A U.S. watchdog agency says businesses are buying and selling assets with growing secrecy in bankruptcy cases, warning the trend could mask the true financial state of businesses operating under Chapter 11 protection.
"Our office is concerned," Joseph McMahon, an attorney for the Office of the U.S. Trustee, told U.S. Bankruptcy Judge Christopher Sontchi Wednesday.
He said actions by several Wall Street banks to keep secret their purchases of loan-servicing rights held by American Home Mortgage Investment Corp. could have a "cascade of consequences" involving accountability in bankruptcy reorganizations.
The Trustee's office is an arm of the Justice Department. McMahon, an attorney in its Wilmington, Del., office, told Sontchi that precedent being set by secret sales of mortgage-related assets could undermine broad financial-disclosure standards currently embedded in the Bankruptcy Code.
Among other things, he said, it could allow Chapter 11 companies to avoid having to make public disclosure of their monthly financial statements.
"The Bankruptcy Code actually requires information of this type to be disclosed, regardless of what impact it might have on the purchaser," McMahon said.
Sontchi on Wednesday overruled McMahon's objection to American Home's sale of loan-servicing rights to a unit of Bear Stearns & Co. Bear Stearns hasn't disclosed the sale price, and Sontchi authorized it Wednesday to keep the amount out of public view.
Lawyers for American Home and Bear Stearns argued the secrecy was justified because the buyer is a major financial institution engaged in the business of buying and selling mortgage-related assets. An attorney for Bear Stearns also said the secrecy is necessary because "the competition is stiff" in the mortgage-sales arena.
Sontchi said that, by one measure, Bear Stearns paid a higher price for the small loan-servicing portfolio it's buying from American Home than W.L. & Co. is paying for a much bigger portfolio.
W.L. Ross, a private equity firm affiliated with billionaire investor Wilbur Ross, is paying $500 million for rights to service about $40 billion in loans. Measured as a percentage of the face value of the loans, Bear Stearns price is higher, Sontchi said.
That revelation, Sontchi said, should "go a long way" toward calming concerns that Bear Stearns was getting a "sweetheart deal."
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