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Big asset management firms have been fighting the eminent domain movement hard, making clear that they will not take massive enforced haircuts sitting down. They have taken the fight to all cities that would dream of using eminent domain to seize underwater mortgages. That fight has landed with a bang in Richmond, CA, which has become the first city to actually try to put the theory into practice.

The battle in this Bay Area city promises to be heated. The city council recently voted to make offers to buy underwater mortgages from lenders. It subsequently sent notices to more than 620 underwater mortgages owners, offering to buy the mortgages for 80 percent of the fair value of the homes.

If the city is rebuffed, the city plans to take the mortgages anyway via eminent domain. It will then work with Mortgage Resolution Partners, which has emerged as a force in the movement, to refinance the loans with help from the Federal Housing Administration.

The council felt compelled to act, as the city continues to struggle under the weight of mortgage debt. Reported, about 12,000 families -- half of all homeowners in the city -- are currently underwater.

Mortgage bond trustees Wells Fargo and Deutsche Bank have sued the city on behalf of big investors, the likes of Pimco, BlackRock and DoubleLine Capital.

The investor group argues that if Richmond is allowed to go ahead "it may result in steeper down payment requirements and higher interest rates." The purpose of the action is to "protect retirees and savers from an unlawful and unconstitutional seizure of private property and prevent severe damage to the country's home mortgage market," according to its complaint, as noted by Reuters. It also argues that the use of eminent domain should not be extended to home mortgages and that the plans are designed to enrich MRP and others.

The city and MRP, however, are proceeding. They say they are within the law and note that all transactions will be made at a decent value. MBS holders thus shouldn't take huge haircuts, though one would expect some losses.

This is going to be interesting. Many other cities are taking note.

Read more about: mortgages, Foreclosure
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Today's Top News

1. Icahn has some legal cards to play

By Jim Kim

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2. Meredith Whitney predicts massive layoffs in banking industry

The conventional wisdom holds that Carl Icahn is on the defensive right now in his effort to buy computer company Dell. Michael Dell and his private equity partner Silver Lake have successfully prodded the board's special committee to make some key voting rule changes and accept his dividend-sweetened bid for the company. With the PC market continuing to deteriorate, his bid is looking better and better in the eyes of some.

But Carl Icahn is a grizzled veteran of these situations, and no less than the Deal Professor thinks he will prevail on at least one issue that he has pushed into the Delaware court system. Icahn has sued with several goals, two of which are to compel the board to prevent the postponement of the annual meetings and to hold the vote on the same day as the annual meeting, preferably sooner rather than later.

"Under Delaware law, an annual meeting must be held within 13 months of the previous one. Dell's last annual meeting was on July 13, 2012. The Delaware courts have held this requirement to be 'virtually absolute.' In past cases, the Delaware courts have repeatedly ordered a meeting held even when there was a good reason for postponement, like the unavailability of financial information or even allegations that another shareholder was out to harm the corporation."

The professor goes on: "In Dell's case, the 13-month period expires on Aug. 13, 2013. Given the law, this likely means it is game over for Dell on its meeting postponement unless the judge finds the narrow exception in Delaware law applicable."

Icahn's strong position on the annual meeting, however, does not mean that he an equally strong position on compelling the two votes to be held on the same day. "One reason is that it would be difficult under the proxy rules to set a record date and distribute a proxy for the annual meeting in time to hold it on the same day as the vote on the buyout."

All in all, it would appear that Michael Dell has the upper hand, but there are some loose ends to be grappled with.

What would really change the game would be a fresh offer from Icahn.

For more:
- here's the article

Read more about: Carl Icahn, Leveraged Buyout
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By Jim Kim

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3. Bank of America's poor showing in Orlando

"We are on the precipice of a seismic down-sizing on Wall Street, the likes of which have never occurred before."

So says Meredith Whitney, the independent analyst who isn't afraid of bold pronouncements. As an independent research shop owner, she has every reason to want to make attention-grabbing predictions. You've got to market. The problem is that some people keep score, and if she racks up enough inaccurate predictions, it might come back to haunt her credibility.

He case for an impending seismic down-sizing, as noted by the New York Post, is that U.S. banks remain overly dependent on the housing market and mortgage securities. "Leverage became America's greatest export," Whitney wrote in her note to clients.

