Monday, January 11, 2010

Bubble Datapoint of the Day

Felix Salmon points to a NY Times article on a brilliant (brilliantly stupid?) oversight by lenders to Foxwoods Casino's Pequot Nation.  See, the Pequot tribe is allowed to run Foxwoods because they are a sovereign nation - it's an Indian casino.  This means that if bondholders lend money to the Pequots, which they did, they have one major problem - they, the bondholders - can't really foreclose on the assets of the Pequots, because no one but the Pequots are allowed to run Foxwoods.  The collateral isn't really collateral for the lenders.

Felix sums it up:

"Essentially, the lenders can’t foreclose on the casino, because the current owners — the Pequots — are the only people who can own it. If it’s not an Indian casino, it’s can’t be a casino at all. That, in turn, gives the debtors enormous leverage over their creditors: they can pretty much name their terms, and the lenders have little choice but to agree to them."

“It’s kind of uncharted territory,” said Tom Foley, a lawyer who specializes in Indian gambling issues and is a past chairman of the National Indian Gaming Commission. “Many of the banks and bondholders should have been aware of these kind of risk factors, but when everything is good, nobody is really looking at the downsides.”

 What a magnificent example of the pure ignorance of risk we saw in the credit bubble of the last 10 years.



Anonymous said...

KD - Thought you might be interested in this interview. (Couldn't find any other way to contact you other than posting.)

As a frequent reader of your blog, I thought this would give a good view on your often presented perspective of "don't hate the player, hate the game".

Anonymous said...

To be entirely fair, recovery on gaming assets is almost always tough. If a casino fails, the biggest factor is generally the location and the physical plant, neither of which can be changed by swapping out the management or equity holders - which is why Trump was able to hang onto his AC assets through a reorg or two. This particular structure does disadvantage bondholders further, but who knows, maybe they got an extra 75 bp to compensate them...

Anonymous said...

I wonder if all the holders of Macai gaming paper, (Sands Macai, Wynn Macai, etc.) take notice...I can't imagine the bank/bond holders will have much more success enforcing their collateral claims upon default there either..."WTF, lending laws aren't enforceable in communist countries???" Hoocouldnode???

Kid Dynamite said...

Anon@ 2:02pm: i read parts of that transcript. I think one thing i learned from my visit to the Treasury was how political everything is, including monetary response. Treasury basically said to us bloggers, when we said "you have to recognize the losses and deal with the bad debts - you can't avoid that," they replied "what are we supposed to do - not even try?"

in other words, kicking the can down the road is a MANDATORY policy, because at the very least, you hopefully get elected again, and get the miracle shot to sustain the ponzi scheme for another cycle. When it finally blows up, you're on the beach in Cabo.

getyourselfconnected said...

I hope they even have the paper work on hand as many banks seem to have missed that detail going into forclosures.

OT from last post:
Do you think Kurt Warner is a Hall of Famer? I would say yes but many say no.