few years ago against ST. Gobain (for only the second time in history) can disrupt a corporate asset sale, a spinout, or cause a bankruptcy such as would have likely been the case should Sears had been the subject of the threatened PBGC Termination action which compelled a Sears settlement.
The question of underfunded pension plans and the development of uncollectable claims against deteriorating plan sponsors lies at the feet of Congress as much as it lies at the feet of the financial wise guys who, obeying the law, take advantage for their investors and themselves as any capitalist would. It may not be acceptable to some, but it is legal as defined by the actions of Congress.
What your carefully crafted apologetics fails to mention is how “financial wise guys”, aka banksters, seem to “obey laws” crafted by lawyerly types but closely edited by them, followed by buying puppet pols to legislate. Now it seems the “movement” is to remove the middlemen reps and take a more “hands-on” approach to legislating. I’m also of the OPINION that without the reassuring bosom of the nanny states TAAA-TAAA’s(There Are Always Alternatives-for banksters), most self-proclaimed “capitalists” could not “earn” a return for themselves, much less “their investors”, AND therefore should NOT be allowed to gamble with “other peoples” pensions. And should be “walled” away from the social contract of Social Security.
I offer no apologies, nor do I support ESL’s actions. I am merely offering an explanation for what is happening and facts for fictional conclusions. I was the leader of the program at the PBGC that negotiated the settlement with Sears that dedicates assets to secure the unfunded liability in the Sears pension plan.
Ok Sandy:
“The question of underfunded pension plans and the development of uncollectable claims against deteriorating plan sponsors lies at the feet of Congress as much as it lies at the feet of the financial wise guys who, obeying the law, take advantage for their investors and themselves as any capitalist would. It may not be acceptable to some, but it is legal as defined by the actions of Congress.”
So if I understand you correctly, you would require a law or rule to be in place before you would act ethically?
This is not about my ethics. I fought to protect plan members that were exposed to the risk of benefit cuts. This is about understanding that if the law allows growing unfunded liabilities as a company deteriorates it is a shared responsibility of Congress. Once a company begins to deteriorate history suggests that corporate executives protect equity owners, current employees and creditors, in that order. Retirement liabilities are just that liabilities and as creditors they have historically come last. This is not my opinion of appropriate ethical response to the challenge, it is just my observation.
The problem with the “ethics” is that Congress sets funding requirements, and they have systematically granted funding relief to pension plan obligors. Funding relief is fine for a strong/investment-grade company not so great for a weak or deteriorating company like Sears.
There are many potential remedies to these problems. Funding requirements that reflect the risk to default, calculation of pension liabilities using risk free interest rates, granting a senior secured claim to defaulted pension plan liabilities, empower the PBGC to act to protect plans earlier, among others. Hard to legislate ethics. The goal would be to legislate against the market dynamics that cause plan sponsors to default on promised pension plan benefits.
Does Sears have any going concern value other than the residual value of its assets?
That is an honest question, BTW.
“retail Sears” —-the legal entity that operates the stores probably has little/no value.
Seemingly everything of value has been shifted to random LLCs (like for Sears intellectual property/licensing, etc).
Parts. They still have a ton of built in demand for replacement parts, which was always one of their selling points.
Basically Lampert looted and pillaged Sears. Mnuchin was right there helping him do it.
If anyone is interested in how Eddie Lampert ran Sears:
https://www.bloomberg.com/news/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles
More recent:
http://www.businessinsider.com/sears-obsession-with-wall-street-2016-3
What disaster. This does not bode well for a number of reasons, biggest of all is what Trump really stands for. Had the Democrats focused on this rather than made up Russian hacking accusations, they might have made serious progress on discrediting Trump.
To me this suggests that all of Trump’s economic populism is just a cover-up for his real agenda. This is going to get ugly really fast. The really big part though is that the Left is going to have to fight a Civil War against the Corporate Democrats or we’ll get a Clinton-like nominee in 2020. Even if they win, it will be no victory. They’ll appoint another Mnuchin or some other corporate hack.
“For too long, a small group in our nation’s Capital has reaped the rewards of government while the people have borne the cost. Washington flourished — but the people did not share in its wealth. Politicians prospered — but the jobs left, and the factories closed.”
Mnuchin will ensure that the people (Eddie Lampert is a “people”, not a “politician”) will flourish instead of the politicians. Mnuchin will ensure that the politicians do not get their hands on Eddie Lampert’s assets. Transferring assets to PBGC would allow that “small group in our nation’s capital” to “reap the rewards of government”.
Fighting against this is just more proof that Democrats like Bob Menendez are anti-business.