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

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




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

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, 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
, "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

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
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

(Seth Bailey, a CEI
research associate, contributed to this article.)