Klarman Secretly Moved to Block BAC Settlement?

[JSArbitrage]

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

 

I don't know why people say this is unethical.  If anything, I think he is the most ethical actor in this mess.  It can't be Countrywide who misrepresented (lied about) the quality of the loans they sold to investors.  It can't be the NY Fed/PIMCO/BlackRock, as they have a huge vested interest in pushing the issue under the rug, regardless of whether other investors get made whole.

 

I am not saying Klarman is doing this for altruistic reasons but, let's face it, big settlements between the Big Banks and Government/Cronies are pretty egregious.  The SEC just got legally bitchslapped by a judge for preferential treatment of Citi (he even went as far as to imply collusion.) 

 

People say these settlements need to happen for the good of the country.  I say covering up a massive criminal scheme, which if you've done any background reading on the crisis, you'd know that's exactly what this was, is never in the interest of the country.  It might be in the best interests of the majority of wealth-holders of this country but certainly not for the majority of citizens in this country. 

 

As for Klarman, I say take your pound of flesh from these criminals.  More power to you.

 

 

[ubuy2wron]

zerohedge is suggesting its some short BAC long MBIA strategy that Klarman is executing. I frankly doubt it ,kudos to Seth if he pulls it off. The only problem I have with all of this other than its my ox he is goring cuz I am long BAC leaps, is the lawsuit does not benefit those who have suffered damages cuz Set prolly bought them super duper cheap and the poor pension fund that took the loss aint gonna benefit and the villains like Mr perma tan are also enjoying their lives pretty much care free. The teachers who have an under funded pension and will have to accept a lower standard of living for the remainder of their days will get bumpkis from all of this. But thats kinda how it works on wall street.

[SFValue]

short bac / long MBI seems directional to me, please explain.

[bathtime]

JSArbitrage, you make some fair points.

 

I find it unfortunate that the government has taken little civil and criminal action. I think that would be for the good of the country.

 

Here's a good article on the case:

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=34198

 

And a recent Walnut Place court filing which includes their legal argument:

 

http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2011/12_-_December/walnutvcountrywide--MTDresponse.pdf

 

I'm not so sure whether much good for the country will come out of this legal battle. I read through the above filing and was left with the feeling it just seems to come down to lawyers using very fine legalese to battle over money. One excerpt from page 6 of the Walnut Place argument:

 

---

The Walnut Place entities own securities issued by two of Countrywide's trusts. Concerned by widespread reports about the poor quality of Countrywide's loans, Walnut Place spent many hundreds and thousands of dollars to investigate the true quality of the loans in the two trusts. It found that hundreds of loans in each trust were not of good quality and breached several of the representations and warranties that countrywide had made about them.

---

 

At this point I wish they had inserted, "We were shocked, I tell you, shocked!"

 

On page 12 of the document a crucial argument is discussed, which is what comprises an "Event of Default." I'm no expert, but on a cursory reading I don't buy the Walnut Place argument on that question from a "common sense" reading of the paragraph, which is not to say that they can't prove their point with enough legal argument, which they provide aplenty.

 

 

 

[JSArbitrage]

Interesting because my reading of the document makes it seem like Walnut Creek has a slam dunk.  Basically, CW is arguing that Walnut can't sue them because a violation of reps and warranties doesn't constitute an Event of Default.  CW construes that paragraph narrowly to say that you can never sue CW for anything but an EoD.  Walnut basically says that untrue and the same court has addressed that same issue in the past.  In that case the Court gave a 4 prong test that a plantiff must be in order to sue outside of the Event of Default.  Walnut met all 4 prongs.

 

Lastly, I'd like to also note that, if Walnut alleges the violation of reps and warranties was a result of fraud (i.e. they knew it didn't conform when the loans were sold), then CW can't waive suit regardless.  But it seems like Walnut hasn't gone that far yet because they haven't had to.

[ubuy2wron]

short bac / long MBI seems directional to me, please explain.

 

See attached link http://www.zerohedge.com/news/was-seth-klarman-just-exposed-bank-americas-biggest-short-and-covert-mbia-long

[bathtime]

JSArbritage - thanks, that makes sense. I got lost in the details.

[mpauls]

"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.)

 

There may be more to the story, but if the facts are as stated, I totally agree with NetNet.

 

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!)

[QLEAP]

"We have on occasion owned a small amount of default protection on Bank of America debt as part of our overall portfolio hedging strategy through which we hold credit default swaps on a diverse group of financial institutions and other corporate issuers," the memo said. "We currently have no long or short position in equity, corporate debt, or credit default swaps of Bank of America or MBIA."

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=34462&terms=@ReutersTopicCodes+CONTAINS+%27ANV%27

 

 

[ERICOPOLY]

Let's say Klarman's actions eventually force a trial decision that is "multiples of the original settlement".

 

First:

How long until that decision?

 

Second:

Assuming the bank then tries to take Countrywide into bankruptcy, no doubt a whole new trial will need to take place to contest the bankruptcy.  How long from today until they would eventually have to pay up if the court rules that Countrywide was not property "ring fenced"?

