LAWSUITS AHEAD: Trump’s Treasurer Steven Mnuchin was Eddie Lampert’s Wingman as Sears Declined for a
Mnuchin’s role in enabling the mismanagement, asset sales, pensions shortfall and stock decline amid executive self-dealing will likely be a focus of lawyers and investigators
Mnuchin’s role at Sears as it went from The Everything Store to bankruptcy
Former CEO Edward Lampert plays an over-sized role in the bankruptcy of iconic retailers Sears and Kmart but at his side, on his board his accomplice in the destruction of an American institution was his college roommate, former employee, longtime deal collaborator, confidant and best friend, Steven Mnuchin.
Although he is now the U.S. Secretary of the Treasury, Mnuchin’s role at Sears is still likely to be a target for the many shareholder lawsuits and investigations.
During Lampert’s ownership over the past 13 years, with Mnuchin at his side for most of the time, Sears has gone from being the “everything” store where America shops to a bankrupt disaster. As a result of management’s failure to adapt and reckless asset stripping for personal gain, Sears under Lampert has lost customers and cost employees, investors, mall owners and shareholders millions of dollars.
“As of the filing, about 700 stores remained open and the company employed 68,000 workers,” CNN reported Monday. “That's down from 1,000 stores with 89,000 employees that it had as recently as February.”
While sears shareholders and mall owners take the hit, Lampert and Mnuchin have already taken out millions in compensation, dividends and profit. While they lose some money, both did well financially during their disastrous stewardship.
Mnuchin worked for Lampert first as an employee early in the 21st century on his then hot ESL hedge fund; and later supported him as a loyal member of Lampert’s handpicked board of directors for Sears Holdings.
At times, Mnuchin was on board committees that dished out rich compensation to Lampert while starving the underfunded pension fund, leaving past employees to face their own bankruptcy nightmare.
Mnuchin only gave up his board seat at Sears after being plucked out of relative obscurity by President Donald Trump to be his Secretary of Treasury in late 2016.
Lampert was so proud of his pal Mnuchin’s selection for the Trump cabinet that he sat in the Senate chamber during Mnuncin’s controversial confirmation with other Mnuchin family and friends to cheer him on.
With the crashing of an American retailing institution, it is crucial to examine Mnuchin’s role as a key supporter, enabler and pal of Lampert’s for nearly four decades.
As Sears and Kmart were shrinking and floundering, they were systematically drained of money and assets that greatly enriched both Lampert and Mnuchin over the years.
"Sears has been dying for many years," President Trump said Monday. "It’s been, obviously, improperly run for many years, and it’s a shame."
Trump can look across the cabinet table at his Secretary of the Treasury to see one of the key players who has had a significant role in “improperly running it for many years.”
It’s a business horror show turned buddy movie where two nerdy compadres milk Sears leaving a long string of unhappy customers, investors, shareholders, and suppliers. After 132 years of operation, Lampert managed to engineer this disastrous end for the company in little over a decade.
So, let’s dig into the history of this Yalie bromance and its consequences.
Mnuchin joined by his third wife, actress Louise Linton, for the unveiling of dollar bills carrying his signature
Little known by the public, Trump tapped Mnuchin for the same reasons Lampert liked him so much – his loyalty to the man no matter what it did to others.
Mnuchin impressed Trump during the 2016 campaign as chair of his fundraising committee and then was rewarded.
Secretive and press shy, Mnuchin’s Cabinet appointment was controversial because he was little known outside Wall Street, banking, and Hollywood circles. He was also attacked because of his record while CEO of One West Bank, which foreclosed on so many people, primarily elderly and minorities, Mnuchin was nicknamed the “king of foreclosures.”
At the time when the Treasury appointment was announced in November 2017, Trump praised Mnuchin as a “world-class financier, banker and businessman” who would bring his “expertise and pro-growth ideas” to the administration.
There is no question that Mnuchin and investors made a lot of money, including the hundreds of millions from buying the failed IndyBank with Uncle Sam’s loans and flipping it into One West Bank for $3.4 billion dollars.
