"Night of the Living Dead," the old black-and-white cult classic, was recently remade in living color. In its new, gorier incarnation, the film ought to appeal to bondholders and lenders -- these days, the financial living dead are littering the landscape. These financial zombies -- borrowers that can't pay their bills but that lenders and bondholders aren't putting into bankruptcy -- are all over the place.
A few years back, financial zombies consisted mostly of savings and loans that regulators took over without closing. The new generation consists largely of borrowers that hocked themselves to the eyeballs to buy things like TV stations, magazines and real estate that everyone "knew" would always rise in value.
While not all of these zombies are hopelessly dead, it may take a miracle to revive them.
Take Donald Trump. He's the proud owner of at least three zombie properties -- the Trump Shuttle airline, which hasn't paid interest on its $235 million Citibank loan for months; the Trump Plaza of the Palm Beaches condominium in Florida, which has defaulted on a loan from Marine Midland Bank; and the Trump Castle casino in Atlantic City, which has missed interest payments on $63 million of loans from Midlantic National Bank of Edison, N.J.
(I'm not counting Trump's Taj Mahal casino in this necrology, because it's supposed to file in bankruptcy court soon under the terms of a deal with bondholders.)
The Trump Castle situation is especially interesting because the Midlantic loans rank equally with the Castle's junk bonds when it comes to being paid, and the Castle paid the interest due on the junk bonds last month, but it hasn't paid Midlantic -- probably because Trump figured that Midlantic either couldn't or wouldn't put the Castle into bankruptcy. Midlantic declined to comment. I didn't bother calling Trump, because he never calls me back.
Then there's Rupert Murdoch, whose News Corp. owns TV Guide, the Racing Form, the Fox TV network, New York magazine and other media properties scattered all over the world. Murdoch's company has borrowed something like $8 billion, but is having a slight problem: It can't make the principal repayments that are scheduled, and probably it couldn't make all its interest payments, either. In the past, when Murdoch was in a corner, he reached into his portfolio of properties and sold a few. In this market, with few buyers and almost no lenders, you can't do that.
The banks wouldn't be able to sell the properties at a good price, either. So rather than put Murdoch to sleep and seize the collateral backing their loans, his banks are negotiating a new set of loans.
Part of the reason that Trump and Murdoch are still walking around, albeit as zombies, is that banks always find it difficult to put huge borrowers into bankruptcy or liquidation. It's like the old joke that goes, "If you borrow $100,000 and can't pay it back, the bank owns you. If you borrow $100 million and can't pay it back, you own the bank."
But another reason, I think, involves the banks' own financial problems. In the good old days, before the rules were changed in 1988, you could lend a busted borrower enough money to pay the interest he owed you and charge him a fee for lending him this new money. Even though you had lent the borrower the fee and the interest, you could count them as part of your operating revenue.
Now, though, if you "restructure" a loan, you can't count the fee and interest as if it came in from a financially healthy borrower. If, however, you aren't restructuring a loan, but are just changing it, you might be able to count the fee as revenue.
Part of Murdoch's proposed deal with the banks, according to leaks, consists of News Corp. paying a fee. I don't know how much it is -- a News Corp. spokesman declined comment. But even a fraction of a point on $8 billion runs up into the tens of millions of dollars.
Empires like Trump's and Murdoch's are almost impossible to grasp, so I would like to focus, briefly, on one relatively small company that looks like a zombie-in-the-making: TV Station Partners. This partnership, set up in 1983, is a cult classic of its own: the first syndicated leveraged buyout, according to I. Martin Pompadur, the man who put it together.
Pompadur used $26 million of investor money and $38 million of loans to buy four TV stations. By 1989, the highly successful partnership had paid off most of its debt. Instead of cashing out by selling the stations, Pompadur made what in hindsight was a mistake: He borrowed $72 million against the stations and paid $64 million of that to himself and his partners. Oops. The market changed, the stations' profits softened, the partnership could no longer pay the interest and Pompadur's management fee.
Are the banks trying to seize the stations? Nope. In October, according to a letter Pompadur sent his investors, the banks agreed to waive "certain covenants in the partnership's revolving credit agreement" if Pompadur deferred his fee and the partnership paid the banks $600,000. The banks get their money when Pompadur sells a station -- which means that he would be giving the banks the proceeds from selling their collateral, and they will probably call it income. The banks wouldn't talk.
In "Night of the Living Dead," the zombies multiply by killing people who then become zombies that kill people. That bears an uncanny resemblance to the proposal floated recently to let the Federal Deposit Insurance Corp. take over busted banks but keep them open because there's not enough money to close them. This would let the banks that created zombie borrowers become zombies themselves. Will life imitate art? God help us if it does.
Allan Sloan is a columnist for Newsday in New York.