RESCU - Rescap liquidating trust

[yadayada]

Anyone know what is going on with this idea? It reminds me of one of those Greenblatt 'you can be a stock market genius' ideas. They are suing banks, and they have a portfolio of mortgages. And apparantly Ocwen bought the servicing rights for a lot of those mortgages?

[Ham Hockers]

There was a write-up on VIC recently.

 

Haven't done very much work, but I seem to remember book was ~$7 per share, there's another ~$5 in assets not yet transfered, and then the rest is whatever you get in litigation. Total claims was I think $9BN. You need to claims to pay out >$600MM in order to justify the current price. Would also love to hear if anyone has any insight.

[yadayada]

ok so the VIC guy claims there is like 80% irr in the base case and 20% in the bear case. But Im reading it, and I dont really understand half of it. Seems a lot of moving legal parts that are hard to handicap for some small outside investor like me.

[Ham Hockers]

there's another ~$5 in assets not yet transfered

 

i was wrong on this, by the way. the bailment assets are already consolidated.

[yadayada]

so to sum it up, that paulson guy is heavily invested in this (even tho he is pretty large). Other entities like this have gotten a lot of money from banks. Because banks falsely represented these loans as something they were not.

 

BUT some of the banks they are trying to get money from don't actually exist anymore?

[RhubarbXIV]

This one's a real beast. I'm struggling to understand it myself. Some useful resources are the docs on the Borrowers Claims Trust site (http://www.rescapborrowerclaimstrust.com/documents.html), and the RMBS case litigation on the RLT website (http://rescapliquidatingtrust.com/RMBSCases.aspx).

 

Regardless, I think it'll be a fun liquidation to watch and a good chance to learn something.

[merkhet]

I must be missing something here.

 

Let's define some quick terms:

 

RLT - ResCap Liquidating Trust

Claimants - The folks that have a $12.2 billion claim on RLT

Litigants - The folks RLT is suing based on Events of Default

 

Let's say Claimants only own assets that were sent to them (through ResCap) from banks that are defunct (and, therefore, not Litigants). I suspect that this means that RLT has not incurred any damages from the Litigants. What happens in that instance? Claimants are owed $12.2 billion regardless of RLT's eventual recoveries.

 

Alternatively, let's say Claimants only own assets that were sent to them (through ResCap) from banks that are Litigants. Why is RLT not limited purely to the damages that it has incurred, namely the $12.2 billion that RLT must pay out to Claimants?

 

Basically, what is causing the differential between what RLT owes to Claimants and what Litigants will pay RLT?

[morningstar]

I must be missing something here.

 

Let's define some quick terms:

 

RLT - ResCap Liquidating Trust

Claimants - The folks that have a $12.2 billion claim on RLT

Litigants - The folks RLT is suing based on Events of Default

 

Let's say Claimants only own assets that were sent to them (through ResCap) from banks that are defunct (and, therefore, not Litigants). I suspect that this means that RLT has not incurred any damages from the Litigants. What happens in that instance? Claimants are owed $12.2 billion regardless of RLT's eventual recoveries.

 

Alternatively, let's say Claimants only own assets that were sent to them (through ResCap) from banks that are Litigants. Why is RLT not limited purely to the damages that it has incurred, namely the $12.2 billion that RLT must pay out to Claimants?

 

Basically, what is causing the differential between what RLT owes to Claimants and what Litigants will pay RLT?

 

Basically, RLT is in the middle of two lawsuits. It was sued by the monolines and RMBS trustees for losses due to the horrible loans it put into MBS. RLT is then suing a bunch of banks for giving it those bad loans in the first place.

 

The first lawsuit was settled for $12.2 bn, and that figure was lumped in with a bunch of other stuff Rescap couldn't pay for (like its bonds) and turned into the RESCU units.

 

The other lawsuit is still going on, against the banks. But there's no reason that this second suit should come up with the same result as the first suit - its a different set of circumstances applied to a different set of contractual agreements between different parties. That's the source of the differential.

[merkhet]

I must be missing something here.

 

Let's define some quick terms:

 

RLT - ResCap Liquidating Trust

Claimants - The folks that have a $12.2 billion claim on RLT

Litigants - The folks RLT is suing based on Events of Default

 

Let's say Claimants only own assets that were sent to them (through ResCap) from banks that are defunct (and, therefore, not Litigants). I suspect that this means that RLT has not incurred any damages from the Litigants. What happens in that instance? Claimants are owed $12.2 billion regardless of RLT's eventual recoveries.

 

Alternatively, let's say Claimants only own assets that were sent to them (through ResCap) from banks that are Litigants. Why is RLT not limited purely to the damages that it has incurred, namely the $12.2 billion that RLT must pay out to Claimants?

 

Basically, what is causing the differential between what RLT owes to Claimants and what Litigants will pay RLT?

