From an economic perspective, the bankruptcy of Great Northern Paper last week isn’t about any of the things that the right and left usually trade insults about in the wake of such a disaster. It isn’t about “greedy” unions. It’s not about lack of resources. It’s not about the high price of energy. It’s not really even about globalization, although no doubt that played a role.
What brought down Great Northern, and what has brought down numerous 20th century industries in the United States, is the grateful eagerness with which governments embrace hedge funds that decide to use a dying company to make a little more money before they shut them down for good.
Cate Street Capital had no real skin in this game. Back in June, the CEO of Cate Street Capital, John Halle, testified that he had no financial interest in Great Northern Paper or Thermogen, a $140 million boondoggle making wood pellets with untested technology for the European market, subsidized in part by Finance Authority of Maine loans, guaranteed by … guess who?
Halle also testified that he owns no land, has no assets, not even so much as a checking account, because his princely salary goes into an account in his wife’s name alone. Even Cate Street Capital is owned by his wife, he claimed, through another company, even though the website still lists John Halle as its founder.
In addition to the $650,000 it owes the town of East Millinocket, and $1.3 million to the town of Millinocket in back taxes, Cate Street has a lot of other creditors, too. The IRS filed liens of $2.49 million against both the East Millinocket holdings and the Millinocket holdings, where the uncompleted Thermogen pellet plant was expected to open. But there had been no activity on that project for months, according to FAME. Cate Street had intended to use the wood waste from the East Millinocket paper mill for the Thermogen project, but the mill shut down in January, leaving Thermogen without a supply chain.
Collectively, the creditors are owed $50 million. Most of them will be out of luck, and the lucky ones may get pennies on the dollar.
The process, however sociopathic, of making money on such a doomed venture is simplicity itself. A company offers to step in and “reorganize” a desperate business … in this case, the shuttered Millinocket plant and the East Millinocket plant that was still operating, albeit on life support. The company gets tax credits and other concessions from the towns, such as TIFs. The company assembles state grants or loans with loan guarantees, and quasi-governmental grants or loans with guarantees, while at the same time purchasing fairly low-cost “swaps” that provide a cushion in case the venture fails. Swaps are a bit like insurance, except anyone on Wall Street can buy them — they don’t have to have a fiscal interest in the company they are essentially betting on to fail.
Labor is jettisoned, because the goal, regardless of the bill of goods the state or town was sold, isn’t really to save the company, it’s an “orderly” shutdown. In January and February, more than 200 paper mill workers were furloughed while Cate Street “retooled” its business plan. There has been very little investment in the plants. Cate Street auctioned off one of the paper machines to pay some of its debts earlier this year.
The officers, however, keep making money. Halle earns $360,000 per year, and has asked for another $100,000 per year in lieu of bonuses, the last of which he received in 2010. And when bankruptcy is complete, and the buildings are sold to the highest bidder — if any — Cate Street will redeem whatever swaps they purchased betting against Great Northern and Thermogen to fail. Cate Street will ultimately end up with a lot more money than they invested in the business.
Nice work if you can get it, eh? But we have to ask why no one in government asked to see a real, working model of what Cate Street proposed. Was Maine so naive that we knew nothing about the hedge fund business model? Did we even ask to see the business model?
Someone dropped the ball here. Unfortunately, the credulity and lack of due diligence means that an already economically depressed region will be even more desperate than it was before.
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