Solutia Inc. has asked a bankruptcy judge to approve a $500 million agreement with Calpine Central LP to settle one of the biggest unsecured claims levied against the company in its chapter 11 case, Bankruptcy Law360 reported yesterday. The settlement would bring an end to 18 months of complex litigation and would let the companies avoid an arbitration hearing set to begin in two months in Houston, Solutia said in its motion. The dispute stems from a series of agreements Solutia and Calpine struck in 1999. Calpine leased land from Solutia in Decatur, Ala., where it built the Cogen Facility, which holds three combustion turbines, three heat recovery generators and one steam turbine. The companies agreed that Solutia would buy electrical and steam energy from the Cogen Facility to power the plant where it manufactured Acrilan, an acrylic fiber used in textile, and that Calpine would sell the leftover energy, Solutia said. The agreement also releases both companies from any claims related to the contracts at issue. In addition, it states that Calpine will vote in favor of Solutia’s chapter 11 plan.

Public pension fund managers are saying that they may slow their push into hedge funds after the recent losses suffered at big funds, such as Goldman Sachs Group Inc. and AQR Capital Management, the Wall Street Journal reported today. Less than a year ago, more than 42 percent of public pension funds said they were planning “significant increases” to their existing hedge-fund investments, according to the consulting firm Greenwich Associates. At least 20 public pension funds are taking steps toward investing in hedge funds for the first time, based on research prepared by Financial Investment News. It may be too early to see any pension funds redeeming their hedge-fund holdings, and some of the hardest-hit hedge funds have already shown signs of rebounding. However, pension managers say  that the erratic moves in recent weeks are reason enough to worry most pension fund boards.

Dura Automotive Systems Inc. on Wednesday filed its disclosure statement  and reorganization plan with the auto parts maker looking to emerge from chapter 11 by the end of the year, Bankruptcy Law360 reported yesterday. Under the terms of the proposed plan, creditors will be entitled to a full cash payout of debtor-in-possession claims, administrative expenses, priority claims and second-lien secured claims. The proposed plan will provide for the conversion of senior notes and general unsecured claims of more than $75,000 into between 57.4 to 60.7 percent of common stock in the reorganized company, and cash payment in lieu of an equity distribution of all trade claims and general unsecured claims of $75,000 or less. There will be no recoveries for subordinated notes’ and convertible preferred securities’ claims, nor will the company’s common stock holders receive any recoveries under the proposed plan.

The four biggest U.S. banks said that they borrowed a total $2 billion from the Federal Reserve, falling in with the central bank’s efforts to stanch turmoil in financial markets by encouraging borrowing from the Fed, the Wall Street Journal reported today. Citigroup Inc., Bank of America Corp., J.P. Morgan Chase & Co. and Wachovia Corp. — the nation’s largest banks as measured by total assets — said they each borrowed $500 million. The move came five days after the Federal Reserve cut the rate it charges for discount-window loans on so-called primary credit to 5.75 percent from 6.25. It also lengthened the duration of the loans to as long as 30 days from the previous one-day limit. Fed officials then held a conference call with bank executives in which they encouraged banks to tap the window. Deutsche Bank AG borrowed from the discount window the same day.

Bankruptcy Judge Kevin J. Carey signed off on a settlement agreement between bankrupt subprime lender New Century Financial Corp. and Deutsche Bank subsidiary DB Structured Products Inc., putting to rest a purchase contract dispute between the two companies involving the secondary market for mortgage loans, Bankruptcy Law360 reported yesterday. The settlement centers on an auction of the mortgage loans in dispute. The proceeds of that sale will be paid “first, to DBSP until DBSP is paid $14million and second, to the debtor’s bankruptcy estates,” the agreement said. In the order approving the deal, Judge Carey noted that if New Century does not complete the sale by Nov. 30, the subprime mortgage giant will hand over the disputed loans to DBSP. However, the judge allowed that the deadline could be extended by two weeks if New Century has a binding offer from a qualified bidder by Nov. 30.

