The Meat and Potatoes of SB 448

In order to best explain what this legislation is designed to accomplish, let’s take a hypothetical case study: Let’s say, hypothetically, that there was a guy named Masun Wain Williams and, back in 2005, he owned a land development company called Swampland Development LLC (“SDL”).

Williams spotted a prime piece of swampland in some county somewhere for $5,000,000, and he dreamed of a vision of multi-family housing being built on this swampland. Williams checked his pockets and discovered he did not have $5 million.

He decided to go visit his local banker, Joe Bob-The Banker. Williams told Joe-Bob “I want to buy this land for $5,000,000. Can you help me out with a loan?”

Banker Joe-Bob responded with “Well…sure. But, since SDL has no other assets except for this land you wish to buy, my lending rules require me to require you to give us a personal guarantee that even if your ‘wonderful, can’t-miss land development idea’ goes south, you will personally guarantee a repayment of this loan.”

Williams responded with “Sure thing! You know me, Joe-Bob. I always pay my debts, and you know I’m good for this loan. Where do I sign?”

And, so, back in 2005 (in this hypothetical case), a loan for the land deal was granted Williams for him to purchase the $5 million piece of land.

So, at the conclusion of the transaction, the following occurred:

1) Mr. Williams had $5 million in cash
2) Joe-Bob Banker had a loan note (call it the “Note”) with Williams’ personal guarantee that even if the slimmest of possibilities happened with the new mutli-family development going the proverbial “south,” the bank would get its money back (with interest of course) from Williams.

Now, over the course of time, the market for development did, in fact, go “south”…and the apartment complex was never fully built.

Also in the course of time, Joe-Bob’s Bank flipped the Note to some other entity wholly separate from Joe-Bob’s Bank; call this new entity “High Risk Taker”…or, “HRT.”

HRT happened to buy the Note at a discount of 50% of the original Note Value. Previously, it has not mattered what the price of a Note has been in the so-called “secondary market” because the original face value of any original note is still a valid “pay-off value” that entities like HRT use to judge the risk vs. reward determination of how much to pay for the Note from a Seller.

NOW…bring in SB 448, and SB 448 will force HRT to only be allowed to retrieve their cost of the Note they paid some Seller (whether the seller was originally Joe-Bob’s Bank, or some other seller of the Note in the secondary debt market), and not the original value of the Note.

Does that sound kinda weird to you? Does it sound like “Golly…how can you change the terms of a loan without both parties to the original transaction approving of it?…and how can you do it retroactively?”

Normally, you couldn’t. In fact, as detailed in two letters in strong opposition to this bill written by 1) the Council for Quality Growth, and 2) a letter from Harold R. Reynolds, CEO of Bank South, this would be a very bad idea.

The letter from Bank South in opposition to SB 448 discusses issues relating to the secondary markets of debt, and we’ll just point anyone interested in the technical nature of the aspects of what the results of this bill will do are encouraged to read Mr. Reynolds’ letter on their own.

The letter from the Council for Quality Growth intrigues PV because it contains a concept we can readily grasp: The Constitutionality of this bill. (YES, Ron Paul fans, the “Constitutionality” of this legislation, is at issue.)

The Georgia Constitution’s Article 1, Section 1, Paragraph X states the following:

“No bill of attainder, ex post facto law, retroactive law, or laws impairing the obligation of contract or making irrevocable grant of special privileges or immunities shall be passed.”

What does all this mean? Well, the specific part of this Clause as it applies to SB 448 is two things: 1) the “retroactive law” part, and 2) the prohibition against “laws impairing the obligation of contract.”

The Note between Mr. Williams and Joe-Bob Banker was a “contract” that was agreed to by both parties back in 2005. SB 448 will allow any loan note in existence today to be “rewritten” at-will to give entities like HRT only the maximum dollar limit of what they paid for the Note that they can legally demand from the original guarantor of the loan, Masun Wain Williams.

Great deal for Williams if HRT acquired the Note for greatly less than the original face value. Bad deal for HRT…and, bad deal in direct implications for ANYONE in the business of trading debt notes in the secondary markets of debt.

This bill, while helping a few choice…”friends” of Senator Don Balfour (R-King of Hubris), who is the lead sponsor and carrier of this bill, will effectively halt any secondary market trades and will force original loan note holders (i.e., banks) to keep the loans on their books as a liability when, for years, it has been a common practice to sell-off that note to get some present-value of cash and write-off the difference between the book value of the note and the actual cash received when the bank flipped the note to HRT.

If SB 448 passes the State House this week, and is signed into law by the Governor, it will mean that the Legislature has decided “Hey! We don’t give a hoot about what the original deal was on the Note…we’re going to allow a re-write of it to help Fat-Cat Land Developer Masun Wain Williams get out from having to pay 100% of the original Note’s value. Screw you, HRT. Suck it up! Ha-Ha-Ha!”

Additionally, the Community Bankers Association has issued a rebuttal to this legislation as well.

How Did This Unanimously Pass The State Senate?

Glad you asked. From our research, it seems that Senator Balfour (as has been detailed in previous issues of the Political Vine) thinks that he is the Ruler of The Georgia Legislature.

His official role is Chairman of The Senate Rules Committee. His M.O. in the senate is to act as the sole “Chief Decider” of what legislation gets to the floor of the state senate.

As Chief Decider, he determines what bill (regardless of the value of the bill to the people of Georgia) actually gets to the floor of the state senate to be voted on.

So, in effect, he controls, literally, everything regarding how legislation flows throughout the entire General Assembly…both the House and the Senate because anything passing the House must go to the Senate floor to be agreed to by the state senate as well.

SO, using his position of influence extortion, when he supports a bill, everybody else in the senate had better be onboard or else their stuff doesn’t get out of the Senate Rules Committee.

There is no “law” that can be made to change this type of arrangement, save for a re-write of the specific “senate rules” that are written by the body of senators themselves. Since that won’t happen any time soon, this state is stuck with this.

NOW…while the state senators did not know enough to question the Constitutionality of this bill, nor the risk to the secondary debt markets this new law (if passed) will impact, the State House, on the other hand, can now be considered themselves to be duly informed of the unconstitutionality of this bill via the two letters linked in this PV, as well as the article from the Community Bankers Association that argue against the value of this bill…as well as a simple review of the Georgia Constitution…which, of course…since every single one of you swore an oath to uphold, you DO know exactly what is in that document, right??? Of course you do. You folks are the “cream of the crop” of Georgia.

So, the big question for the Members of The House is this: Do you allow yourself to be subjugated to Senator Balfour’s wishes to help his developer pals in Gwinnett County and Cobb County, or do you honor your oath of office to defend the Georgia Constitution against all enemies, foreign and/or Senator Don Balfour, as the case may be?

One Final Note: Rumor has it that a 10-day-old PAC by the name of “Citizens for A Better Georgia” has been created to lobby on behalf of this legislation in the House. Here’s a link to the Georgia Secretary of State’s website for this entity’s registration and details: http://corp.sos.state.ga.us/corp/soskb/Corp.asp?1876666

Golly…PV wonders who is financing this lobbying organization…?

This entry was posted by PV, on Monday, March 19th, 2012 at 9:26 pm and is filed under Law and Justice and Tagged: Don Balfour, Georgia Constitution, SB 448, Secondary Debt Market, Senator Balfour
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