Big MAC Attack

[Daveparts]

Big MAC Attack
By David Glenn Cox



With the crisis in the financial markets, the collapse of Bear Stearns, and the Federal Reserve bailout, you would think that it might prompt the banks to be on their best behavior. After all, who knows which institution the bell might toll for next? The President, in his recent speech, called it a rough patch; in Capitalism you have good times and bad times. He reminded us that prosperity is just around the corner and there will be a chicken in every pot and a car in every garage.


This President seems to take these events personally. Whenever any event or calamity befalls us, he is quick to answer, "The terrorists are still out there. Don’t blame me if the economy falters, I’m up to my eyeballs fighting terrorists!" But, a quick review of the scoreboard shows our erstwhile Don Quixote charging the wrong windmills. He told us the economy was fine and didn’t need a stimulus, then proposed a stimulus. He told us the subprime crisis was the fault of the consumers, then sanctioned a Fed bank bailout. Yet, he still offers nothing for the consumers, those American citizens that he took an oath to protect.


He is quick to claim credit; it was his policies that enabled the good times. But, now, when it all begins to go to hell, "terrorists." The rhetoric pointed at the consumers has softened somewhat and talk of freedom has returned. Whenever Americans get the short end of the stick, the Republicans call it freedom. When 18,000 Americans die each year from lack of health care, that’s called freedom of choice. God Bless America, they choose to die defending their freedom rather than to lose that freedom in some government-sponsored program.


When the President reminds us that Capitalism grants us unlimited freedom, hold on to your children. Freedom is a great word, God bless America, can I get an amen! While the President was busy blaming irresponsible consumers for screwing up the economy, the banks were busy maintaining their freedom, the freedom to change the rules after the fact. After all, what right is more sacred to American financial institutions than the right to screw people into the ground? Because, in the end, it all depends on what your definition of 'is' is.


Enter the MAC, or material adverse change. Suppose you wanted to borrow ten million dollars and put up your shopping mall as collateral and then an earthquake knocks it to the ground. That’s material adverse change. Or, if the biggest tenant moves out, leaving an empty shell. The September 11th attacks were considered a material adverse change. It would be doubtful anyone could argue that the financial landscape didn't change after 9-11.


Last year Real Estate developer, John Wimmer, paid Citigroup Global Markets Realty almost $1 million to lock in a 5.6% mortgage interest rate to refinance 6 commercial properties. At the closing, Citigroup, citing falling demand, boosted the interest rate to 7.123 %, a material adverse change. Prudential Mortgage Capital cited the same MAC with a Kentucky developer and both Wimmer and the Kentucky developer have sued. I bet you thought the banks just screwed the little people, didn’t you?Citi and Prudential cited MAC clauses to escape from their agreements because they wouldn’t have made as much money.

That would be a neat clause to use in Las Vegas. Say you bet $100 and then quoted the dealer the MAC clause. You were exempt from that bet because the dealer's 21 had brought about a material adverse change. But, in these deals, Citi and Prudential weren’t losing anything. Due to a downturn in business they needed to make more money to cover losses elsewhere.


The downturn in the credit markets and decline in the value of investment properties have sent a chill through the market. So, suddenly, the potential for loss, or the possibility of not making as much on a loan as anticipated, becomes a material adverse change. It all depends on what your definition of 'is' is.


Dennis Grenwald, lead attorney for the Real Estate law firm of Grenwald, Pauly, Foster and Miller of Santa Monica, said, "The notion that the lender can come back after making a rate agreement and say there's a lot of foreclosures or our cost of lending has changed, that would never fly."


Langley Properties, of Lexington, Kentucky, had paid Prudential Mortgage $1.14 million in June to lock interest rates of 6.3 % and 6.36 % for a pair of mortgages totaling $57.1 million on two commercial developments in Alabama and Mississippi, according to court documents.


In August, Prudential requested Langley pay another $636,000 toward the rate lock on the Mississippi mortgage. Prudential raised the rate to 6.9% the next day and Langley canceled the deal. Prudential then requested an additional $2.6 million in November to lock in the rate for the Alabama property. Langley refused and Prudential cancelled the deal, prompting Langley to sue. U.S. District Judge, Joseph Hood, of the Eastern District of Kentucky, ruled in Langley's favor in December. For Prudential to claim the interest rate was not locked "smacks of fraud," Hood wrote in his decision. Prudential was granted a stay and is expected to appeal.


Wimmer's lawsuit against Citigroup argues that they had several other offers for financing but went with Citigroup based on their strength and reputation. They were advised of the interest rate change the Tuesday before Thanksgiving, leaving them scrambling to find alternative financing before the penalty-free window closed. "I guess the rate lock agreement protected me against a drop in the interest rates," Wimmer said sarcastically.


Wimmer fails to understand freedom and, if you’ve got the money, you can, too. If you don’t have the money, you cannot! If you’ve got the time and money to sue, good for you; if not, you’re through. Just another case, as the President would call it, of an irresponsible consumer jamming up our court system with frivolous lawsuits.