 

Basically, RLT is in the middle of two lawsuits. It was sued by the monolines and RMBS trustees for losses due to the horrible loans it put into MBS. RLT is then suing a bunch of banks for giving it those bad loans in the first place.

 

The first lawsuit was settled for $12.2 bn, and that figure was lumped in with a bunch of other stuff Rescap couldn't pay for (like its bonds) and turned into the RESCU units.

 

The other lawsuit is still going on, against the banks. But there's no reason that this second suit should come up with the same result as the first suit - its a different set of circumstances applied to a different set of contractual agreements between different parties. That's the source of the differential.

 

I guess what's confusing me is the language in the writeup.

 

Based on the allowed claims table presented earlier, we see that ResCap clients (both RMBS trusts and monolines) are expected to suffer total lifetime losses in the range of $46.6-47.5B. As part of the Global Settlement, these creditors received an allowed claim of $12.2B against ResCap. In other words, for every dollar of expected lifetime losses, ResCap’s creditors received 26 cents of allowed claim. Given that the Client Guide only permits ResCap to recover “all losses...incurred by [ResCap]...as a result of an Event of Default”, RLT cannot seek recoveries of more than 26% of the direct losses from correspondent bank loans (A210(A)). In effect, RLT’s recovery is capped by the 26% recovery on expected lifetime losses that ResCap’s clients received in the bankruptcy. Applying this 26% rate to the losses from defendant loans yields lawsuit claims by RLT of $5.2B in the base and bull cases, and $3.6B in the bear case.

 

The underlined parts are what confuses me.

 

(A) If you look in the appendix, you'll see that the first underlined section only applies if RLT decides that a repurchase and/or servicing is not appropriate -- why would they ever make that decision? And if that's the case, then RLT should be asking for repurchase on every single loan that went sour, which, in my mind greatly increases the amount of claims that they can ask to recover from Litigants.

 

(B) However, the writeup seems to indicate that the 26% recovery obtained by Claimants somehow applies also to the maximum recovery receivable by RLT from Litigants. I have no idea why -- either why (1) the $12.2 billion wouldn't apply here or (2) why the 26% would apply here.

 

Any thoughts on this?

[morningstar]

I am not an expert, but I would assume that the loans in question are held by MBS trusts, other end investors, etc. and not Rescap, so RLT may not be in a position to demand repurchase. Having not repurchased the loans to cure their own R&W problem, they don't have the loans to sell back to the originating banks.

 

Considering this, their court recovery against the Litigants should be limited to Rescap's actual losses of $12.2 bn. The actual recovery will be even less given that much of the $12.2bn loss may be attributed to originators who aren't litigation targets, having failed themselves in the meantime.

 

[merkhet]

Well therein lies my confusion, because as I stated before:

 

Alternatively, let's say Claimants only own assets that were sent to them (through ResCap) from banks that are Litigants. Why is RLT not limited purely to the damages that it has incurred, namely the $12.2 billion that RLT must pay out to Claimants?

 

If that's the case, then $7 per unit is the intrinsic value... so what the heck are the authors of this writeup talking about?

[morningstar]

I think your math is off... every billion of settlement recovery is more than $10 in per share value, so recovering even 25% of that $12.2bn is a pretty big return when you add the $5-7 in non-litigation assets.

 

Just to be clear, RLT must pay out nothing directly to claimants. The claimants, through bankruptcy, had their claims converted to units (alongside bondholders, etc.) ... so all the amounts recover flow to unitholders.

[merkhet]

I think your math is off... every billion of settlement recovery is more than $10 in per share value, so recovering even 25% of that $12.2bn is a pretty big return when you add the $5-7 in non-litigation assets.

 

Just to be clear, RLT must pay out nothing directly to claimants. The claimants, through bankruptcy, had their claims converted to units (alongside bondholders, etc.) ... so all the amounts recover flow to unitholders.

 

That's what I was missing. Was this addressed in the write-up or was this somewhere in the source documentation (and I just haven't read it yet)?

[morningstar]

I think your math is off... every billion of settlement recovery is more than $10 in per share value, so recovering even 25% of that $12.2bn is a pretty big return when you add the $5-7 in non-litigation assets.

 

Just to be clear, RLT must pay out nothing directly to claimants. The claimants, through bankruptcy, had their claims converted to units (alongside bondholders, etc.) ... so all the amounts recover flow to unitholders.

 

That's what I was missing. Was this addressed in the write-up or was this somewhere in the source documentation (and I just haven't read it yet)?

 

As I read it now, the write-up on VIC is not totally clear on this fact. But the linked PDF does have a chart at the end of how the allowed claims, including the monoline and RMBS Trust claims, were converted into trust units.

 

Anyway, all the assets of the trust and any amounts it recovers (after expenses) go to unitholders - all the Claimants are now unitholders in addition to anyone else previously owed money by Rescap (though MBIA sold its huge stake to Paulson).