Mnuchin’s other business initiatives have not always been as successful since leaving his lucrative career at Goldman Sachs, where his father worked before him and his brother worked beside him. Mnuchin was lucky enough to work there when Goldman did its initial public offering, which led to him personally netting about $99 million (in addition to his final salary check of over $46 million).
Mnuchin is known in Hollywood as a film investor but couldn’t hold on to his lucrative deal with Fox. His biggest recent deal was to finance a slate of Warner Bros. movies with RatPac, owned by Australian James Packer and Hollywood producer-director Brett Ratner that suffered as most Warner Bros. movies it financed were box office disappointments.
Mnuchin was introduced to Ratner by their mutual pal, Eddie Lampert.
Mnuchin’s brief flyer as a movie studio executive at Relativity Media was even less successful, as he pulled out after about a year, losing millions on his personal investment when it went bankrupt.
HOW THE POOR KID AND RICH KID MET
Edward Scott Lampert was Mnuchin’s roommate and close friend when they were undergraduate economics majors at Yale University (both were born in 1962, but Lampert graduated in 1984 and Mnuchin in 1985).
It began a lifelong personal and business relationship.
Both came from New York State, had Jewish backgrounds, were known for being studious, serious and nerdy. They both were invited to join the Skull & Bones secret society at Yale, which was reputed to be a place to establish lifelong business and social connections.
While they were alike in many ways, they came from completely different financial classes. Mnuchin was from a wealthy family – his dad a highly compensated Goldman Sachs exec) - and only worked to gain experiences for his career.
Lampert, however, was a self-made man, an “up from the bootstraps” force of nature, who worked throughout high school because he and his mom needed the money.
Lampert was born in Manhasset, New York, to Delores and Floyd Lampert. His mother in his early years was a housewife while his father was an attorney with his own firm.
His father died when Lampert was only 14. His mother went to work in retail sales at Saks Fifth Avenue, while young Lampert worked after school and on weekends at a series of part-time jobs, most prominently in a warehouse stocking shelves.
Lampert maintained a high-grade point average, also excelling at sports in high school, which helped him land financial assistance and a scholarship at Yale.
As a teen, Lampert spent many of his school vacations in Miami Beach with his grandmother, who was an avid amateur investor in the stock market. They watched Louis Rukeyser’s TV show “Wall Street Week” together and went to the local library to look up stocks. In his family situation, even as a teenager, Lampert knew making money was very important.
In his sophomore year at Yale, Lampert attended a seminar in investment banking presented by a partner from Goldman Sachs. He was fascinated by risk arbitrage, which involved trading stocks of companies expected to be sold, merged or acquired. The idea was to buy before the stock jumped on a sale, or if a merger was pending, to profit on the difference between the market value and actual sale price.
It had an element of risk because such deals can fall apart before they are consummated. Arbitrage was a hot area for investing in the 1980s, when there was an increase in corporate mergers, sales and consolidation.
Lampert snagged a prestigious internship offered to a Yale student each year at Goldman Sachs for the summer before his senior year. He spent three months in a sales and training program.
When he graduated, Robert E. Rubin, who then headed the arbitrage operation at Goldman, told Lampert he should attend law school. He applied and was accepted at both the Harvard and Yale law schools – much to his mother’s delight – but Lampert was impatient to start earning a living.
LAMPERT'S MOTHER CALLED HIMN CRAZY WHEN HE DIDN'T GO TO LAW SCHOOL
He mother thought he was crazy, but Lampert passed on law school and convinced Rubin to hire him at age 22 as a junior research analyst on the risk arbitrage desk. (Rubin later became Treasury Secretary under President Bill Clinton.)
"I found risk arbitrage intellectually stimulating," Lampert told The Washington Post in 1995. "You needed to analyze the situation in a short period of time, and you needed to understand the relationship between the risks and rewards -- how much money you could make and how much you could lose.”
"It appealed to me because you made the decisions,” added Lampert. “You were committing the partners' capital and could see immediately whether you were right or wrong simply by the facts. It was definite and not subject to other people's opinions."
What Lampert learned grew into his belief in “value investing,” where the goal is to buy shares in companies that have good prospects and assets, but are undervalued by the stock market. The most famous proponent of value investing was Warren Buffett, who built Berkshire Hathaway into a hugely successful conglomerate. Lampert would later be compared to Buffett.
