Klarman Secretly Moved to Block BAC Settlement?

[JSArbitrage]

http://www.reuters.com/article/2011/12/09/us-bankofamerica-walnutplace-idUSTRE7B805920111209?feedType=RSS&feedName=businessNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=56943

 

It seems like Klarman bought the worst of the worst Countrywide loans for pennies on the dollar knowing he could sue for reps and warranties violations and put the loans back to BAC for a profit.  So he created an entity to intervene in the BAC settlement because they were settling for too little money.

 

Reminds me of Andrew Redleaf's old bond strategy.  He would buy distressed debt of companies that failed to file timely financial statements because, unbeknownst to most investors, many bonds contained a clause saying a failure to file financial statements constituted a default of the covenants and would therefore force acceleration of the loan.  He'd buy, sue the company, settle for a large profit, rinse and repeat with a different company.

 

 

[enoch01]

Why are we not surprised?  8)

 

This is probably one of the many reasons he called BAC a "crappy" business recently with Charlie Rose.

[alertmeipp]

http://www.reuters.com/article/2011/12/09/us-bankofamerica-walnutplace-idUSTRE7B805920111209?feedType=RSS&feedName=businessNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=56943

 

It seems like Klarman bought the worst of the worst Countrywide loans for pennies on the dollar knowing he could sue for reps and warranties violations and put the loans back to BAC for a profit.  So he created an entity to intervene in the BAC settlement because they were settling for too little money.

 

Reminds me of Andrew Redleaf's old bond strategy.  He would buy distressed debt of companies that failed to file timely financial statements because, unbeknownst to most investors, many bonds contained a clause saying a failure to file financial statements constituted a default of the covenants and would therefore force acceleration of the loan.  He'd buy, sue the company, settle for a large profit, rinse and repeat with a different company.

 

Seems quite unethical to me. no?

[Guest Hester]

Thanks for posting.

 

Not sure how I feel about this.

[ERICOPOLY]

http://www.reuters.com/article/2011/12/09/us-bankofamerica-walnutplace-idUSTRE7B805920111209?feedType=RSS&feedName=businessNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=56943

 

It seems like Klarman bought the worst of the worst Countrywide loans for pennies on the dollar knowing he could sue for reps and warranties violations and put the loans back to BAC for a profit.  So he created an entity to intervene in the BAC settlement because they were settling for too little money.

 

Reminds me of Andrew Redleaf's old bond strategy.  He would buy distressed debt of companies that failed to file timely financial statements because, unbeknownst to most investors, many bonds contained a clause saying a failure to file financial statements constituted a default of the covenants and would therefore force acceleration of the loan.  He'd buy, sue the company, settle for a large profit, rinse and repeat with a different company.

 

Seems quite unethical to me. no?

 

Like an ambulance chaser, only in hedge fund clothes.

[turar]

Man, why does it have to be Klarman? He must have known this could easily become public, so then he's totally fine with it morally, or there's another side to this story.

[bathtime]

Hmm, this seems brazen. Let us hope that Klarman announces that Walnut Place is the name of a low-income housing project funded by the settlement proceeds.

 

Baupost was looking opportunistic on their investment to turn farmland into a limestone quarry :

 

http://www.inthehills.ca/2009/09/back/melancthon/

 

I thought that Klarman operated at a higher ethical level than others on Wall Street, not so sure now.

 

 

[Parsad]

I don't like it, but he's not doing anything illegal.  That's within his right as a claimant to agree or disagree with the settlement.  Cheers! 

[netnet]

"unethical" "sleazy"  You guys are joking right? 

 

Look, Countrywide engaged in seriously unethical and sleazy behavior that harmed people who basically could not defend themselves, shoved the crap out the door and repeated it.  Klarman, sharp elbowed yes, bought the paper from (supposedly) sophisticated investors, or at least investors who could pay for the education and is now sticking it to the successor company (read partner in crime, BAC).  A firm that on the face of it kept up the Countrywide traditions and seriously stretched (read broke) the laws repeatedly in foreclosure proceedings.  Proceeding that materially harmed many people who could not afford legal defense.

 

And you feel queasy?  I'm sorry this is business. On that premise you would never by anything in a bankruptcy case, where much turns on the fine print, sharp elbows and buying for pennies on the dollar.  (I should add that I'm not an Ayn Rand type, quite the opposite really.)

 

I repeat this is just business; it's totally legal.  it's not charity. and in this arena, all are sophisticated investors.  He isn't selling cigarettes, which though legal are highly immoral.  (No one seems to tut-tut about Loew's!)

[eclecticvalue]

Seth Klarman is one sharp man. Maybe he should donate part of the proceeds to Facing History and Ourselves. One thing to learn from this is read the fine print, footnotes, and small details. It may payoff well.