In addition, banks and the stock market are living on borrowed time when it comes to monetary policy. "Because central bankers have done everything to avoid an economic slowdown, they have created a dangerous and highly inter-dependent global [interest] rates' markets and policy has separated from reality," she wrote.

At some point, she believes more carnage will be foisted on banks, even though the biggest banks have enjoyed a revenue and earnings renaissance this year. Whitney predicts that the industry will be forced to cut at least 15 percent of their work force over the next 18 months. Whew!

At this point, that seems far-fetched. Some will be tempted to bring up her recent prediction of doom and gloom in the muni market, a prediction which so far anyway has yet to materialize. We can only hope that she is similarly off base with her employment prediction.

For more:
- here's the article

Read more about: Meredith Whitney, Layoffs
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By Jim Kim

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4. Prime brokers at risk due to SAC Capital?

The street-level legal knife-fighting that goes on over contested mortgages in judicial states is not for the weak. It's really a war of attrition with attorneys aiming to grind each other into submission. For a glimpse of the tactics, we turn to the case of Warren Hougland and Mary Grant-Hougland in Orlando. Court records show that Bank of America approved a mortgage modification plan in January 2011, then "inexplicably" rescinded its approval in May and "kept trying to collect the older, higher mortgage payments despite court orders to the contrary," according to the Orlando Sentinel.

The bank proceeded to miss a lot of court dates, for which it apologized, noting that it never received notice. A bankruptcy judge got so fed up she levied a $220,000 fine on the bank, "one of the heftiest fine on record" in the Orlando court.

That got the attention of the bank's local counsel. They showed up in time to essentially cave in. Bank of America was able to escape the fine "by accepting a mortgage modification it had first approved 21/2 years ago but had been ignoring ever since."

U.S. Bankruptcy Judge Karen Jennemann "approved a joint settlement between the bank and the Orange County couple that confirms the previous mortgage deal. It also calls for the bank to, among other things, pay the couple $72,000 in cash relief and $10,000 to cover legal fees."

In the end, a lot of the nitty-gritty legal work---not to mention foreclosure, eviction and debt collection work---are handled by local contractors. We would like to think that Bank of America would never tolerate professional service incompetence if it knew about it.

For more:
- here's the article

Read more about: Bank of America, mortgages
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By Jim Kim

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5. SAC Capital agrees to protective order

The biggest prime brokers all depend on SAC Capital for a significant chunk of revenue, and they have proven loathe to give that up. Unlike big limited partners, who decided under pressure they had to exit the funds, no doubt leaving some gains on the table, prime brokers have all stuck by the embattled hedge fund firm.

Goldman Sachs President Gary Cohn was willing to state publically that SAC Capital was a "great counterparty," words that someday may come back to haunt him.

So what would it take for prime brokers to willingly give up so much in commission revenue?

CNBC offers an interesting look at the legal exposure that prime brokers conceivably face if SAC Capital is found criminally liable. "Up until Dodd-Frank, they would have enjoyed a certain level of immunity from being contaminated by allegations of insider trading by even a very large client. Under the current law, however, they could potentially be found liable for not taking steps to detect or prevent insider trading. Both executing trades for SAC and lending money to provide leverage for allegedly illicit trades could land prime brokers in hot water," John Carney writes.

"For most insider trading cases, it would be a stretch to blame the broker for not detecting insider trading. But with SAC, things are different. For starters, the hedge fund has a close relationship with its prime brokers—creating both the incentive to turn a blind eye to illicit trading and the opportunity for brokers to detect it. Regulators could argue that the pattern of trading at SAC should have raised "red flags" to the brokers—much as the Justice Department has argued that SAC turned a blind eye to 'red flags' with respect to its traders."

One would think that this is a topic of some urgency within the SEC. The agency may be emboldened by its victory in the Fabrice Touure trial, but my sense is that they pass, unless the evidence is rock solid that pervasive wrong-doing, not just specific trades, was enabled. Prime brokers will likely remain confident enough that they will not be charged. I doubt we'll see any severe the relationship any time soon.

For more:
- here's the article

Read more about: insider trading, prime brokers
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By Jim Kim

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