WHY LAMPERT LEFT GOLDMAN SACHS AFTER ONLY THREE YEARS
Eddie Lampert with his wife Kinga in happier times
Lampert spent only three years at Goldman Sachs, leaving in 1989. At age 26, he wanted his own hedge fund. He wanted to combine arbitrage with value investing.
"I liked the idea of buying something at $30 if it's worth $60 as opposed to buying it at $59 to sell at $60," Lampert told The Washington Post in 1995. "Goldman was not in that business. We were in the business of buying at $59 to be worth $60 in a short time."
While still at Goldman Sachs, Lampert went to Rubin with the idea of forming his own hedge fund. The older man warned him it would be a poor career choice, but Lambert left
Goldman Sachs anyway. Rubin remained a close friend and became one of Lampert’s early investors.
Lampert wasn’t acting blindly. During the summer of 1987, while on vacation in Nantucket, Massachusetts, he had met Richard Rainwater.
Rainwater himself had worked at Goldman but left, making his reputation and fortune as chief investment officer for the billionaire Bass Brothers of Fort Worth. The company had made billions in oil and gas investments and in 1987 was expanding.
Lampert moved to Ft. Worth, Texas, where Rainwater and his friends provided him with nearly $29 million in financing (including his own savings), which he was to use to buy and sell stocks in undervalued companies. Lampert called the company ESL Partners (using his own initials).
After 18 months, Lampert began chafing under Rainwater’s direction and wanted to be his own boss, a feeling that would guide him through the rest of his career. His investments were doing well, but he wanted complete control.
“I didn't want to have to ask permission to do a deal,” Lampert told The Washington Post. “If I was the quarterback, I didn't want the coach calling the plays."
Rainwater pulled back but still left some of his money in ESL.
Lambert moved to Greenwich, Connecticut where he brought in other investors, some of whom he met through Rainwater. They included movie and music mogul David Geffen, who invested a reported $200 million with him, the Fisher family (Gap), the Tisch family (Loews, CBS) and the Ziff family, who had a publishing empire.
After a slow start, as the world’s economy was being hard hit by Iraq’s invasion of Kuwait, ESL’s investing philosophy began to pay off. Through the first half of the 1990s, ESL enjoyed a 25 percent annual average return. Lampert’s portfolio grew in value from $30 million to about $700 million.
He jumped into buying and holding stakes in other undervalued companies, making a fortune in his early years from IBM, American Express and other smartly timed investments.
NY TIMES CALLS MNUCHIN'S BOSS SECRETIVE, CONTROLLING, IMPATIENT
In a profile of Lampert in 2002, the same year Mnuchin joined ESL, the New York Times described him as “secretive, controlling and so impatient for success and obsessed with work that some who know him say he takes little note of people unless he needs them.”
“Warm and fuzzy Edward S. Lampert is not,” added The New York Times. “But that has not seemed to matter. Mr. Lampert, a 39-year-old money manager, has scored an extraordinary 14-year record of value investing, with an average annual return of 24.5 percent. The 2001 performance of the ESL Partnerships, a group of hedge funds he controls, was particularly stunning: it soared 66 percent as the Standard & Poor's 500-stock index sank 13 percent. Even after the typically high hedge fund fees, his investors had a 53 percent return.”
Mnuchin joined ESL Investments as Vice Chairman in the Greenwich, Connecticut headquarters.
Mnuchin’s job was to ferret out strong, asset rich but undervalued companies for new investments.
Lampert had become a billionaire by the time he was 43.
“He hit home runs, “noted Bloomberg News, “the most impressive with the auto-parts retailer AutoZone and the car seller AutoNation Inc. His clients saw annualized returns of more than 20 percent after fees until 2001.”
It may have been the effect of the recession in the early 21st century, but around that time, after nearly 15 years doing risk arbitrage, it seemed that wasn’t enough for Lampert. He wanted to not just be a voice on a board of directors; he wanted to control companies and be the one who called the shots. That was where Lampert parted company with the philosophy of Warren Buffett, who bet on companies and smart management, but never tried to run the businesses himself.