[nwoodman]

I repeat this is just business; it's totally legal.  it's not charity. and in this arena, all are sophisticated investors.  He isn't selling cigarettes, which though legal are highly immoral.  (No one seems to tut-tut about Loew's!)

 

Great post, but the reference to Loews is a little outdated :)

 

http://www.nytimes.com/2008/06/11/business/11menthol.html

[augustabound]

I've got to be honest.  My first thought when I read this was, he's pretty smart (which nobody would ever deny of Klarman anyway) and good on him for seeing something most others didn't. 

[mevsemt]

I echo netnet's sentiments.  Klarman bought these because he recognized value at the price he was paying, as he would say he was acting as a "provider of liquidity". 

 

Now that he owns these loans, he has a responsibility to his LP's to get a reasonable price when he sells them.  He probably has a "fair price" in mind, and the proposed settlement just didn't get there.  I don't think he expects 100 cents on the dollar, I think he just wants the settlement to get to his "fair price."  If you were in his shoes, what would you do? 

[BargainValueHunter]

Unless he was privy to information that nobody else had i don't see what is wrong with this.

[enoch01]

How is there anything wrong with this?  He's enforcing a contract guys.

[Kraven]

There are a number of shops doing this.  They aren't buying the loans, they're buying MBS.  It's kind of the opposite of the Burry/Paulson trade where they went looking for the MBS with the worst of the worst loans in the deal so they could short it.  Now, you have people looking for the worst of the worst so that they can buy the securities that are already busted for pennies on the dollars, push for buybacks due to breaches of reps and warranties and get more money flowing into the deal.  It's a labor intensive business.  So far I don't know how lucrative the trade has been.  It's a long term thing that I believe people are hoping plays out over the next few years.

[Guest Hester]

"unethical" "sleazy"  You guys are joking right? 

 

Look, Countrywide engaged in seriously unethical and sleazy behavior that harmed people who basically could not defend themselves, shoved the crap out the door and repeated it.  Klarman, sharp elbowed yes, bought the paper from (supposedly) sophisticated investors, or at least investors who could pay for the education and is now sticking it to the successor company (read partner in crime, BAC).  A firm that on the face of it kept up the Countrywide traditions and seriously stretched (read broke) the laws repeatedly in foreclosure proceedings.  Proceeding that materially harmed many people who could not afford legal defense.

 

And you feel queasy?  I'm sorry this is business. On that premise you would never by anything in a bankruptcy case, where much turns on the fine print, sharp elbows and buying for pennies on the dollar.  (I should add that I'm not an Ayn Rand type, quite the opposite really.)

 

I repeat this is just business; it's totally legal.  it's not charity. and in this arena, all are sophisticated investors.  He isn't selling cigarettes, which though legal are highly immoral.  (No one seems to tut-tut about Loew's!)

 

Really good points. Relative to what some other businesses do, like cigarrettes or even some soft drink makers, this isn't bad.

 

In any case I'd love to see the reaction if a short seller, say Jim chanos, did the inverse of this. Say he shorted the stock of a company that had public bonds and wasn't filing financial statements for that period. Then he sued them, forcing default and profited from the equity short. Or something like that. I seriously doubt anyone would be saying "he's just enforcing contracts, guys."

[JSArbitrage]

Whoa! This thread really took an interesting turn.  Let me say that I said "it seems" that's the play he made.  I only gathered this inference from the various articles I've read.  He could simply be short BAC and bought a nominal amount of these loans just to have the right to intervene.  He could simply be long MBIA.  It could be some play that no one knows about.

 

I was just speculating based upon the articles I've read about this story and the fact that Klarman is well-known as a deep value fixed income player.

 

I have no special information regarding this play.

[enoch01]

 

In any case I'd love to see the reaction if a short seller, say Jim chanos, did the inverse of this. Say he shorted the stock of a company that had public bonds and wasn't filing financial statements for that period. Then he sued them, forcing default and profited from the equity short. Or something like that. I seriously doubt anyone would be saying "he's just enforcing contracts, guys."

 

That's much too speculative.  Do you have enough information on what Baupost is doing to draw that analogy?

[ragnarisapirate]

"unethical" "sleazy"  You guys are joking right? 

 

Look, Countrywide engaged in seriously unethical and sleazy behavior that harmed people who basically could not defend themselves, shoved the crap out the door and repeated it.  Klarman, sharp elbowed yes, bought the paper from (supposedly) sophisticated investors, or at least investors who could pay for the education and is now sticking it to the successor company (read partner in crime, BAC).  A firm that on the face of it kept up the Countrywide traditions and seriously stretched (read broke) the laws repeatedly in foreclosure proceedings.  Proceeding that materially harmed many people who could not afford legal defense.

