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A Hedge Fund Makes Billions Off Americans’ Underwater Mortgages

ABI Bankruptcy Brief
ABI Bankruptcy Brief
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December 27, 2018

ABI Bankruptcy Brief

A Hedge Fund Makes Billions Off Americans’ Underwater Mortgages

Fortunes were made on Wall Street betting against sketchy mortgages before the housing bust a decade ago. In its aftermath, one firm has made billions taking the other side of that trade, scooping up battered home loans in a wager that plenty of Americans would keep paying them, the Wall Street Journal reported. The payoff, years in the making for hedge fund firm Fir Tree, is $2.6 billion and counting, according to an investor letter reviewed by the Journal. Fir Tree has reached the final stages of collecting on its gambit at a time when the housing market is at a crossroads following five years of sharp gains. In many cities, surging prices have strained affordability, while rising interest rates and high student loan debt have made it difficult for the generation starting families to buy homes. Fir Tree, which manages about $8 billion, favors complex trades that often involve legal action. It is a creditor in the decade-old battle over what is left of failed investment bank Lehman Brothers, and it has spent years trying to wring cash from Puerto Rico’s defaulted bonds and, during the recent oil bust, emerged from bankruptcy court holding the reins of energy producers. Its mortgage wager was two-pronged: The firm relied on human nature — a belief that homeowners would stick with their mortgages, even if their houses were no longer worth what they owed — while it also took legal action to force banks to pay up for flawed loans that did default. So far, about half of the firm’s $2.6 billion profit is attributable to homeowners paying underwater mortgages. The rest has been redress for loans that defaulted. In 2010, during the depths of the crash, more than 12 million U.S. houses were worth less than the debt on them. In places like Las Vegas and Miami, about two of every three mortgaged homes were underwater (Subscription required.)

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Busy Law Firm Merger Market Shows No Signs of Slowing

As their smaller peers have been coupling up in record-breaking numbers, large and midsize law firms in the United States have mostly been sitting on the sidelines. Expect that to change in 2019, according to an American Lawyer report. Several substantial combinations took place over the past year. Bryan Cave’s trans-Atlantic tie-up with Berwin Leighton Paisner created a 1,600-lawyer superfirm. Three hefty mergers in Texas — Foley & Lardner and Gardere Wynne Sewell; Hunton & Williams and Andrews Kurth Kenyon; and Clark Hill and Strasburger Price — helped build and define the buzz around the Lone Star State. Fox Rothschild and Nelson Mullins Riley & Scarborough both bolstered their presence in the Southeast through deals with firms of roughly 150 lawyers. These deals hint at a growing trend in the marketplace, says Lisa Smith, who heads the Washington, D.C., office of consultancy Fairfax Associates. “When you look at some of the largest mergers in 2017, taking out cross-border deals, they tended to skew a little lower in size than what you’re seeing now,” she explains. “I think we’re seeing more interest in the firms that are in the 200-to-500-lawyer range, reaching combinations with similar-sized and larger firms.” As 2018 came to a close, it was on pace to become the busiest year ever for law firm mergers, surpassing a record set in 2017. “I can’t remember a time when we’ve been asked to conduct more merger assessments — for deals that are already on the table,” Altman Weil principal Eric Seeger says.

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U.S. Consumer Confidence Fades in December

A measure of confidence among American households fell for a second consecutive month, weighed down by weaker expectations for economic growth and heightened market volatility, the Wall Street Journal reported. The Conference Board said today that its index of U.S. consumer confidencedropped to 128.1 in December, down from 136.4 in November. The October index reading of 137.9 was the highest since 2000. Even though confidence remains historically strong, the report suggested consumers were spooked by the recent rout in global equity markets, weak housing data, and the continuing concerns about the Trump administration’s trade actions this year. A gauge of the nation’s households assessment of the present economic situation fell slightly in December, as well as an index tracking expectations for the future. (Subscription required.)

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Analysis: Key Retirement Issues for American Workers to Watch in 2019

It is going to be a busy year in Washington, D.C., and state capitals for policymakers working to improve the retirement security of millions of Americans, the New York Times reported. New retirement savings options will be on the horizon in 2019 for millions who don’t have access to workplace 401(k) plans. Meanwhile, Congress will try to agree on a plan to avert sharp cuts in traditional pension benefits for over a million workers. The long-running battle over regulation to protect investors will enter a new phase when the Securities and Exchange Commission issues new “best interest” rules governing investment advice. And the House of Representatives could take up legislation to expand Social Security.

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U.S. Farmers Wary of ‘Ulterior Motive’ for Traders’ Digital Push

Facing competition from hi-tech startups, two of the world’s biggest trading houses are seeking U.S. approval to create a joint digital network designed to let farmers manage their data online, Bloomberg News reported. That may be the easy part. The tough part: Persuading wary growers to use it. Agribusiness giants Archer-Daniels-Midland Co. and Cargill Inc. are asking regulators to approve a joint venture called GrainBridge to help farmers gather and aggregate information on crops and markets. The push comes as startups like Indigo Ag Inc., Grainster Inc. and the Farmers Business Network Inc. have begun offering digital access to growers to help them pinpoint opportunities in specialized crop markets. Technology is needed, said Jon Bertsch, who grows soybeans, corn and wheat on about 2,500 acres in Hillsboro, N.D. But farmers always wonder if “there is an ulterior motive,” he said by phone. “They want all of our data. Them getting it should be at a premium.” As a first step, Omaha-based GrainBridge aims to give mainstream growers access to their trading house transactions, along with their contracts, precise cargo weight and payment information. Ultimately, growers in the U.S. and Canada will be able to sell grains on their own schedules, see break-even levels and ascertain risk, the companies have said. The two companies didn’t disclose terms of the joint venture, but said in a statement they could close on it “in the next few months.”

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New on ABI’s Bankruptcy Blog Exchange: CFPB Once Again Enters New Year with Direction TBD

The biggest question is whether new CFPB Director Kathy Kraninger will deviate from the pro-industry policies of her predecessor, or bring continuity, according to a new blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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