The same year Mnuchin joined his firm, Lampert seized upon what would become his biggest and most important investment. It began when he started buying the debt of Kmart, the big discount retailer which had gone bankrupt after expanding too rapidly during the national recession. He bought debt at 40 cents on the dollar and then as it sank, for 20 cents on the dollar.
Once he had a powerful position,Lampert also began pushing to get Kmart out of bankruptcy, which allowed him to turn his debt into equity, giving him control of the reorganized parent company.
Walmart, Target and emerging online retailers led by Amazon took away a lot of the business of traditional retailers, but Lampert still saw opportunity in the asset rich company. After selling some of the Kmart stores to Sears, he decided to go after the big American retailer as well, which he would merge with Kmart in 2004.
Mnuchin was made a board member of Kmart, and then after the merger he also became a board member of Sears (the combined companies would become Sears Holdings). He would remain on the board of Lampert’s Sears until the end of 2016, when he quit to prepare for his new job as Treasury Secretary.
A tragic event in Lampert’s life Leads To An Ugly Takeover Battle With Ron Burkle
At the time Kmart was burning through cash and Lampert began looking around for partners in the expensive deal. He connected with Ron Burkle, who had made his fortune buying and selling grocery chains including A&P and Ralph’s stores. Burkle had owned about six percent of Kmart stock pre-bankruptcy.
Lampert, Burkle, and Mnuchin all were very secretive about their business activity and rarely spoke to the press. They were all on a constant hunt for undervalued and distressed properties which they could buy to flip or strip (and sell) the assets or turn around and take public.
At the time, it seemed like a good idea to have Burkle buy some of the Kmart debt that Lampert had acquired, or make an investment. Lampert saw the value in drawing on Burkle’s experience. He saw they could share the risk and the rewards if the company was revived and turned around. Lampert’s plan was to quickly sell real estate and cut costs.
ESL Investments operated out of a non-descript four story building in Greenwich, with a staff of fewer than two dozen, and minimal security.
On Friday evening, January 10, 2003, at about 7:30 p.m. Lampert was rushing to his car after work for a dinner with his wife and mother at an area restaurant. He was probably thinking about what he had to do that weekend, including conference calls and meetings, all before Monday, when he faced an important deadline to get the Kmart re-fi in place.
As Lampert described it to Fortune Magazine in a 2006 profile that declared him “the best investor of his generation,” he recalled descending into the building’s underground parking garage when he was grabbed by four strong young men. A thick hood was shoved over his face, and he was forced into a SVU that immediately took off.
After an agonizing hour-long ride, Lampert was spirited into a motel and forced into the bathroom for the next 39 hours or so. He was blindfolded and his hands were bound by plastic handcuffs.
The kidnapper told Lampert they had been hired to kill him which was a frightening lie. They knew all about him - where he lived, things he had done (from research on the Internet), so he felt he had to play it straight.
He was allowed a passport photo of his five-month-old son to look at when his blindfold was removed as he ate. He was given only a little water and one meal, Popeye’s take out fried chicken. The kidnappers, however, dined on pizza. Unfortunately for them, they used Lampert’s credit card to pay for it, which later led to their arrest.
There were reports he promised them $5 million in ransom, but he said he had to personally get the money so they let him go. However, Lampert later denied offering them a ransom. He said he convinced the kidnappers to release him since he had not seen them. He convinced them that it was better to let him go than add a murder rap if they got caught. So, in the middle of the night on a Sunday, they dumped him off at a highway off ramp. He walked a mile to the local police station and they ended up in prison.
Afterward, some friends counseled Lampert to take a rest, get out of his high-pressure business, but after brief consideration, he wanted his life back. He took a few days off, but soon he was calling colleagues about the deadline he had missed on the Kmart financing.
What he learned shocked Lampert. There were rumors that he had made up the kidnapping story as a delaying tactic because he didn’t have the Kmart money buttoned up. The sellers apparently thought he was stalling.
He also learned that shortly after he returned home, Burkle had contacted the Kmart CEO about taking over the entire deal.
Lampert was very unhappy about what Burkle had tried to do, going behind his back while he was down. Lampert began pushing harder than ever, taking on the entire deal himself. Within a year, he invested $800 million, cutting Burkle out of the acquisition altogether.
