WASHINGTON -- Congressional negotiators are considering gutting a Depression-era financial law in order to help private equity firms overpower pension funds and other investors in major bankruptcy cases. The item is being discussed as a potential policy rider for a spending bill to avert a government shutdown, according to sources familiar with the talks.
The change would allow investors who own a majority of a troubled company's debt to implement a new payment plan without input from a federal bankruptcy judge. As a result, big-ticket bondholders could extract punishing financial concessions from other investors -- including pension funds -- without government supervision.
"This is about screwing pension funds to help private equity firms," said one Democratic aide.
The Trust Indenture Act, passed in 1939, bars such out-of-court strong-arming by major investment firms. But lawmakers are considering changing the law in light of two recent cases.
Casino kingpin Caesar's and for-profit college empire Education Management Corp. (EDMC) are both faltering under mountains of debt. EDMC was owned by Goldman Sachs, Leeds Capital Partners and Providence Capital before reorganizing, and it is now controlled largely by Kohlberg Kravis Roberts. Caesar's was owned by Apollo Global Management and TPG Partners before its reorganization process began. Both companies -- and their Wall Street owners -- want to rewrite the terms of their existing debt contracts without the consent of some investors who own that debt.
Under current law, a company can file for bankruptcy if it cannot hope to repay its debts. An independent bankruptcy judge can then oversee the cancellation of some of those debts, while ensuring that all parties involved in the process are treated fairly. The Trust Indenture Act made it illegal for a company to simply rewrite existing bond deals outside of court without the consent of bondholders. The New York Times' Gretchen Morgenson detailed the implications of the 76-year-old law for contemporary debt disputes in January.
Negotiators in Congress are considering tailoring the language of the rider to exclude EDMC from its benefits. EDMC recently paid $95.5 million to settle a fraud case with the Department of Justice.
But the implications of the bankruptcy law change could extend well beyond the two cases currently drawing political attention.
"How many times do we have to learn not to fuck with banking laws from the 1930s?" said another Democratic aide. "These were passed to deal with the problems that cause economic depressions."
Congress must approve new funding for the federal government by Dec. 11, or the government will shut down. Legislators are still considering a host of riders for the funding bill. A year ago, congressional negotiators agreed to subsidize risky Wall Street derivatives trades as part of a bill to avert a government shutdown. The financial rider seriously jeopardized the approval of the final bill, which only passed after President Barack Obama and JPMorgan Chase CEO Jamie Dimon personally entreated lawmakers to vote in favor of the legislation.
This article has been updated to clarify the ownership structures of EDMC and Caesar's.