Credit Suisse said yesterday that it is laying off about 150 workers from its mortgage-backed securities unit, the New York Times reported today The job cuts were the latest response to the subprime mortgage implosion that rocked the markets this summer. But Credit Suisse’s numbers were relatively mild by comparison to some of its peers. Lehman Brothers last month closed down one of its home lending units, laying off 1,200 people, or 4.2 percent of its work force. Bear Stearns, which closed two hedge funds because of heavy subprime-related losses, laid off 240 employees at two home-lending units.

A bankruptcy court ruled on Friday that Pacific Lumber Co. would not be allowed to pay 63 workers it fired shortly before entering chapter 11 nearly $950,000 in severance pay before the court confirmed a reorganization plan, Bankruptcy Law360 reported yesterday. Shortly before filing for bankruptcy on Dec. 1, 2006, Pacific Lumber and its subsidiary Scotia Pacific LLP announced that they would fire over 100 employees in an effort to cut costs, effective Jan. 31. Sixty-three of those employees were offered 60 days’ wages as severance pay, with additional severance for employees who had worked at the company for more than five years. Pacific Lumber contended that because the payments were due post-petition, they should be considered as post-petition wages, which would have the priority of an administrative claim. Judge Richard Schmidt disagreed, saying that the workers’ severance was compensation for work done pre-petition. Judge Schmidt noted that while the relevant case law would allow the company to pay pre-petition wages if all creditors with higher priority claims consented, one such creditor—Marathon Structured Finance Fund, a secured lender—had already objected.

The consortium that had agreed to buy Sallie Mae for $25 billion plans to return to the negotiating table and seek a lower price and, if it doesn’t, it may move to scuttle the deal, the New York Times reported today. While the buyers — the private equity firms J. C. Flowers & Company and Friedman Fleischer & Lowe, as well as two banks, JPMorgan Chase and Bank of America — are hoping to renegotiate the price of Sallie Mae, they may also be willing to walk away and pay the $900 million breakup fee. If that happened, the deal would become the biggest casualty of the tighter credit market, which persists despite the Federal Reserve’s decision on Tuesday to cut interest rates. The buyers also appear to be reacting to legislation that Congress passed over the summer that would reduce subsidies to student lenders.

A bankruptcy trustee asked a judge to approve the sale of a bottling plant to Giant Eagle Inc., less than two weeks after the judge ruled the supermarket chain intimidated a competitor into dropping out of the sale, the Associated Press reported yesterday. Under a settlement reached Monday and detailed in a court filing Wednesday, Cadbury Schweppes Beverage Group will complete its $19 million purchase of the Le-Nature’s plant and then resell it to Giant Eagle for $19 million. Bankruptcy Judge M. Bruce McCullough on Aug. 30 ruled that Giant Eagle acted in bad faith in its bid to buy the closed Latrobe plant for $20 million. He awarded the sale to the competitor, the beverage arm of U.K.-based Cadbury Schweppes PLC. Under the settlement, Giant Eagle denies wrongdoing, but will still forfeit its $2 million deposit, as previously ordered by the judge. It also will pay bankruptcy trustee R. Todd Neilson another $2.25 million that will be used to repay Le-Nature’s creditors.
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The Midwest labor market is feeling a double-barrel blast from the national housing slump and the continuing woes of Detroit’s auto makers, the Wall Street Journal reported today. Across the region, factories that churn out the bricks, tiles and wallboard used to build new homes are feeling the effect of the steep decline in new-home construction in once-hot markets such as California, Arizona, Nevada and Florida. Chicago-based USG Corp., which makes gypsum wallboard and other building materials, has cut 1,100 jobs in the past 12 months and plans to shut down more capacity in the third quarter. Kohler Co., a maker of home plumbing products, laid off 160 people at its Wisconsin plant. The job losses are exacerbated by lackluster employment growth in the region, and the fallout in the auto and housing markets is showing up in unemployment numbers. The unemployment rate for the five-state region that includes Wisconsin, Michigan, Illinois, Indiana and Ohio was 5.7 percent in July, the highest of any region in the country, according to the latest government data. Michigan’s 7.2 percent unemployment rate leads the nation.

