FEBRUARY 17, 2024 – Very little of my daily work life in the trenches was of much interest to people beyond the immediate parties involved, who were usually quite limited in number. In a couple of instances, my name—misspelled—appeared in a back-page newspaper article about a work-related matter, but such publicity wasn’t significant enough for a personal scrapbook had I maintained such a thing. There was one gig, however, in which I enjoyed or, rather, endured, about an hour of broader visibility.
The setting was the crowded main ballroom (converted to a large meeting space) inside the Hyatt Grand Central, as in Grand Central Station, with a live feed to another large group of human sardines in a conference center in Dallas, Texas. It was a sufficiently significant occasion that one of the instigators of the event later sent me a professionally produced videotape of my time in the spotlight. It’s “Something that you might want to show your grandchildren someday,” he wrote on the accompanying card. The grandly flattering statement failed to foresee that long before the arrival of my grandchildren, VHS tapes would go the way of floppy disks.
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In my days as a practicing attorney based in the Twin Cities, my litigation cases and transactional matters involved a range of dollar figures, but none came anywhere near a hundred million, let alone a billion bucks. When I joined the corporate trust department of Norwest Bank, however, many of the dollar amounts I encountered came with one, even two additional zeros to what I was accustomed: I’d now joined the world of large corporate bond issues. One matter was followed by a third additional zero, putting the total sum close to two billion bucks.
Among other surprises during my first week on the job, I landed in the middle of a storm that had been raging for a couple of years. At my first briefing—with an in-house lawyer who’d been passively managing the case to that point—my head was put into a rapid spin that took the rest of the day to stop. Hardly a day passed over the next several years when the head-spinner case didn’t cast its shadow over my vocational life.
The notorious matter involved bonds issued by the Nebraska Investment Finance Authority (commonly referenced by acronym: “NIFA”) and supposedly earmarked for agricultural finance. In reality the bond proceeds had nothing to do with financing Nebraska farms, feedlots or grain elevators. Pursuant to an arbitrage scheme cooked up by the infamous Michael Milken—“Junk Bond King” and high flying senior executive of the now long-gone investment bank Drexel Burnham Lambert (commonly referred to as simply “Drexel” or “Drexel Burnham”)[1]—the bond money was invested in guaranteed investment contracts (“GICs”) issued by Executive Life Insurance Company of California—“ELIC” for short.
A salesman in our bank’s corporate trust department who pre-dated my time had cultivated contacts at Drexel Burnham, had reeled in the trusteeship of the bonds. [2] Normally, such trusteeships are strictly ministerial. The trustee collects payments from the bond obligor, monitors financial covenants associated with the bond issue, and distributes payments to bondholders. In the case of “muni-bonds” and bonds issued by quasi-governmental agencies such as NIFA, the bondholders were often “moms and pops,” as we referred to individual bondholders. In some issues, however, institutional investors would be among the holders. For mainly operational and monitoring services, the bank in its capacity as indenture trustee of the issue would charge a modest annual fee.
If and when a default occurred, however, “ministerial and monitoring” functions were replaced by intense and highly specialized “firehouse” administration by the bank as trustee. That actual “firehouse” gang happened to be the division that I’d been hired to manage.
In all cases an outside law firm—usually a big one—would be retained to represent our bank in its trustee capacity. Our main mission was not necessarily to optimize the recovery. Truth be told, it was to make damn sure the bank didn’t get sued: bondholders—especially “moms and pops”—didn’t like losing their financial shirts, and when news hit that the bonds some broker had been pushing were now in the toilet, the natural thing for many folks was to look around for parties to blame. Since the recovery process was usually expensive, protracted, and fell short of a full recapture of principal, let alone interest, bondholders (and their lawyers) would monitor and potentially criticize recovery actions by the trustee, even though the trustee—albeit a bank—had nothing to do with the underwriting or issuance of the bonds (except in its very limited capacity as indenture trustee). That tendency, in turn, is what informed our work in the “workout” phase of bond deals gone bad.
In the case at hand, we had plenty of company. In the course of pairing our bank up with the NIFA bond issue, Drexel Burnham had assembled similar arbitrage deals with other public finance agencies and hired other corporate trustees to administer the bonds; that is, the bond proceeds from each deal were invested in ELIC-issued GICs.
Whereas Norwest Bank’s corporate trust department was a major player in the world of junk bonds—euphemistically labeled as “high-yield”—thanks to the aforementioned salesman’s contacts at Drexel Burnham, the trustees of the companion bond issues were community banks in Texas, Louisiana and Tennessee. Those corporate trust departments were small and had little to no experience in administering major bond defaults.
What was most striking about these bond issues, however, was the collective amount involved: $1.85 billion—especially when barracuda-like plaintiff law firms around the country launched a massive class action securities fraud case, naming the trustees among the defendants. This inconvenient consequence of doing business with Drexel Burnham, however minor the original role, caught the attention of senior bank management. It underscored the mantra of corporate trust managers: “Whatever you do, don’t get sued!” (Cont.)
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© 2024 by Eric Nilsson
[1] Drexel Burnham filed for bankruptcy protection in 1991. Michael Milken was prosecuted for securities fraud, pled guilty and was sentenced to 10 years in prison and fined $600 million. His sentence was reduced to two years for cooperation in the prosecution of companion cases and for good behavior. In February 2020 he was pardoned by President Trump.
[2]In the relatively small world of the Twin Cities, after the demise of Drexel Burnham in 1991, the Norwest Bank Corporate Trust salesman changed jobs and went to work for a major competitor—whose outside law firm of choice was Oppenheimer Wolff & Donnelly, which I’d joined in mid-1989. Much of my work at the firm involved defaulted bond issues administered by that very same guy. I worked very closely with him on a number of cases. When I completed the circle by leaving the firm to take the job at Norwest, I was surprised to stumble across said guy’s former deals—including the NIFA trusteeship and the “billion-dollar fiasco” involving Executive Life.
