As we approach the last weekend before Christmas, we take a moment to pause from discussions about the economy and financial markets. Our intention is to spread some holiday cheer and encourage moments of joy during this festive season.
Who among us wants to ponder the unemployment rate or the consumer price index while humming “Silent Night” at a candlelit Christmas Eve service? Who wishes to debate Federal Reserve policies or the structure of high yield ETFs while enjoying an Old Fashioned with their father-in-law?
A friendly piece of advice: conversations about politics and religion should be avoided at the dinner table, where discussions about NCAA football and the latest fishing gear are far more agreeable. You might not be a fan of Nick Saban, but everyone can agree that Tua Tagovailoa was unjustly denied the Heisman Trophy. And it’s universally accepted that catching freshwater fish requires far more skill than deep-sea fishing.
However, let’s not limit ourselves to just two safe topics of conversation. We shall delve deeper and present you with an entertaining story that involves considerable blunders and murky dealings. This narrative features characters from exclusive circles, where the distinction between heroes and villains often blurs beyond recognition.
To fully appreciate the richness of today’s tale, it is essential to clarify the backgrounds of the key players involved. We have referenced a recent Bloomberg article to gather important historical context.
Secret Handshakes
Eddie Lampert, Chairman of Sears, and Stephen Freidheim, founder of Cyrus, both graduated from Yale University in the mid-1980s with economics degrees. Their paths have intertwined in complex ways over the years, much like a Gordian Knot.
Stephen Freidheim has a younger brother, Scott Freidheim, who worked at Lehman Brothers from 1991 until its unfortunate collapse in 2008, during which he was part of CEO Dick “The Gorilla” Fuld’s inner circle.
Interestingly, Lampert was a client of Scott’s while he was at Lehman Brothers, and he attended Scott Freidheim’s wedding to Isabelle Dufour in 2008. Dufour, a French equestrienne, holds an MBA from Columbia Business School and is also a venture capitalist.
Both Stephen and Scott are sons of Cyrus Freidheim, a former vice chairman at Booz Allen Hamilton and the former CEO of Chiquita Brands International.
After the demise of Lehman Brothers, Scott began working at Lampert’s company and even became the executive vice president of operations at Sears before moving on to serve as CEO for Europe at Investcorp International, a firm that invests on behalf of Middle Eastern institutional and private clients.
The elder brother, Stephen, who graduated with Lampert, is known for his expertise in distressed debt. He once established the credit arm at Och-Ziff Capital Management, which has several ties to Lampert.
For instance, Och-Ziff was co-founded by Dan Och, who was a colleague of Lampert at Goldman Sachs in the 1990s. The Ziff brothers—Dirk, Edward, and Daniel—are the heirs to the family fortune amassed by the late publisher William Bernard Ziff Jr. They invested in Lampert’s hedge fund, ESL Investments, at various times.
Stephen Freidheim’s middle name is Cyrus, named after his father. Near the onset of the new millennium, he spun off his credit unit from Och-Ziff into his own firm, Och-Ziff Freidheim, which later became Cyrus Capital Partners in 2004.
The essential takeaway is that Eddie Lampert and Stephen Freidheim are well-acquainted with the intricate rituals and networks of Wall Street’s elite. They have navigated the treacherous waters of finance together for years.
Merry Christmas Eddie Lampert!
Eddie Lampert is a shrewd businessman, keeping his strategies closely guarded while playing to win. To an outsider, like the humble editor, his methods remain opaque. This is particularly true of his 15-year tenure as CEO of Sears, which culminated in the company filing for bankruptcy in mid-October.
Sears stands as a relic of the 20th century—a dinosaur from a bygone era. Lampert’s interest in the company over the years has sparked much speculation. Opinions have ranged from asset stripping to capitalizing on its extensive real estate holdings, or perhaps motivated by an undefined sense of nostalgia. Could it be that Sears serves as a vehicle for financial maneuvering? The answer remains elusive.
Interestingly, weeks following Sears’ bankruptcy filing, Lampert sought assistance from Stephen Freidheim and Cyrus Capital Partners to facilitate a buyout from bankruptcy court. Cyrus reportedly held significant debt and equity positions in Sears leading up to its bankruptcy, and had even sold a large volume of credit default swaps (CDS), betting that the company would continue servicing its debt.
Post-bankruptcy, complications arose. According to the Daily Herald:
“At one point, rival CDS factions clashed over obscure Sears notes that were nearly worthless individually. However, these notes had the potential to impact the insurance-like bets in the CDS market. Consequently, Cyrus paid $82.5 million to Sears to prevent the debt from falling into the hands of competing funds.”
“The transaction provided Sears with $82.5 million just as the crucial holiday shopping season was kicking off. As part of the agreement with Cyrus, Sears committed not to auction off any more of these pivotal notes.”
This might have seemed like a harmless maneuver, but not so fast.
Recently, Judge Robert Drain of the U.S. Bankruptcy Court in White Plains, New York, indicated, as reported by the Wall Street Journal, that he would review the validity of the sale of the Sears notes to Cyrus. Drain stated that the “$82.5 million bankruptcy sale may not have adhered to proper procedures and might have unfairly disadvantaged investors who had purchased insurance on the company’s debt.”
In simpler terms, Drain called foul on the secret agreement between Lampert and Freidheim. The future of this situation remains uncertain, but the likelihood exists that Cyrus may end up facing significant repercussions.
Nevertheless, not everything is bleak for Sears’ executives. Last week, Judge Drain approved Sears’ request to pay as much as $25.3 million in bonuses to top executives.
Merry Christmas, Eddie Lampert!
Sincerely,
MN Gordon
for Economic Prism
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