By Adam Tempkin
NEW YORK, Jan 31 (IFR) - A hedge fund holding legacy
mortgage securities entangled in JP Morgan's proposed private
settlement with institutional investors is offering other
bondholders a whopping 833% premium compared with the bank's
recovery offer in order to get hold of one specific battered
bond, according to offer documents seen by IFR.
On January 22, New York-based Fir Tree Partners made a cash
tender offer to buy some of the six mortgage bonds caught up in
the proposed US$4.5bn settlement from 21 institutional
investors. The settlement was arranged by law firm Gibbs & Bruns
and the investors include BlackRock and Pimco.
The fund's long-term strategy is to wring a better payout
from JP Morgan than what the bank is currently offering
investors in the proposed settlement, which still awaits
approval by trustees.
This is based on two assumptions: that prices on the
securities will rise, given improving housing fundamentals and
MBS valuations; and that JP Morgan can be made to pay more than
agreed in the settlement, as it was even more egregious than
assumed in hiding the quality of shoddy mortgages in the run-up
to the financial crisis.
Fir Tree is telling investors that if they sell, they can
get a better deal upfront rather than waiting for the settlement
to be approved by trustees.
"Fir Tree is offering a better recovery with a more certain
payment outcome on a much faster timeline for the RMBS subject
to our tender than the proposed JPM settlement," said Clinton
Biondo, a managing director at Fir Tree. "Holders will get their
money now, rather than waiting for the settlement payout, which
could potentially take months or years - if it happens at all."
Fir Tree might know what it is talking about. The firm has a
history of investor activism aimed at maximizing the value of
legacy RMBS, and has dug deep into legacy RMBS over the past few
years to unearth faulty practices in the assembly of the
Its new offer - involving one first-lien and five
second-lien RMBS - is for a handful of securities out of 330 JP
Morgan-related crisis-era RMBS that soured during the financial
crisis and are tied up in the settlement. The offer expires on
As of January 7, more than US$700m in aggregate principal
balance was outstanding across the available tranches of the six
securities. Fir Tree is offering investors an 833% premium to
the JP Morgan recovery for tranches from a bond called JPMAC
2006-WMC4, and a 33% premium for the other five bonds.
According to Fir Tree, the complaints filed against JP
Morgan with respect to the trusts that are subject to litigation
allege pervasive breaches ranging from 79% to as much as 98% of
mortgage loans, based upon a review of publicly available
information and/or loan file reviews.
For the JPMAC deal, the fund estimates, the JP Morgan
settlement would pay a recovery equal to 0.75% of trust losses.
By comparison, Fir Tree would pay 7%.
For the other five deals, Fir Tree is offering 10% compared
with the average settlement recovery of 7.5%. Even better, Fir
Tree would hand over the money now.
The fund has made large post-crisis profits by picking apart
and scrutinizing legacy RMBS pools in search of violations of
representations and warranties, as well as other violations of
Over the past four years, Fir Tree has caused - and in many
cases paid for - the re-underwriting of more than 40,000 loans.
Additionally, in recent years the hedge fund has
aggressively pursued putbacks from issuers who may have violated
representations and warranties by issuing RMBS containing weak
credits. A putback means issuers are forced to buy back faulty
Secondary market trading in 2013 of some of the bonds in
question indicates that prices on some of the subprime mortgage
securities are still depressed. Investors said the calculation
of projected potential recoveries on the bonds was not an easy
task, and current prices would need to be taken into
In September, a senior bond of the subprime RMBS titled SACO
2006-5 - from issuer Bear Stearns, which JP Morgan bought during
the crisis - was trading in the low 40 cents on the dollar,
according to Empirasign, which operates a database of trading
prices for securitised products.
On the other hand, a senior bond of SACO 2006-6 was seen
trading in the mid-to-high 80 cents on the dollar in September,
up from US$48.50 in April 2012.
In order to ensure that big issuers such as JP Morgan were
held accountable and that trustees enforced the rights under the
trusts to recover for breaches, Fir Tree, together with a small
number of other institutional investors, in recent years began
to take actions to cause trustees to enforce the trusts' rights
to recover on these breaches.
This process has developed so that it now often involves
litigation against the responsible parties to enforce the
In the case of the JPMAC deal, for example, the securities
administrator, at the direction of other institutional holders,
has initiated litigation against JP Morgan.
Fir Tree has also advised affiliated funds that hold
securities issued by some of the 530 securitization trusts
within the scope of another proposed settlement related to
soured securities issued by Countrywide Financial and Bank of
In a May 2013 letter to the judge governing the approval of
that settlement, Fir Tree strongly urged the court to affirm the
proposed US$8.5bn offer from Bank of America that was hashed out
On Friday, Justice Barbara Kapnick of New York state
authorized the US$8.5bn settlement. However, the judgment
excluded releases on certain loan modification-related claims
for which the court found that the trustee acted "unreasonably
or beyond the bounds of reasonable judgment."