Patterico's Pontifications


Financial Reorganizations

Filed under: Economics — DRJ @ 11:20 pm

[Guest post by DRJ]

Lehman Brothers Holdings, Inc., will file for Chapter 11 bankruptcy in New York on Monday. Bank of America walked away from a possible Lehman purchase this weekend but, if regulators and shareholders approve, BOA plans to buy Merrill Lynch for $29/share in a $44 billion transaction.

Reorganizations can be so lucrative.


9 Responses to “Financial Reorganizations”

  1. “Reorganizations can be so lucrative.”

    Well, they they usually require plenty of lawyers if that’s what you mean, DRJ.

    Chunks of businesses being spun out of the reorganizing firms can also often be bargains for savvy buyers.

    AIG also requested Fed assistance over the weekend, which as of Sunday night was not granted. It will be interesting to see of they assist a nonbank, nonprimary dealer firm.

    daleyrocks (d9ec17)

  2. Clearly this is totally due to Sarah Palin’s inexperience, odd views of feminism, and lack of foreign policy experience.

    I’m sure Andrew Sullivan will be writing this momentarily.

    All he needs is some glasses to look down over…sort of like Charlie Gibson.

    Eric Blair (36c1a9)

  3. The scam is that billions were paid in salary and bonuses to the lawyers and investment bankers who put these “complex” deals together – deals that are now falling apart.

    Perfect Sense (9d1b08)

  4. Actually, the crisis has gotten this bad in large part due to the desire to AVOID paying lawyers.

    I will explain.

    A securitized residential mortgage obligation is a trust holding as its assets the real estate security (mortgages, trust deeds, etc.) of many individuals. The logic is that the value of security is, in the worst case, the value of all of the collateral. Out of these securities banks would create further derivative securities (or sometimes create from the beginning) securities that represented first money, second money out, etc. These securities were sold with complex prospectuses making predictions about the realization of cash and loss of security value over time–in other words, over the life of the securitized obligation, most mortgages were prepaid (producing cash for investors but causing the collateral to evaporate), some went to foreclosure, and some were paid off according to the original maturity schedule. The security thus gave off cash while the collateral base disappeared. This is very different from a corporate bond, where the collateral base changes over time based on the success of the company and pays a pre-agreed amount of cash and return of principal.

    When these securities were first created, a few years before I begin practicing as a lawyer, the work was very lucrative and very lawyer intensive. Several banks became specialists in hiring teams of lawyers to go over every single security and make sure that the documentation assigning the mortgage from the originating lender to the trust was airtight; sometimes this chain of assignments involved several steps.

    After a couple of years new companies began bidding for the servicing work, undercutting the incumbents. How did they come up with lower bids? But skipping the legal work, and instead guaranteeing that the loans would in fact be assigned. They asserted that they would catch up with the legal work and do it at a more reasonable pace, rather than hiring an army of lawyers to get the work done. Over the last 15 years, the practice of ensuring that the assignments of the mortgages were actually done evaporated.

    Now, of course, the trusts that own this paper are trying to realize their collateral, and they are discovering that, in many cases (a) the paperwork showing a chain of title has been irretrievably lost, and (b) where the paperwork to conduct the foreclosure exists or can be created by backdated assignment, the mass of foreclosures is creating political blowback–something all of the attorneys in the big law firms were very well aware of, but were never paid to address, since the disclosure of such risk would have made the payment models appear worthless (which, of course, they were). The worthless underwriting standards employed by many of the brokers and lenders only added to this problem.

    The securities, which were sold based on certain predicted realizations of cash based on foreclosures and prepayments, have ceased to perform anywhere close to what the original projections stated. Moreover, the realization from foreclosures has become a fraction of what it should be.

    Personally, I was so pessimistic about the consequences of the failure of these securitizations, I predicted a real estate crash starting in 2002, but this was a case where I knew too much to get the timing right.

    The failure of the residential securitization market was easily foreseeable, and in fact was foreseen by those attorneys who worked in the area directly or, in my case, indirectly. There was no way that the increasingly shoddy practices of the mortgage brokers and Wall Street could lead to anything other than a gigantic collapse in confidence once the crippling of the securitization trusts to turn foreclosures into cash as represented in the prospectuses and models became obvious to everyone.

    Cyrus Sanai (4df861)

  5. Nothing so complex. “A gaggle of thieves” explains it just fine. Don’t have to be an attorney to know that, and the thieves all had attorneys.

    Now, if some attorneys can figure out how we can put these CEOs & CFOs in front of firing squads, my hat will be off to them.

    Kevin Murphy (0b2493)

  6. Greed is a much simpler explanation Cyrus. Ever shoddier underwriting standards and an ever expanding deal flow make for ugly results. Many of us watched the looming disaster begin to unfold.

    daleyrocks (d9ec17)

  7. The stinking weeds of Republican style voo doo economic incompetence and corruption and manipulation have taken over the garden.

    And the Republican’s need to pay dearly for this. And they will be held responsible on November 4th.

    I’m really beyond even trying to discuss this or let some slimeballs try and assuage the hugeness and craziness of what’s taking place. I think any Republican trying to get into office should get a public beating.

    Peter (e70d1c)

  8. daley,

    This will make money for lawyers but that’s a small part of the lucre I was referring to. There are buyers and sellers in reorganizations, too, so for every “losing” worker or investor there are are *hopefully* new, more efficient “winners.” Reorganizations like these can also be important tools that I hope will help the economy work out housing sector over-valuation problems that have plagued the financial markets since the 90s.

    DRJ (7568a2)

  9. I guess Jeb lost his job today; not sure how his pension will play out :(
    Miami Herald

    Bob Loblaw (6d485c)

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