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Berkshire Hathaway offers to buy ResCap unit

By Josh Funk
AP Business Writer / June 12, 2012
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OMAHA, Neb.—Warren Buffett's Berkshire Hathaway Inc. is offering to buy the mortgage division and loan portfolio of Residential Capital LLC, which filed for bankruptcy protection in May.

Residential Capital, also known as ResCap, is a subsidiary of Ally Financial Inc., the former auto lending arm of General Motors. ResCap was hobbled by payments on debt taken out to finance soured home mortgages.

Berkshire didn't spell out why it is interested in ResCap's assets in the court filing in which it outlined why its offer is better than competing bids.

But the conglomerate based in Omaha, Neb., already has significant interests in the insurance business along with a variety of other companies ranging from railroads to newspapers and clothiers.

Buffett has said that he believes the U.S. housing market will recover because more families continue to be formed, but he's not predicting when residential construction will rebound.

This investment could be related to Buffett's long-term optimism about the housing market, but it could also simply be a bid to pick up assets that are selling for less than they are worth.

Berkshire officials did not respond to a message Tuesday morning.

Jeff Matthews, a shareholder who wrote "Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett," said he doesn't think Buffett is thinking of jumping into the mortgage lending business.

"He clearly thinks he's buying an under-valued asset," Matthews said.

Berkshire already holds roughly $2.8 billion in mortgage-backed securities purchased for about $2.5 billion for its investment portfolio. Berkshire also owns manufactured home builder Clayton Homes, which runs its own lending unit, so it has some experience with mortgages.

Ally, which is 74 percent owned by the U.S. government, makes loans to GM and Chrysler customers and finances dealer inventories. The government first bailed out the company, then known as GMAC Inc., in late 2008 as part of the Bush administration's aid to the auto industry. The Obama administration provided additional funding in May and December 2009.

ResCap had been a drain on Ally's finances for years, struggling to make payments on its heavy debt ever since the bottom fell out of the U.S. housing market in 2007. In regulatory filings before the bankruptcy, Ally said that deterioration in the U.S. housing market had led to fewer sources of money for ResCap, which was highly leveraged due to mortgage defaults.

In papers filed with the bankruptcy court for the Southern District of New York on Monday, Berkshire said it will offer more favorable terms for ResCap's mortgage business than Fortress Investment Group LLC has.

Berkshire's court filing mentions Ted Weschler, one of Berkshire's new investment managers, so it's not clear if this bid on ResCap's assets originated with Buffett. Weschler is a former hedge fund manager who started building a $2.75 billion investment portfolio at Berkshire in January.

ResCap agreed last month to sell most of its assets to a group that includes Fortress and NationStar Mortgage LLC, which is majority owned by Fortress

Berkshire said it will match Fortress' $2.4 billion bid for the mortgage unit, but will offer a lower breakup fee of $24 million. Fortress' breakup fee is $72 million if its deal doesn't go through.

Berkshire also said in the filing that it will not require any expense reimbursement. Fortress may get up to $10 million in expense reimbursement if it loses the auction for ResCap's assets.

Berkshire also says it will offer better terms for ResCap's loan portfolio, which Ally wants to purchase. Berkshire said it will pay $1.45 billion for the portfolio, compared with Ally's $1.4 billion offer. But Ally could pay $1.6 billion if a deal is made under ResCap's Chapter 11 bankruptcy reorganization plan.

An Ally spokeswoman did not respond to a message Tuesday morning.

Berkshire wants to replace Fortress and Ally as the "stalking horse," or initial bidder, for the ResCap assets. The company says its offers will stay open until June 19 for the court to approve. The deadline is consistent with Berkshire's policy not to enter into bidding wars.

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