Bloomberg News

Berkshire’s Bond Holdings May Give Buffett Role in ResCap Plan

December 14, 2011

Dec. 8 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc., one of the largest creditors of government-owned Ally Financial Inc., may wind up playing a central role in the restructuring of its Residential Capital LLC mortgage unit.

Advisers to Ally, Rescap and the U.S. Treasury Department see Buffett as someone that they may approach about taking an equity stake in the subsidiary as they explore whether to put it into a pre-packaged bankruptcy, said people familiar with the talks. While they haven’t approached Buffett, advisers made preliminary calls to buyout firms to gauge their interest in bidding for the unit in a possible bankruptcy, said the people, who declined to be identified because talks are private.

Berkshire is seen as a potential buyer because it has more than $500 million of bonds in Detroit-based Ally and ResCap and previously invested in a commercial-mortgage firm that once was owned by Ally, said people familiar with the talks. The advisers have recently approached firms that last year explored offers for the lender, the people said.

“Buffett or a private-equity firm could want a part of this business, especially as the mortgage-origination business picks up over the next few years,” said Jody Lurie, a credit analyst at Janney Montgomery Scott LLC. “Any deal would certainly be difficult, as it would have to be structured so investors felt protected. That could be through a bankruptcy of ResCap.”

Berkshire joined Leucadia National Corp. in 2009 to buy bankrupt Capmark Financial Group Inc.’s loan-servicing and mortgage business for more than $400 million. Capmark had been owned by GMAC LLC, which was renamed Ally. Buffett hasn’t sought to influence the ResCap process, and advisers intend to have a more complete plan before they approach him, the people said.

Ally Bonds

Buffett, 81, chairman and chief executive officer of Omaha, Nebraska-based Berkshire, didn’t return a message left with an assistant. Gina Proia, an Ally spokeswoman, declined to comment, as did Matt Anderson of the U.S. Treasury Department.

Berkshire had more than $400 million in Ally debt at its insurance units as of June 30, according to Bloomberg data. That includes the Government Employees Insurance Co.’s $275 million holding of Ally’s $1.9 billion of 8 percent notes due in March 2020. ResCap holdings at Berkshire insurers exceed $90 million, the data show.

The Ally notes traded at 101.75 cents on the dollar according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. ResCap’s $2.1 billion of 9.625 percent bonds due May 2015 are trading at 63.5 cents on the dollar.

Buffett’s firm has ResCap holdings beyond those that are disclosed to U.S. state regulators by insurance subsidiaries, said a person familiar with the matter. The top holder of Ally debt is Pacific Investment Management Co., manager of the world’s biggest bond fund, the data show. Pimco’s Mark Porterfield didn’t return a message seeking comment.

Public Offering

Berkshire’s bond holdings could give Buffett a central role in restructuring even if he opts against bidding for Minneapolis-based ResCap. Ally may reduce its liabilities if it separates from ResCap, bolstering the parent company’s balance sheet and prospects for an initial public offering.

Investors and lenders are concerned about costs ResCap faces from more than 20 lawsuits tied to mortgage securities and a case from the Federal Housing Finance Agency, which claims the firm is among lenders that misrepresented the quality of mortgages later sold to Fannie Mae and Freddie Mac.

Advisers are weighing how a ResCap bankruptcy may change Ally’s funding costs, and any decision is probably at least weeks away, said the people. Ally is exploring a separation payment that would help ResCap weather some future losses, including costs tied to disputes with mortgage investors and state and federal regulators, the people said. The solution could cost $2 billion or more, said one of the people.

Mortgage Costs

Ally and ResCap may face as much as $4.1 billion in expenses tied to mortgage costs, Adam Steer, an analyst, said in September when he was at CreditSights Inc.

Steer estimated $3 billion would be needed to resolve disputes from investors who suffered losses on mortgage-related securities packaged by the firm. About $829 million of that sum has already been reserved, according to Steer, who now works at Brookfield Investment Management Inc. The analyst also estimated a $1.1 billion cost that would be Ally’s share of a potential settlement between state attorneys general and the largest mortgage firms over foreclosure deficiencies.

‘Clean Transaction’

“There would be interest in ResCap if the buyers could structure a clean transaction, which may have to be through bankruptcy court,” said Kirk Ludtke, an analyst at Stamford, Connecticut-based CRT Capital Group LLC. “There is no question that the probability of ResCap filing has increased.”

If Ally does pursue a sale of ResCap through bankruptcy it may target buyout firms including Fortress Investment Group LLC, Centerbridge Capital Partners LLC and mortgage servicer Ocwen Financial Corp., which all considered bids in mid 2010 in a failed auction for ResCap, the people said.

Gordon Runte, a Fortress spokesman, declined to comment. Ocwen Chief Financial Officer John Van Vlack didn’t return a message seeking comment. A call to Centerbridge wasn’t returned.

Resolving ResCap would require approval from the FHFA and from the Federal Deposit Insurance Corp., which oversees Ally because it accepts customer deposits, one of the people said.

Corinne Russell of the FHFA declined to comment as did FDIC spokesman David Barr.

Ally, which is 74 percent owned by the Treasury Department, is seeking to repay $17.2 billion in U.S. bailout funds through an IPO. Ally had almost $182 billion in assets and $162.2 billion in liabilities, for equity of $19.7 billion, as of Sept. 30, according to a company regulatory filing. ResCap’s tangible net worth was $331 million at the end of the third quarter.

--With assistance from Zachary R. Mider, Pierre Paulden and Devin Banerjee in New York. Editors: Dan Kraut, Dan Reichl

To contact the reporter on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net;

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net


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