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ResCap and Buffett


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This bankruptcy proceeding is interesting in several dimensions (monoline insurers, Buffett, BAC, ..)


Buffett spars with DC over $1B+ ResCap debt



Exhibit A is the unusually hostile tack Buffett took with the Obama administration this week when he asked a judge to allow an independent probe of the deals worked out between the government-owned Ally Financial and its bankrupt ResCap unit.


The deals had been OK’d by Obama’s Treasury Department.


But Buffett’s request was tossed aside yesterday when Bankruptcy Judge Martin Glenn ruled in favor of a competing request — from ResCap’s creditors’ committee.


The committee wants to look at the deals. Buffett presumably believes that fellow unsecured committee members, like monoline insurers who have reached settlements with ResCap, are biased and wanted a second probe.


ResCap seeks to release Ally from claims. “The fact [Judge Glenn] approved the committee today was quite bad for Buffett,” a source close to the case said. “I would have to imagine the probability of him getting an independent examiner just fell.”


A second source close to the case said, “The judge just basically told Buffett to take a hike.”

Buffett’s Berkshire Hathaway owns $900 million in ResCap secured debt, of which it will get paid at face value, plus $500 million of unsecured debt that is now likely worth less than 10 cents on the dollar.

Buffett likely paid between 20 and 50 cents on the dollar for those bonds, the source said.


The Oracle of Omaha’s objection went against his typical style. He makes a point of not buying companies in hostile bids, and is also not known for challenging bankruptcies. “What he was trying to do was get more ammunition for a lawsuit,” the second source said. “I do not think the fight is over.” Buffett, too, in his objection did not complain about the sale of assets to Fortress Investment Group, leading two sources to believe he was not interested in buying ResCap.

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On Monday, Berkshire filed a petition calling for an impartial examiner to investigate transactions before ResCap’s bankruptcy filing, whose net effect, Berkshire said, “was to transfer a substantial share of ResCap’s operating assets to [Ally]”.


In the next two days, Berkshire sold some of its bonds, according to a filing on Friday. Ted Weschsler, a Berkshire investment manager who had filed a petition in support of the call for the independent examiner on Monday, wrote in a filing on Thursday: “I have been informed that on June 5 and 6 2012, Berkshire executed trades and sold its holdings of unsecured bonds issued by Residential Capital.”

Berkshire continues to hold more than 40 per cent of ResCap’s junior secured bonds, the latest filing stated.


Berkshire did not immediately reply to requests for comment. Mr Weschsler could not be contacted. It was not clear from the latest filing whether Mr Weschsler was party to the decision to dispose of the bonds.


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Warren Buffett's Next Big Investment Idea Has Everyone Baffled




For example, Keefe Bruyette & Woods analyst Bose George expressed surprise in a note published late Monday after Berkshire raised its bid for the ResCap platform, which includes mortgage servicing rights on 2.4 million homes.


"The increased Berkshire bid suggests the company might be genuinely interested in purchasing this platform, which if successful could create a strong competitor. We originally assumed that Berkshire's only interest was in protecting its bond position," George wrote.


But Buffett's sudden interest in mortgage servicing still went unmentioned at a panel discussion in New York on Tuesday about investment opportunities in the industry at a conference hosted by National Mortgage News. Rather, the panelists appeared to be in agreement that interest in mortgage servicing rights (MSRs) is quite limited.


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Buffett bidding also could have been a gambit - with no real intention of buying the ResCap servicing portfolio.  If he forced Nationstar (Fortress) to up their bid, his unsecureds would be worth more.  Not sure on timing of the bids and his selling his unsecureds down, though.

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