DealZone

Buffett seen raising bet on housing

BuffettWarren Buffett is in talks to buy GMAC’s mortgage lender Residential Capital, the New York Post reports. Teamed up with Appaloosa Management and Avenue Capital, Buffett has large debt positions in the gut-shot company, according to the Post. In September, Buffett’s Berkshire Hathaway and Leucadia National agreed to buy Capmark Financial Group’s mortgage loan and servicing business for up to $490 million.

If the residential property market hasn’t begun a solid recovery, it certainly established a solid bottom over the past six months. New home sales figures out yesterday were shockingly weak, but keep in mind that November and December are not particularly hot months for residential real estate, and new home sales are a much smaller chunk of the market than the existing portion. Lots of analysts were expecting the housing recovery to face a test as we get closer to the extended deadline in March for the $8,000 homebuyer tax credit.

But it’s a rare investor who gets rich betting against Warren Buffett. And if he’s looking to buy low, he could hardly have done better than ResCap. The lender has been flirting with dangerously low capital levels, with the Post reporting it is bouncing around the minimum required net worth of $250 million. It had a tangible net worth of $409 million at the end of the third quarter. The mortgage company has lost over $10 billion in the last three years. The number of loans delinquent rose to 13.40 percent at the end of June from 11.50 percent at the end of 2008.

ResCap has been kept on life support by parent GMAC, which itself been a primary beneficiary of government assistance, after being caught out with loans to weak borrowers. Perhaps one of the events in its tumultuous recent past that caught the oracle of Omaha’s eye was GMAC’s reinvention as a bank in order to qualify it for more government aid under TARP. As the auto and commercial lending arm of GM, becoming a bank made almost enough sense to seem inevitable during the nadir of the crisis. Having been kept warm through the worst of times, bailed out businesses like ResCap are naturally hot targets when recovery is at hand.

Bank of America’s Chalice: Poison or Red Bull?

For months, as he endured hearings on Capitol Hill and fought off a series of lawsuits, Bank of America CEO Ken Lewis trudged through a post-apocalyptic financial landscape against a steady drumbeat of questions about his future. The deal he had called “the strategic opportunity of a lifetime” — his purchase/salvage of Merrill Lynch — had swung from an act of patriotism, keeping the American way of banking from utter ruin, to a scandal over Merrill losses and bonuses.

Perhaps he should have seen the writing on the walls of the vacant houses financed by Countrywide, the mortgage lender Lewis purchased/salvaged just six months before the Merrill deal. The two transactions may have been strategic gems, but they were laced with political poison as the economy floundered toward its dramatic deleveraging and taxpayers pumped $20 billion into Bank of America to fund the Merrill deal.

“It was only a matter of time,” Campbell Harvey, a professor at Duke University’s business school, told Jon Stempel. “There is too much collateral damage.” As Stempel reports, Lewis spent north of $130 billion on acquisitions, including FleetBoston Financial Corp, the credit card issuer MBNA Corp, LaSalle Bank Corp, Countrywide, Charles Schwab Corp’s U.S. Trust private banking unit, and Merrill. In buying Merrill, he added a giant investment bank to what was already the largest U.S. retail bank, credit card issuer and mortgage provider. (Wells Fargo & Co has since become No. 1 in mortgages.)