Burkle later said that he had only acted in the best interest of the company after he heard a rumor from someone at ESL that Lampert’s hedge fund would not put any more money in Kmart.
Through Lampert, the bankruptcy was concluded ahead of schedule. He emerged with a controlling 54 percent interest in the equity of the new Kmart, relieved of its past debt.
Although Lampert has a large home in Greenwich, Connecticut, it has been reported that the recluse spends most of his time at his home Indian Creek Golf Club island - which cost him $40 million - that has been reported to be the 34th most expensive home in Florida.
Mnuchin stood by his friend, but he appears to have chaffed under Lampert’s management style. Lampert is by several accounts a micro-manager who gets involved in details. At Kmart, he used a computer tracking system to choose which toys and products to discontinue and which to buy more of to increase sales.
After less than two years, Mnuchin left Lampert to join a hedge fund he ran for George Soros, the controversial billionaire who is among the best-known Democrats in America.
However, Mnuchin and Lampert remained friends. Mnuchin went on the board of Kmart, and then in 2005, when it merged with Sears, he joined the board of the new Sears Holdings.
MNUCHIN REWARDED FOR LOYALTY TO LAMPERT BUT STOCKHOLDERS WERE NOT
In its heyday, Mnuchin was paid $150,000 a year for being on the Sears Holdings’ board, for essentially rubber stamping his friend’s moves, even as the company’s profits plummeted, stores closed, and the stock price dropped from $28 in 2015 to $4 by 2016.
As of the end of last week, Sears shares were trading at about 41 cents a share.
A 2017 filing showed that Mnuchin also remained a trustee of Lampert’s personal trust (ESL 2012 Family Trust); and holds among his own assets about $25 million in the ESL Partners, LLP. He also owns small amounts of stock in other Sears related companies.
While there were great changes in American retailing with the Internet, that wasn’t the big problem.
“Many of Sears' problems were self-inflicted,” wrote CNN.com Monday. “Its management tried to compete by closing stores and cutting costs. It slashed spending on advertising and it failed to invest in the upkeep and modernization of its outlets. Sears and Kmart stores grew barren and rundown.”
“Sales declined,” continues CNN.com. “Losses piled up in the billions of dollars. Debt mounted, and the company's cash reserves disappeared. Sears sold many of its most valuable assets, including its massive real estate footprint, to raise the cash it needed to survive. According to the bankruptcy filing, the company was losing about $125,000 a month.”
Despite the collapse of one of the great retail empires, Lampert and other insiders including Mnuchin came out surprising well. Sears shareholders were not as lucky. Several lawsuits were filed, charging that under Lampert the company was run to benefit ESL and Lampert, not the shareholders.
LAWSUIT CHARGED THAT SEARS WAS BADLY MIS-MANGED AS TIMES CHANGED
A 2015 lawsuit by investor Ryan Flanagan laid out the problems: “Since Lampert took control of Sears in 2005, the Company’s financial performance has decayed. Lampert adopted a strategy of letting stores go under-served by refusing to allocate capital towards renovation or inventory.
Rather than reinvesting capital and improving the business, Lampert forced the Company into pursuing a series of conflicted transactions that accumulated more debt on Sears’ balance sheet. These capital infusions, while providing short-term liquidity to the Company, are unfair to the Company and solely benefited Lampert, placing him in a prime, protected position should the Company file for bankruptcy.”
“Between 2005 and 2010, when Sears was still generating profits,” added the lawsuit, “Sears recorded net income of almost $3.8 billion. Instead of reinvesting profits to repair and improve decaying store fronts, Lampert made the Company spend roughly $5.8 billion on share repurchases at a time when a majority of businesses were cutting their share repurchases back to adjust to the recession and constrained consumer spending. Since 2005, the Company’s cash on its balance sheet declined from $4.4 billion to just $250 million in 2014. Sales at Sears and Kmart also declined under Lampert’s tenure from $49.1 billion in 2005 to $31.2 billion in 2014.”
Though Lampert lost over $240 million in the value of his Sears stock, reports Bloomberg, he remains very, very rich.