[merkhet]

Anyway, all the assets of the trust and any amounts it recovers (after expenses) go to unitholders - all the Claimants are now unitholders in addition to anyone else previously owed money by Rescap (though MBIA sold its huge stake to Paulson).

 

Yup, you're right -- the Disclosure Statement indicates that the RMBS Claims Trust received Units.

 

However, I'm still confused by the write-up. We know that RLT suffered $12.2 billion of losses because that's what they payed out to Claimants. Unfortunately, we are unaware as to where the Venn Diagram crosses between "RMBS sent to Claimants" and "RMBS originated by Litigants."

 

I don't understand how taking the $32 billion and multiplying it by the LifeTime Loss Rate and then 26% gets us to the "Losses Asserted in Lawsuits by RLT" on page 12... and why that would be equal to the middle part of the Venn Diagram -- which is what we should be trying to figure out...

 

I suppose the crux of my confusion lies in whether the $32 billion is all within the original pool upon which the initial RMBS settlement was made -- if so, then perhaps the calculation has merit... I guess there's no real way around that other than to read each individual filing.

[yadayada]

any weight in paulson having a large position in this? I mean how smart is that guy? Can you infer from him liking this that there is serious value to be had (since he put a relatively small % in this).

 

Let's say that buffett theoretically would as much as possible at current position. You would probably blindly follow him into this.

[timidbid]

There are some mass-media summaries of the situation that are easier to read:

 

http://www.cnbc.com/id/101697878

http://nypost.com/2014/03/25/hegie-paulson-seeks-new-mortgage-payday/

 

I am having trouble wrapping my head around the taxation issues.  If this goes well, what % do unit holders keep?

[nkp007]

This situation sounds interesting. I just purchased some.

 

The lawsuits seem strong, but I'm not an expert.

 

Are the lawsuits / contracts as really as strong as they appear? It seems almost too good...

[merkhet]

any weight in paulson having a large position in this? I mean how smart is that guy? Can you infer from him liking this that there is serious value to be had (since he put a relatively small % in this).

 

Let's say that buffett theoretically would as much as possible at current position. You would probably blindly follow him into this.

 

It's usually not a good idea to blindly follow someone into an investment (even if it's Buffett) -- you won't know enough to hold on if/when there's a correction in the stock and might get shaken out.

[seeker]

any weight in paulson having a large position in this? I mean how smart is that guy? Can you infer from him liking this that there is serious value to be had (since he put a relatively small % in this).

 

Let's say that buffett theoretically would as much as possible at current position. You would probably blindly follow him into this.

 

Buffett is in this...

[yadayada]

yeah but doesnt he hold it because he bought something else, and this is the end product instead of buying? Anyway, gl to anyone who holds it. Feels like a black box to me (probably why it exists). Already got one black box haha.

[hardincap]

any weight in paulson having a large position in this? I mean how smart is that guy? Can you infer from him liking this that there is serious value to be had (since he put a relatively small % in this).

 

Let's say that buffett theoretically would as much as possible at current position. You would probably blindly follow him into this.

 

Buffett is in this...

 

buffett is in RESCU? rescap sold assets to berkshire but doesnt look like he's in the liquidating trust.

[johngu]

Anyone know what the tax consequence for the investors are of owning RESCU?  I imagine it's much like an MLP where you get a K-1 at year end and have to contend with the tax consequences yourself.  However, I'm not sure if that means having to potentially file taxes with a bunch of states?  When does a state have a claim on a piece of a litigation settlement?

[RhubarbXIV]

Anyone know what the tax consequence for the investors are of owning RESCU?  I imagine it's much like an MLP where you get a K-1 at year end and have to contend with the tax consequences yourself.  However, I'm not sure if that means having to potentially file taxes with a bunch of states?  When does a state have a claim on a piece of a litigation settlement?

 

Though I am not a tax expert myself I have consulted with one. His opinion was that distributions from the Trust would be subject to taxes in states from which recoveries were collected. So basically, file a K-1 in every state from which you receive recoveries. Obnoxious.

 

I ended up not buying this for my fund due to the hassle for LPs and the expense of drawing up all the tax docs. Sad day.

[johngu]

Anyone know what the tax consequence for the investors are of owning RESCU?  I imagine it's much like an MLP where you get a K-1 at year end and have to contend with the tax consequences yourself.  However, I'm not sure if that means having to potentially file taxes with a bunch of states?  When does a state have a claim on a piece of a litigation settlement?

 

Though I am not a tax expert myself I have consulted with one. His opinion was that distributions from the Trust would be subject to taxes in states from which recoveries were collected. So basically, file a K-1 in every state from which you receive recoveries. Obnoxious.

 

I ended up not buying this for my fund due to the hassle for LPs and the expense of drawing up all the tax docs. Sad day.

 

Thanks much.  I completely understand not wanting to deal with the tax consequences of owning this.  It seems that unless you can invest significant capital, the potential cost (both time and money) of dealing with K-1's for a bunch of states is not worth the trouble.  Does look like a compelling opportunity though.