 

 

[Kraven]

Let's say Klarman's actions eventually force a trial decision that is "multiples of the original settlement".

 

First:

How long until that decision?

 

Second:

Assuming the bank then tries to take Countrywide into bankruptcy, no doubt a whole new trial will need to take place to contest the bankruptcy.  How long from today until they would eventually have to pay up if the court rules that Countrywide was not property "ring fenced"?

 

I don't see how all of this isn't years of litigation.  BAC has no incentive to settle unless it is on their terms or they feel they derive some benefit from not litigating.  Litigation can be dragged on for a lot longer than people think.  Just for point of reference in situations that have nothing to do with this case or even remotely related.  There is still Exxon Valdez litigation that goes on over 20 years later.  There is still asbestos litigation that goes on from the original cases filed decades ago.  The Winklevoss twins still have litigation against Facebook after 7 or so years.  There is still plenty of Bear Stearns litigation ongoing.  It becomes a war of attrition.  At some point both sides will either agree to settle because the fight isn't worth it any longer, or they won't.  But look at the incentives.  BAC keeps pushing and all they owe is more legal fees.  The ones suing them have their returns diminishing every day it goes on and have their own legal fees to pay.  Not even Klarman can or will want to go on forever.

[onyx1]

Let's say Klarman's actions eventually force a trial decision that is "multiples of the original settlement".

 

First:

How long until that decision?

 

Second:

Assuming the bank then tries to take Countrywide into bankruptcy, no doubt a whole new trial will need to take place to contest the bankruptcy.  How long from today until they would eventually have to pay up if the court rules that Countrywide was not property "ring fenced"?

 

There are so many ways this can play out it's anyone guess, but it’s hard to imagine a scenario where it doesn’t go one for 5 years or more.  Walnut Place is only one of 44 parties who want to intervene in the settlement.  Some want more money, some want the option to opt out, and some want the distribution among parties to be different.  WP owns only a handful of the 530 covered trusts.

 

If, years from now, WP is successful, surely the other trusts will petition the trustee for an improved settlement.  But even if the trustee convinces BOA to up the settlement amount from $8.5bln, will it be over?  I say no.  State AGs other political interests will want their notoriety.  Other certificate holders will still want a different distribution among senior and junior classes, and still others will want even more in settlement amounts and may bring their own actions.  Since non-GSE claimants need a higher threshold to receive damages (they must show that the R&W breach caused them material harm) it’s easy to see this turning into a decade’s long litigation nightmare. 

 

If BAC decides to fight it out in court the present value of the settlement will work in their favor.  Additionally, since BACs losses are a function of house prices on the put-back loans, BAC liability will drop over time as the housing market recovers.  The more time, the better chance their losses are minimized or even eliminated.

 

If they decide to file CFC in BK11, the litigation window may not be as long, but it could easily be 5-10 years because of the tens of thousands of unsecured claimants.

 

I’m pulling for the settlement to hold, but if it does not,  it’s far far from game over for BAC.

 

[Santayana]

Let's say Klarman's actions eventually force a trial decision that is "multiples of the original settlement".

 

First:

How long until that decision?

 

Second:

Assuming the bank then tries to take Countrywide into bankruptcy, no doubt a whole new trial will need to take place to contest the bankruptcy.  How long from today until they would eventually have to pay up if the court rules that Countrywide was not property "ring fenced"?

 

There are so many ways this can play out it's anyone guess, but it’s hard to imagine a scenario where it doesn’t go one for 5 years or more.  Walnut Place is only one of 44 parties who want to intervene in the settlement.  Some want more money, some want the option to opt out, and some want the distribution among parties to be different.  WP owns only a handful of the 530 covered trusts.

 

If, years from now, WP is successful, surely the other trusts will petition the trustee for an improved settlement.  But even if the trustee convinces BOA to up the settlement amount from $8.5bln, will it be over?  I say no.  State AGs other political interests will want their notoriety.  Other certificate holders will still want a different distribution among senior and junior classes, and still others will want even more in settlement amounts and may bring their own actions.  Since non-GSE claimants need a higher threshold to receive damages (they must show that the R&W breach caused them material harm) it’s easy to see this turning into a decade’s long litigation nightmare. 

 

If BAC decides to fight it out in court the present value of the settlement will work in their favor.  Additionally, since BACs losses are a function of house prices on the put-back loans, BAC liability will drop over time as the housing market recovers.  The more time, the better chance their losses are minimized or even eliminated.

 

If they decide to file CFC in BK11, the litigation window may not be as long, but it could easily be 5-10 years because of the tens of thousands of unsecured claimants.

 

I’m pulling for the settlement to hold, but if it does not,  it’s far far from game over for BAC.

 

this is true, especially now that Buffett has blessed the company and it's management. not only that, as the economy starts to improve, and slowly but surely bac numbers begin to improve, they will have even less incentive to settle on a bad deal for them. The Zerohedges of this world will sound like little Casandras and their influence will wane. The parasites will see that settling sooner rather than later will be wise.

 

You know the story of Cassandra is that she was always right?