“He’ll continue to lead his low-key billionaire life,” reports Bloomberg, “reading, riding his racing bicycles and spending time on his 288-foot yacht. (Lampert named it The Fountainhead, after the 1943 novel by Ayn Rand, whose books glorify individualism and the pursuit of riches.) And looking for deals.”
LAMPERT NAMED HIS YACHT FOUNTAINHEAD after a book by one of his favorite authors, Ayn Rand, whose philosophy was that in business all that matters is making money. The yacht is 288 feet long, and sleeps 14 guests in 7-cablns. It has been valued at $130 million.
“Lampert shows up at the headquarters outside Chicago only a few times a year,” adds Bloomberg. “He prefers to beam in (teleconference) from his office in Florida; while he still owns a home in Connecticut he lives most of the time in a $40 million estate on Indian Creek, an island near Key Biscayne that’s home to two dozen or so of Miami’s uber-wealthy.”
Lampert also intends to control Sears again out of bankruptcy, as the largest debt holder. He is even willing to put up over $300 million more to keep it going.
LAMPERT SELF-DEALING ASSETS EVEN AS SEARS BECOMES A PENNY STOCK
Once again Lampert is playing with Sears like it is his personal cow to be milked again and again, even when it is in trouble.
“In 2015, Sears sold off stores worth $2.7 billion to a real estate company called Seritage,” reported the New York Times on Monday. “Mr. Lampert is a big investor in that company as well as its chairman. Seritage is converting many of the best locations into luxury offices, restaurants and apartments.
“Mr. Lampert is also seeking to buy the Kenmore brand from Sears for $400 million.”
Even beyond the grave of bankruptcy, besides a reorganization, the Lampert-Mnuchin hook up is likely to have other consequences.
At Mnuchin’s Senate Finance Committee confirmation hearing on January 19, 2017, the ranking Democrat on the panel, Senator Ron Wyden (D-Oregon) zeroed in on his involvement with Sears.
“Mr. Mnuchin spent years as a director of the holding company that owned Sears, an iconic American brand,” said Wyden. “He served on the committee that watchdogged the Sears’ employee pension fund. The record shows the plan was routinely mismanaged and underfunded.”
“Retirees recently saw their pensions cut,” added Wyden, “losing a monthly health care stipend that was enough to offset roughly a third of the premiums seniors pay for Medicare Part B. Sears has also shuttered hundreds of stores nationwide over the last few years, and recently announced another round of closures.”
“Once again showing his impressive capacity to advantage himself while others fell behind,” said Wyden, “Mr. Mnuchin joined a small group of investors that spun off the company’s real estate into a separate trust. It was arguably the most valuable asset Sears had left. So as retirees watch their pensions shrink and Sears’ remaining workers worry face an uncertain future, this small number of powerful individuals made out fine.”
At the confirmation hearing, Senator Bob Menendez (D-NJ) also grilled Mnuchin about his Sears connection,
“Menendez pointed out that during that tenure, a hole in Sears pension fund grew to $2.1 billion,” Business Insider reported in January 2017. “Now that the company is facing a real threat of bankruptcy, that matters to Mnuchin's appointment. Lampert loaned Sears a bunch of money, so as it stands now, he could get paid before any other part of the company, including the pension.”
MNUCHIN RECUSES HIMSELF FROM JUDGING SEARS PENSION DISASTER
“If he becomes Treasury Secretary,” continues Business Insider, “he will sit on a three-person board called the Pension Benefit Guarantee Corporation. The PBGC will then have the power to decide whether or not Sears' pension plan is accepted or denied after it goes bankrupt.”
The judge and jury on the PBGC is made up of the Secretaries of Labor, Commence and the Treasury. The Labor Secretary (Alexander Acosta) is chairman.
Mnuchin has promised to recuse himself from any decisions related to Sears but the damage is done.
The incestuous insider self-dealing leading up to Sears financial collapse are likely to result in future lawsuits.
This “has the potential to get very messy,” Stephen Opper, a distressed-debt analyst at Reorg Research, told The New York Post Monday. “He owns the debt and the equity and he’s been involved as a manager of the company, which raises questions and red flags.”
Mnuchin left before the final curtain fell but when lawyers and investors go looking at who to blame, he will come in a close second to Lampert.