General Electric Co., the world’s largest provider of private-label credit cards, may sell its Japanese consumer-credit unit Lake after a government clampdown on fees eroded earnings in the industry, Bloomberg News reported yesterday. GE’s possible exit follows an increase in bad loans in Japan’s $170 billion consumer-finance industry, after lawmakers and courts reduced the maximum interest that can be charged and gave borrowers more scope for demanding refunds. Promise Co., Japan’s third-largest consumer lender, offered to buy rival Sanyo Shinpan Finance Co. last month for about $1 billion.  Lake ranks sixth among consumer lenders in Japan after Citigroup Inc., according to data from the Liaison Group of Consumer Finance Companies, an industry body. The value of Lake’s outstanding loans has fallen to about 700 billion yen ($6.1 billion) as of March 31 from 860 billion yen at the end of 2005, Liaison Group estimates.

A new research paper co-written by the vice chairman of the Federal Reserve says that consumer debt soared over the last six years mainly because of the rapid increase in housing prices and that consumer spending may slow down over the next few years, the New York Times reported today. The paper, authored by Donald L. Kohn, the second-highest ranking Fed official after Ben S. Bernanke, and Fed Economist Karen E. Dynan said that higher housing prices made many homeowners feel wealthier and more willing to take on debt, which they then used to finance more spending. This spending helped to keep the economy growing at a healthy pace since the last recession ended in 2001.But the increase in debt “is not likely to be repeated” unless home prices rise as rapidly as they have in the recent past and mortgages become even easier for borrowers to obtain, according to the study. The authors note that the average household now owes more money than it makes in annual income. In the early 1980s, the debt-to-income ratio was below 60 percent.

The Securities and Exchange Commission reached a settlement with a New York hedge fund for failing to disclose its investment holdings for three years, a move that spotlights a debate over how much hedge funds should disclose about their activities, the Wall Street Journal reported today. Quattro Global Capital LLC, a hedge fund with $900 million in assets, agreed to a cease-and-desist order and to pay a $100,000 penalty for not disclosing its investment positions from 2002 through the middle of 2005. The SEC found that Quattro, which invests in convertible securities, violated rule 13F, which requires any investment adviser with $100 million or more in investment assets to disclose its holdings every quarter. The firm settled without admitting or denying the allegations. The issue has been at the forefront in recent weeks as stock-market volatility left investment banks and others scrambling to figure out how to value derivatives tied to subprime mortgages. The illiquid instruments can be difficult to price as many hedge funds, including ones managed by Bear Stearns Cos. and Goldman Sachs Group Inc., have suffered heavy losses as a result of the fallout.

The U.S. residential-mortgage market’s woes keep popping up in unexpected places, even real-estate investment trusts that specialize in commercial lending, the Wall Street Journal reported today. While REITs that trade in residential mortgages have taken the main hit during the credit crunch, exposed as they are to some riskier home-loan types, those focused on commercial mortgages are feeling pinched in part because some have more exposure to residential loans than first presumed. Recent disclosures include one by RAIT Financial Trust, a commercially focused REIT, which calculated its exposure to American Home Mortgage Investment Corp., a troubled home-mortgage lender, at $95 million. That amount, if written off, is 7 percent of RAIT’s book value per share, according to some analysts. Analysts and investors say they fear there could be more of such revelations coming. UBS REIT analyst Omotayo Okusanya says most commercial-mortgage REITs suffer from poor disclosure and don’t, for instance, break out their loans by industry or highlight their top 10 borrowers.

Chicago Bankruptcy 
 

A group of American Home Mortgage Corp. employees who were axed last week have filed a putative class action against the bankrupt home lender for back pay, arguing they were let go without fair warning, Bankruptcy Law360 reported on Friday. The employees, who were fired as part of mass layoffs ordered by AHM before it filed for bankruptcy on Monday, claim the firm violated their rights under the Worker Adjustment and Retraining Notification Act. They allege the Mellville, N.Y., lender, which laid off one-third of its workforce, was obligated under the WARN Act to give the workers 60 days’ advance notice of their termination and owes them two months’ worth of wages and pension benefits. The case is In re American Home Mortgage Holdings Inc., case number 07-11047 in the U.S. Bankruptcy Court for the District of Delaware.

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