“You were a Director at Sears for 12 years where you had oversight over the administration and investment in the pension fund.”
That Sears Holdings will file for bankruptcy appeared to be taken for granted in the confirmation hearings before the US Senate on Thursday. And when it does file, it’s going to get very complicated for Steven Mnuchin, the Trump administration’s appointment for Treasury Secretary. But the most fascinating part, for us as a non-political finance and economics site, is the dissection of the whole Sears deal.
Senator Bob Menendez (D-NJ), as he proceeds with his questioning, lays out how Sears Holding’s CEO “Eddie” Lampert, his hedge fund ESL, and some other entities have worked hard to get their hands on the real estate, while the pension fund, when Sears Holdings goes through bankruptcy, will be left behind as a sinkhole that taxpayers might be shanghaied into filling.
I postulated at the end of December that Sears Holdings will try to stay out of bankruptcy at least through July to avoid running afoul of fraudulent conveyance provisions in the bankruptcy code. But after that, all bets are off. So this might transpire pretty soon.
The office of Senator Menendez emailed me the transcript of the hearings on the Sears situation. It’s posted below. The C-Span video clip (6 min) is at the bottom of the transcript:
Menendez: Thank you Mr. Chairman, you’ve heard a lot about pensions and I care about American workers and their pensions, and you served as director of Sears Holdings, which is the parent company of Sears and Kmart, for about 12 years, you served on the Finance Committee which was tasked with reviewing investment policies of the retirement plans of the Company and its subsidiaries, is that correct?
Mnuchin: That is correct
Menendez: And the Chairman and CEO of Sears Holdings is a gentleman named “Eddie” Lampert, who I understand is your former college roommate, correct?
Mnunchin: Yes and the benefit is he’s actually here with us today.
Menendez: Okay, good. So you’re also an investor in the hedge fund ESL Investments, which you are choosing not to divest yourself of as I understand from your disclosure. The hedge fund is also run by Mr. Lampert. You earned up to $26 million dollars from the hedge fund last year according to your disclosures. That same hedge fund currently holds 29% of its portfolio in Sears stock and Mr. Lampert himself effectively owns 49% of Sears’ stock according to public SEC filings. Is that all fair statements?
Mnuchin: I think actually I’ve invested close to $26 million, I didn’t make $26 million.
Menendez: Okay I won’t equivocate with you. Now Sears has been performing poorly and, as a result, forced to sell assets to cover operating costs and to contribute to its pension fund. Interestingly, several of the most valuable assets have been sold in part to Mr. Lampert’s hedge fund, including Lands End, Sears Canada, and most of Sears’ real estate.
The real estate was sold off to a different entity, whose largest shareholder is Mr. Lampert’s hedge fund. And that seems to have resulted in a shareholder lawsuit according to SEC filings.
The Pension Benefit Guaranty Corporation (PBGC) initiated an agreement with Sears to protect the pension benefits of the more than 200,000 plan participants after the real estate deal and significant cut to pensioners’ health subsidies that occurred during your watch.
Unfortunately, the agreement with the PBGC puts the plan’s pensioners behind Mr. Lampert’s hedge fund in the ability to get assets from Sears in any bankruptcy proceedings. Because of this, because Sears has received at least $800 million in secured loans from Mr. Lampert’s hedge fund, some of them secured by Sears properties. The Sears pension fund currently faces a $2.1 Billion dollar funding obligation gap. Now I take these all from filings and public reports and I assume that that basically is a fair statement.
Mnuchin: That sounds about right but let me…
Menendez: Are you aware that if you are confirmed as Treasury Secretary, you would become one of three board members of the Pension Benefit Guaranty Corporation that has the power to either accept or deny a pension plan termination application, such as could occur with Sears bankruptcy, making the Federal Government cover Sears’ pension tab? Do you recognize that you’re going to be part of that board?
Menendez: You do? Now, so here’s where my concern is and maybe you can elucidate it for me. You were a Director at Sears for 12 years where you had oversight over the administration and investment in the pension fund. That pension fund has been underfunded, its benefits were cut during the time period you were there, it now faces a $2.1 Billion funding obligation gap.
Sears has sold off some of the most valuable assets while you’ve been on the board. Your college roommate’s hedge fund has large interests in the properties sold, numerous secured loans with Sears and owns a controlling share of Sears’ stock shares. You earned up to $26 million last year from your shares in that hedge fund and you’re refusing to divest yourself of the hedge fund.
Should Sears go bankrupt and you if confirmed as Treasury Secretary, are a PBGC director who would have a role in the Pension Benefit Guaranty Corporation’s attempts, as an unsecured creditor, to recover $2 Billion for the unfunded liabilities in the Sears pension fund while simultaneously trying to not lose money in your hedge fund investments in Sears that you hold with your college roommate who is the CEO of Sears. How is it that you’re going to do that?
Mnuchin: So let me just correct again because you said again that I made $26 million which I didn’t, I invested 26 million, so I just want to make sure that the record stated that. Let me first say that my original involvement with Mr. Lampert was with Kmart coming out of bankruptcy. Where all the professionals thought that Kmart should be liquidated, and Mr. Lampert… working for him saved tens of hundreds of thousands of jobs.
Sears when he bought it was already a failing issue and he’s contributed, the company’s contributed multi billion dollars to that pension fund which were pension issues beforehand. I’m well aware of the pension issues and something that when I was on the board we were very cognizant of, very significant contributions. As it relates to your answer, obviously I will recuse myself in any way as it relates to being on the board if indeed there ever were an issue with Sears, whether I had an investment in ESL or I didn’t have an investment in ESL, I would be concerned about any appearance of conflict. So I would recuse myself.
Menendez: Well we’ll have to look at the consequences of any such recusal because there are 3 members of the board who get a vote and if you recuse yourself under those set of circumstance I’m not sure that the remaining 2 can ultimately make a decision on such a case that involves 200,000 peoples’ pensions. So it’s a serious issue and I urge your attention to it in terms of thinking about how this very well may happen because those pensions were underfunded and now we’re going to have a set of circumstances at some point where we’re going to have to deal with it. So I bring it to your attention because I think it’s a serious challenge.
Mnuchin: Again I will work with the Ethics Office and the General Counsel to work through that, and again I would just comment that Sears inherited, when it was purchased, underfunded, and has contributed billions of dollars to this along the way. Thank you sir.
Menendez: It may have inherited it, but by the same token it continued to underfund it.
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