Trustees: cheating, or just not that into you?

Dear DealVector:

Is it better to have your man cheat on you, or ignore you?

How about your Trustee?

– Left in the Lurch

Gretchen Morgenson’s recent assessment (“Who has your back? Hard to Tell”) of Trustees’ conflicted behavior in high-profile litigation is straightforward, compelling, and brutal.  Cheaters …

The charge is that the Trustee, BNY, acting on behalf of investors in a suit against BofA, settled for an amount that was astonishingly low without consulting most of the investor base. BNY settled for $8.5 billion on potential claims totaling more like $100 billion. Ostensibly BNY did so to please BofA, BNY’s true love economic client and the source of 60% of its deal mandates.  60%? That’s a lot of lipstick on the collar ….

As much as that hurts, we at DealVector are more worried about apathy in the relationship. It’s often so hard to get Trustees’ attention. Sending nice letters. Leaving lots of messages. When will they return those calls?

In many cases it almost seems that Trustees just can’t be bothered to help investors.

(He’s Just Not That Into You: Bradley Cooper, Jennifer Aniston, Ben Affleck, Scarlett Johansson, Jennifer Connelly, Drew Barrymore, etc — all lonely-hearts that have trouble getting dates.)

A typical case involved a manager seeking to contact CDO investors for the purposes of proposing a beneficial amendment and canvassing responses. Now, the way messaging works to reach holders of securities today is complicated. Usually the first step is to request an SPR (Securities Position Report) from DTC that details the custodial institutions where the ultimate holders are located. Here’s the catch: typically, it is the trustee who needs to request an SPR for a particular security.

In this situation, the Trustee refused to make the SPR request on behalf of the collateral manager, not wanting to get involved. The Trustee also indicated it would refuse a request from the Issuer. Trustees in too many cases have adopted a legalistic crouch, arguing that any facilitation of communication outside the four corners of the document will expose them to litigation risk. They take this view even if they are merely passing messages in a neutral manner, messages that both sides then are free to evaluate and act on with better information.

In another situation, we heard the following: “We think that what you are doing is admirable, and likely would maximize value for holders and for the CDO, but we won’t help you. Not our thing.”

Apathy? Let’s call it a lack of will-power to do the right thing. Why do Trustees interpret their role to be such a flaccid one, particularly in cases where they are the only entity in a position to act to help stakeholders? Trustees in structured securities have come to interpret their roles as being much more constrained than might be indicated by the word “Trustee” – they choose to not exercise the freedoms that would logically flow from the mandates they have been given.

It’s worth mentioning that not all Trustees seem to have this cultural view. In particular, in Europe the impetus seems to be to find a much more proactive approach to servicing client needs.  Maybe that’s where investors need to go to find a little love. We’ll get the European perspective in a future article.

So don’t give up girls; there are still some good ones out there. But make sure they treat you right.