Chapter 1, Introductory Cases Dublin Small Animal Clinic, Inc. 1 page; introductory
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- Corporate governance Securitization
16 pages; intermediateCorporate value statementsCorporate governanceBusiness judgment and competing interestsEthicsIBM and Google are highly profitable and in many ways are among the world’s most ethical companies. Both have impressive and lofty corporate value statements with parts that could be used for not-for-profit organizations. However, IBM and Google are publicly traded and employ tens of thousands of employees—they are not charitable organizations. As they react to competitive challenges, they sometimes need to reduce salaries or benefits, or engage in actions that seriously harm their competitors. This case includes three instances where IBM faces difficult choices and its value statements seem to be of limited value (reduced pension benefits; lower salaries, and; competitive actions to protect their mainframe business). The case also includes seven instances where Google faces complicated decisions. In six of the instances, Google seems to be going against its value statements and violating various laws. However, in the seventh instance, Google stands up to Chinese censors at potentially great cost. I use the case to discuss difficult choices corporations often face. I also use it to discuss the real value of value statements.
Best uses:Ethics Undergraduate intermediate accounting First-year MBA/Executive MBA financial accounting Executive education 11.Chrysler, LLC: Bankruptcy 12 pages; intermediate to advancedCorporate governanceBankruptcyPriority in bankruptcyNational policy and competing interestsChrysler and General Motors received large U.S. government loans shortly before George Bush left office. As President Obama entered office, it was obvious that Chrysler and General Motors would need additional funding to continue operating. A bankruptcy would be extraordinarily costly and might put thousands of employees out of work just as the economy entered the worst recession since the Great Depression. It seemed highly unlikely any private investor would invest in either firm. In response, the government proposed a plan for a rapid exit through a Chapter 11 bankruptcy reorganization that would circumvent the legal priority of creditors in bankruptcy. That led some to question whether the plan might lead to a lack of faith in contract law and the courts. However, that does not seem to have occurred. In the case of Chrysler, the U.S. government sought to: offer equity holders and most unsecured debt holders nothing; offer secured debt holders partial payment; retain unsecured liabilities to the UAW’s pension and retiree health care funds, and; offer equity in post-bankruptcy Chrysler only to the UAW funds. Several State of Indiana pension plans, which owned secured debt, sued to block the reorganization plan. However, on a technicality, the government won the lawsuit. The case is an excellent overview of bankruptcy law. It can also be used to discuss alternative bankruptcy plans, such as liquidation. Another alternative would have been to cancel Chrysler’s obligation to the UAW pension and retiree health care funds. Those liabilities had always been cancelled in prior bankruptcies (for example, steel company and airline bankruptcies).
Best uses:Ethics Undergraduate intermediate accounting First-year MBA/Executive MBA financial accounting Financial reporting Financial statement analysis Corporate finance Valuation
Use with:Retiree Benefits in the United States (Chapter 7) 12.General Growth Properties: Crises in Securitization 17 pages; advancedCorporate governanceSecuritizationPiercing a securitization trustBusiness judgment and competing interestsEthicsThe case is an interesting and excellent introduction to securitization, to conflicts of interest, and to corporate governance. This case covers a bankruptcy court ruling that seemed to circumvent securitization trust contract law. General Growth Properties (GGP) was the nation’s second largest mall owner/operator; it operated more than 200 shopping malls throughout the U.S. About 225 of GGP’s malls were funded though debt issued by a separate securitization trust for each mall. The trust would own the shopping mall, which would have been funded with a cash contribution from GGP, plus the sale of debt secured by the mall property. GGP’s cash contribution was significant and could not be withdrawn until debt holders had been repaid according to a predetermined schedule. During the recession of 2008-2009, commercial real estate financing was nearly impossible to obtain. Although all GGP’s malls were financially sound, GGP itself was about to declare bankruptcy. Much of its cash contributions to the securitization trusts were funded by debt that needed to be refinanced, and GGP could not obtain refinancing. GGP declared bankruptcy but also caused about 200 of its financially sound malls to also declare bankruptcy, which might let GGP withdraw its excess cash in the securitization trusts, cash that was to have provided a cushion to mall debt holders. GGP argued that it operated each of the 200 malls; if it were forced to liquidate, the individual malls would also be in serious trouble since they lacked managers to operate the malls. The court agreed and let GGP withdraw its cash from the individual securitization trusts. The value of GGP equity immediately rose from $1.00 per share to $16.75 per share, its approximate value in mid-2010. That court ruling is not expected to apply to securitization trusts where debt is secured by ownership, i.e. mortgages, auto receivables, or credit card receivables. However, it may apply to commercial real estate which involves operating assets that must be managed, so debt funded by commercial real estate is far less secure than in the past, more difficult to value, and far more difficult to refinance. It may lead to significant changes in how securitization trusts are organized. For example, it seems unlikely that originators will be allowed to appoint independent directors in the future. The case also raises two additional ethical issues. First, GGP’s president and CFO purchased GGP stock on margin; when the firm’s stock price declined in 2008, they needed to provide additional margin. They did so by borrowing a total of $100 million from a trust for the benefit of Mary Bucksbaum Scanlan, daughter of GGP’s deceased former CEO (and niece of GGP’s then CEO). Attorneys who were trustees of that trust were also attorneys for GGP. Subsequently, when GGP was in serious financial difficulty, but before its stock price collapsed to $1.00 per share, the trustees purchased as much as several hundred million dollars of GGP stock using funds in Mary Bucksbaum Scanlan’s trust.
Best uses:Ethics Undergraduate intermediate accounting First-year MBA/Executive MBA financial accounting Financial reporting Financial statement analysis Corporate finance Valuation
Use with:Brief Excel Case: Securitization (Chapter 8) Directory: resource uploads -> downloads downloads -> Chapter 19 Chapter Outline downloads -> Chapter 1 Practice Quiz Introducing the Economic Way of Thinking downloads -> Bltc-8e Case Problem with Sample Answer Chapter 30: Partnerships 20. 5 Case Problem with Sample Answer downloads -> Cross-7e: Case Problem with Sample Answer downloads -> Atmospheric circulation downloads -> September 3, 2007 downloads -> August 30 2009 Website Update downloads -> Chapter 3 exercises downloads -> Review Sheet: Chapt. 1: The Moral Point of View Moral concerns are unavoidable in life. Ethics downloads -> Chapter 17 Chapter Outline Download 123.35 Kb. Share with your friends:
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