Vulture Capital buying into Subprime Lenders

[Olav23]

He's made a fortune picking through the bones of failed steelmakers, textile mills and coal miners. Now billionaire investor Wilbur Ross is taking aim at another beleaguered industry: subprime mortgage lenders. He took his first step on Monday by providing $50 million in debtor-in-possession financing for American Home Mortgage Corp, which filed for bankruptcy earlier in the day.
It's a tiny step, but Ross told Reuters there are many more to come.

Vulture investor Ross turns sights on subprime | Reuters

It sounds like he is a very-deep-value investor. I'm wondering if it is possible for smaller investors to get in on deals like this? Is there a way to buy bankrupt company stock/debt and hope for a turn around? Or once it files, it is no longer "tradeable" except to buy out owners or something?

I've been hearing a lot about this lately, buying assets from places at fire sale prices because they needed to get out of deals. Refco, Bear Stearns, LTCM, etc. Is this something only big players can be involved in, like a back-office deal?

 

[Gumby]

Publicly traded stock of companies in bankruptcy still usually trades, although sometimes only on the Pink Sheets. However, with rare exceptions, stockholders usually do not recover anything and the last one holding the bag when a plan of reorganization confirms gets hammered because the old stock is then usually terminated.

You can also buy the bonds of a bankrupt company and hope they get more in a plan of reorganization than you paid for them. In general, however, I would advise against doing even this (buying bonds of bankrupt companies). You will be competing against distressed hedge funds who know the capital structure of the company and the bankruptcy process better than you ever will. Valuing a bankrupt company and predicting distributions in a plan of reorganization is an exercise that baffles even the experts.

 

[twaddle]

If you did find a deal, just remember you're getting leftovers after the professional vultures have already picked off the meat.

What's the poker cliche? If you don't know who the sucker is, it's probably you.

 

[audreyh1]

Marty Whitman of Third Avenue Value mutual fund sometimes gets involved in these opportunities - he's pretty good at it. You can get some benefit by owning his fund.

Audrey

 

[brewer12345]

This is within the bounds of my profession. If you try to do this, be prepared to do a lot of analysis and then endure plenty of volatility for an uncertain payout.

Frankly, in this environment you can buy the stock of similar companies that are still in one piece but trade like they are distressed.

 

[Texas Proud]

If you get lucky... you can make a killing...

Way back when I worked at a bank that failed... someone bought up a lot of the preferred stock at 10 cents a share... when all was said and done with suing the Fed etc... it came out with a value of $17 per share...

So... if you have money to 'throw away' and want to take a flyer.... look for something that MIGHT have value after it is done... and that value CAN be a tax loss carryforward (if structured correctly)...

 

[al_bundy]

subprime is a nice business if you price in risk properly. a lot of companies used to make a lot of money on subprime starting in the late 1990's. it started in 2004 or 2005 where they forgot all about risk and gave loans literally to anyone.

i remember back in 2003 reading creditboards.com if you wanted a subprime mortgage it was pay like 12%, qualify for a Fannie program or go FHA. Each one required no open collections, on time payments for at least 12-24 months, down payment, PMI and be out of BK for at least 6 - 12 months.

starting in around 2004 or 2005 the mortgage brokers on there started telling people the new looser standards and someone a month out of bankruptcy could get a $0 down, 110% LTV, cash back at closing no doc mortgage at less than 8%. it was beyond belief.