ResCap Musical Chairs

Pipeline Press, Rob Chrisman says:

The industry continues to watch ResCap’s bankruptcy, even though at this point it is not front page news. The highly leveraged ResCap subsidiary had made Ally (its parent company) an unattractive asset because of the fears that the bank may become responsible for ResCap’s debt. On May 15, 2012, Ally put the company into bankruptcy as ResCap had posted a $402 million loss in 2011 and had missed a $20 million payment on unsecured debt in April. Ally agreed to pay ResCap $750 million to settle any claims against the parent, buy as much as $1.6 billion of securities if others don’t, and provide $150 million to help finance ResCap’s operations during bankruptcy, according to a company statement. Existing are various claims that Ally harvested assets from ResCap before seeking a quick and easy divorce through bankruptcy, evidenced by the debtors’ plan of separating itself, once and for all, from ResCap.

But whether Ally’s agenda also happens to be in the best interest of ResCap and its creditors is another question. The claim here is that Ally stripped ResCap of some juicy assets at below-market prices via “affiliate transactions” prior to filing. As one report put it, “That would be the equivalent of someone selling a piece of bank-funded property to their uncle before walking away from the mortgage. The bank would surely go after the uncle.” Goldman and Citi faced off during the CDS auction about the recovery of these unsecured bonds, and the bonds fell. The 6.5 percent bonds that matured on June 1 dropped more than 7 percent as of yesterday. The 6.5 percent bonds maturing next year fell 16 percent. And the 6.875 percent bonds fell almost 12 percent. All were selling for 17.6 cents on the dollar. It is unclear if Citi made money on this transaction, although it looks like the bank (which coincidentally is also partially US government owned) was more in the loop than Goldman. GS is now stuck with $345 million in unsecured bonds (which it bought in the CDS auction) as part of the game of ResCap musical chairs.

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