Was Seth Klarman Just Exposed As Bank Of America's Biggest Short (And A Covert MBIA Long?)
While we have extensively covered the blood feud between Bank of America, and its archnemeis, the mysteriously titled Walnut Place in the past (see here and here and here and here and most importantly here) which just happens to be the entity that successfully scuttled Bank of America's "proposed" $8.5 billion settlement with a bevy of so called litigants (among which BlackRock, PIMCO and the New York Fed for god's sake - the very entities who survival depends on BAC's continued existence) who in realty were merely subversive agents seeking to settle $424 billion in misrepresented mortgage CFC trusts just so the status quo would not be impaired, we never asked one simple question: just who is Walnut Place? Now, courtesy of Reuters, we know, and the revelation is quite stunning, because it means that the person who potentially has the biggest short in Bank of America either via equity or CDS (which do not have to be publicly desclosed) is the legendary head of Baupost: Seth Klarman. Reuters reports: "Walnut Place, a group of undisclosed investors who oppose Bank of America Corp's $8.5 billion mortgage bond settlement, is the Baupost Group, a distressed debt fund, according to an attorney for the bank. "Walnut Place is actually a made up name," Theodore Mirvis, an attorney with Wachtell, Lipton, Rosen & Katz who represents Bank of America, said at a hearing in New York state Supreme Court Thursday. The "real" firm, which sued Bank of America and Bank of New York Mellon BKNYK.UL, as trustee, over mortgage-backed securities trusts is Baupost -- "known as a distressed debt or sometimes a vulture fund," Mirvis said." As a reminder, Baupost is one of the world's biggest hedge funds at $23 billion, and unlike other fly-by-night one hit wonders, is not down 47% YTD. In fact, the mere name of Seth Klarman being long or short a stock has typically had a huge impact on the stock price. And since by implication in his continued efforts to destabilize the proposed settlement, Klarman is either short BAC, or long the beneficiaries of ongoing, and successful, litigation such as MBIA, this means that the pain for BAC is about to magnified as the traditional 13F clones jump on board the pair trade, and short BAC while going long MBIA et al (incidentally this is half the thesis that we presented back in September 15, when we said to... go long MBIA and short Bank of America).
Walnut Place is involved in separate cases against Bank of America.
In August, 11 entities sharing the name Walnut Place filed to remove the global $8.5 billion settlement case from New York state to federal court, citing its size and complexity.
The settlement was intended to resolve much of Bank of America's remaining legal liability tied to its disastrous 2008 purchase of mortgage lender Countrywide Financial Corp. The deal, which was reached with over 20 institutional investors, would apply to other investors as well.
The decision to remove the case to U.S. District Court for the Southern District of New York is on appeal to the U.S. Court of Appeals for the 2nd Circuit.
Bank of New York Mellon is the trustee for the 530 mortgage securitization trusts covered by the proposed agreement.
Granted, with full Kudos to Reuters, the identity of the mysterious pair trader could have been uncovered long before:
In a May court filing, Bank of America said that Baupost sent letters to the Bank of New York Mellon, claiming it was a certificate holder and that loans in two trusts did not comply with representations and warranties made by Countrywide Home Loans. They said appraisals were inflated and other information had been misrepresented.
Baupost demanded the trustee give notice of the alleged breaches to Countrywide, according to the document, and require Countrywide to repurchase the loans. On December 21, 2010, the trustee received a letter concerning one of the trusts from entities including the "Walnut Place" entities.
"The Walnut Place entities claimed to have been assigned Baupost's interest in that trust," the document said.
Either way, now that it is known that the nemesis of Bank of America is one of the truly most successful investors in history, Brian Moynihan's life just got much more difficult.