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From the sublime to the ridiculous

Interred deep in the fine print of News Corporation's banking covenants, there used to be a clause, a very curious clause.

Interred deep in the fine print of News Corporation's banking covenants, there used to be a clause, a very curious clause.

Besides the reams of standard clauses customary in any loan document - that an event of default arises after a company misses a certain number of interest payments and so forth - was a clause relating to asset values.

To wit, an event of default would be triggered if the value of News Corp's mastheads were to fall by a certain amount. There was nothing strange about this. Just another protection for the banking syndicate, and a standard one at that.

But the curious thing about this clause was how the valuation would be struck. The value of these assets, according to the loan documents, would be determined by one man. Let's call this fellow Mr Y.

We must disclaim. Our source for this unique perspective on News is not nearly as incontrovertible as a freshly-hacked voicemail recording. And it is a single source to boot, though trustworthy and privy to the inner workings of News at the time of its near death experience and dramatic debt restructuring in 1990.

Anyway, according to the clause, News's mastheads would be valued by this Mr Y and by no one else. There would be no challenge to his valuation by anybody, including the banks, on any basis whatsoever. No further details about Mr Y were provided, only an apartment number and a street in New York.

We're not talking the Wall Street offices of Skadden, Arps, Slate, Meagher and Flom, either. Just a single man, resident in a flat, who had the last word on valuing the assets of News Corporation.

Did one knock three times, and wait for a piece of paper to slip out from under the door?

Did Mr Y answer to Rupert? Or did Rupert answer to Mr Y?

Was the clause subsequently extended to cover the other assets of New Corp?

Make of it what you will.

FROM the twilight zone to the twilight years.

News Corp faces a welter of lawsuits and Rupert Murdoch is now in a battle for control of the media empire he founded.

Besides a tsunami of damages claims from phone hacking victims in Britain, and a suite of lawsuits in the US, is the prospect that News could see a shareholder class action in Australia for breach of continuous disclosure laws.

We put this to John Walker, the chief of the leading litigation funding company IMF Australia. "It's one thing for companies to conduct illegal activities," Walker said yesterday. "It's another for companies not to tell the market when it's material."

Walker declined to say whether IMF was preparing a case but it's worth extrapolating from his comments.

For those who don't know of the joys of litigation funding, a funder stumps up the money for a lawsuit and takes roughly a third of the pot if the action is won or settled. So a funder needs, firstly, a cause of action and, secondly, a set of deep pockets to sue.

News Corp delivers both. There was systematic criminal activity by its subsidiary News International in Britain. News, which is listed here as well as overseas, does not appear to have told the ASX about the activity when it first became aware of it, and the share price later fell when the story broke, bringing a loss for shareholders.

The BSkyB mop-up offer was soon abandoned and a $5 billion share buy-back quickly announced as $9 billion was wiped from the value of the shares.

Under the continuous disclosure regime a company is required to tell the stock exchange if it knows about something that might have a material effect on its share price.

The News situation would appear to mirror AWB, where there was systematic criminal activity - the wheat for weapons deal with Iraq - the company's management was slow to disclose it, the news broke during the AWB inquiry, the stock price fell, a class action ensued and IMF won a $39.5 million settlement.

The critical question for News is, when did its directors and officers became aware of things? That will soon become clearer. In the meantime, pressure is likely to mount on News's "independent" directors.

Rupert Murdoch's last great challenge was in 1990 when the tycoon almost lost control of his empire to the banks. There was one hold-out, Pittsburgh Bank, among his 146 syndicate of lenders, which wanted to liquidate the company.

Now, the survival of News is not at stake, just Murdoch's control. The cable and network operations in the US, among others, are first-rate assets but undervalued. Murdoch himself used to put a premium in the stock price, but now it's a discount. And directors and major shareholders know that in a break-up or change of control News Corp would be worth more than it currently fetches on the market.

That stark economic reality, coupled with an impending crush of lawsuits, suggests that if Rupert Murdoch doesn't cede control willingly he will spend the rest of his days fighting.

WHATEVER the result of last night's efforts to resolve the impasse over the debt ceiling in the US, two things are certain: one, confidence and American prestige have taken a hit thanks to the dithering in Washington, and two, the great paradox over US Treasuries persists.

That is, the formidable conundrum that, amid all the woes in the US there is, at the same time, a flight of capital into the world's "safe haven" ... the US. This confusion may reign for some time.

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