 

And you feel queasy?  I'm sorry this is business. On that premise you would never by anything in a bankruptcy case, where much turns on the fine print, sharp elbows and buying for pennies on the dollar.  (I should add that I'm not an Ayn Rand type, quite the opposite really.)

 

I repeat this is just business; it's totally legal.  it's not charity. and in this arena, all are sophisticated investors.  He isn't selling cigarettes, which though legal are highly immoral.  (No one seems to tut-tut about Loew's!)

 

Really good points. Relative to what some other businesses do, like cigarrettes or even some soft drink makers, this isn't bad.

 

In any case I'd love to see the reaction if a short seller, say Jim chanos, did the inverse of this. Say he shorted the stock of a company that had public bonds and wasn't filing financial statements for that period. Then he sued them, forcing default and profited from the equity short. Or something like that. I seriously doubt anyone would be saying "he's just enforcing contracts, guys."

 

Well put, Hester.

 

The guy is trying to make some money, and is doing so in a legal way... I don't know why we should be disparaging him.

 

Plus, this does go with his philosophy of going where nobody else will to get nice returns. Certainly too icky for most, so, it can make for some fantastic returns.

[Kraven]

I am still puzzled why people would even begin to think there is something wrong with it.  We might not like it (especially those who are long BAC), but it isn't unethical or anything else.

[netnet]

but the reference to Loews is a little outdated :)

 

http://www.nytimes.com/2008/06/11/business/11menthol.html

 

Thanks for the update!  I haven't looked at Loews for a number of years now.

[bathtime]

From the article:

 

---

"In a May court filing, Bank of America said that Baupost sent letters to the Bank of New York Mellon, claiming it was a certificate holder and that loans in two trusts did not comply with representations and warranties made by Countrywide Home Loans. They said appraisals were inflated and other information had been misrepresented.

 

Baupost demanded the trustee give notice of the alleged breaches to Countrywide, according to the document, and require Countrywide to repurchase the loans. On December 21, 2010, the trustee received a letter concerning one of the trusts from entities including the "Walnut Place" entities."

---

 

It's not as if "Walnut Place" was ignorant of the nature of these MBS when they bought them. To a lot of people the optics of this will look like another case of the rich getting richer because they know how to game the system. While many working people are struggling to make ends meet, a billionaire with a few good lawyers can make hundreds of millions for his company in a settlement over acts that hurt those working people.

[Parsad]

In any case I'd love to see the reaction if a short seller, say Jim chanos, did the inverse of this. Say he shorted the stock of a company that had public bonds and wasn't filing financial statements for that period. Then he sued them, forcing default and profited from the equity short. Or something like that. I seriously doubt anyone would be saying "he's just enforcing contracts, guys."

 

That would be completely different than what Klarman is doing.  He's not playing both sides.  He bought the bonds, expected some sort of settlement at some point, and is not happy with the amount.  He's simply trying to get the most he can out of the investment, and any benefit he derives, all other bondholders would also get.

 

The analogy you give of Chanos would be at the expense of the other bondholders and risking their settlement.  Not the same thing as Klarman.  If Chanos did the same thing as Klarman, I would have no problem with that.  At least it's not the same as talking down a stock through the media, or piling onto a company with your hedge fund friends.  Cheers! 

 

[enoch01]

From the article:

 

---

"In a May court filing, Bank of America said that Baupost sent letters to the Bank of New York Mellon, claiming it was a certificate holder and that loans in two trusts did not comply with representations and warranties made by Countrywide Home Loans. They said appraisals were inflated and other information had been misrepresented.

 

Baupost demanded the trustee give notice of the alleged breaches to Countrywide, according to the document, and require Countrywide to repurchase the loans. On December 21, 2010, the trustee received a letter concerning one of the trusts from entities including the "Walnut Place" entities."

---

 

It's not as if "Walnut Place" was ignorant of the nature of these MBS when they bought them. To a lot of people the optics of this will look like another case of the rich getting richer because they know how to game the system. While many working people are struggling to make ends meet, a billionaire with a few good lawyers can make hundreds of millions for his company in a settlement over acts that hurt those working people.

 

exacty. his "partners" come first. the country second.

 

I don't know - I like a country where contracts mean something.  If he is successful, that will contribute (in a small way, granted) toward future issuers thinking twice before lying in their documents.  That, in turn, might help direct credit towards those who are credit-worthy.  Maybe that would make assets more affordable for the "working people", because those "working people" won't have to compete for credit with anybody who can fog a mirror.