While credit card issuers and other companies that lend to consumers have escaped the barrage of defaults that mortgage lenders have suffered, some card issuers are raising interest rates, while others are cutting back offers to less creditworthy customers or lowering credit limits, the Associated Press reported yesterday. James Chessen, chief economist with the American Bankers Association trade group in Washington, D.C., said of lenders, “We’ve also heard they’re taking a more careful look at people with less-than-stellar credit. There’s the feeling that the risk may have been underpriced in the past.” Because credit cards have not seen substantial increases in delinquencies, “we haven’t seen deterioration in the performance in credit card asset-backed securities,” said Cynthia Ullrich, a senior director in Fitch Ratings asset-backed securities group. Still, Wall Street analysts said that investors concerned about mortgage problems have demanded a slightly higher return on securities backed by credit card receivables in recent weeks to make up for a higher perceived risk.

The House Financial Services Committee divided along partisan lines at a hearing yesterday in response to the credit crunch that has dried up funding for the subprime mortgage market, with Democrats advocating tougher regulation for those who sell mortgage-backed securities and Republicans calling for a more limited approach, CongressDaily reported yesterday. House Financial Services Chairman Barney Frank (D-Mass.) noted that federally regulated banks behave more responsibly than financial institutions unfettered by stringent oversight such as nonbank lenders, mortgage brokers and hedge funds. “It does seem clear that we have a set of financial markets today that are very different than it was 10 years ago, but our regulatory structure is essentially the same as it was 10 years ago,” Frank said. But Republicans argued against any response that could further dry up funding for borrowers, especially lower- and middle-income individuals wanting to buy their first home. Financial Services ranking member Spencer Bachus (R-Ala.) said only a small percentage of mortgages were problematic and advocated a more narrow approach. Bachus touted a measure he sponsored that would place a national standard to prevent intimidation of appraisers and require simplified loan documents and verification of income for borrowers. Treasury Undersecretary Robert Steel said that the administration is continuing to monitor the credit crunch that has spread to other markets, for example, with private equity firms facing a greater difficulty in obtaining financing for leveraged buyouts. He added that the credit crunch impact outside the mortgage market was “faster and swifter” than he expected.

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House Financial Services Committee Chair Barney Frank (D-Mass.) is planning to unveil a bill later this month to tighten consumer protections in the mortgage industry, The Hill reported today. Curbing predatory loans won’t help people already trapped in unaffordable mortgages, but it could prevent another binge in risky lending, proponents argue. The prospects for the bill, which faces steeper odds in the Senate, are likely to rise as conditions in the mortgage market worsen. Frank’s legislation will tighten underwriting standards and include language designed to prod states to enact minimum standards for mortgage originators involving disclosure and broker licensing, according to discussions that Financial Services Committee staffers had with lobbyists over the recess. Frank suggested that he wanted to bring the standards applied to non-bank mortgage lenders and brokers more in line with those adhered to by the banking industry. “We have a regulated and an unregulated sector in terms of mortgage loans, and the regulated sector has worked much better,” he said.
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Bankruptcy Judge Judith K. Fitzgerald criticized federal prosecutors for not alerting her to allegations that accounting firm L. Tersigni Consulting PC was illegally padding bills while advising asbestos claimants in large chapter 11 cases, Bankruptcy Law360 reported yesterday. As she signed off on approving Charter Oak Financial Consultants LLC as the new financial advisers to the asbestos committee for W.R. Grace & Co., Judge Fitzgerald ordered all bankruptcy officials to alert her to any suspected wrongful billing practices as soon as possible. Federal prosecutors had instructed Bradley M. Rapp, the LTC employee who first alerted law enforcement to the suspicious bills, not to tell the court while the investigation was pending.
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