Home/Blog/Trading Ideas/Warren Buffett's Big Bond Bet

Warren Buffett's Big Bond Bet

16 August 2012 in Trading Ideas

Most of us aren’t in the position to reap millions of dollars in profit on a distressed-debt investment, but that doesn’t mean we can’t enjoy watching an old master flex his financial-acumen muscles.

In this case, it’s a recent strategy by Warren Buffett’s Berkshire Hathaway (BRKSA), which holds $900 million of junior secured debt of Residential Capital, formerly known as General Motors Acceptance Corp.

Leading up to the Great Recession, GMAC had been a peddler in subprime mortgages, which ultimately resulted in its reorganization into ResCap , then ResCap declaring bankruptcy earlier this year. According to Learnbonds.com, the company’s assets will be auctioned on Oct. 23.

Meanwhile, the value of ResCap bonds has been rising throughout the year, due largely to rising expectations for the auction. That’s because Berkshire is reportedly bidding against Nationstar Mortgage Holdings, which is seen as the only other serious contender for ResCap’s assets.

Learnbonds.com reports that many believe Berkshire doesn’t even want to win the auction, and is simply driving up the cost for Nationstar. Why? Because the bigger the price paid by Nationstar, the larger the payout for ResCap’s bondholders, including Berkshire.

On the other hand, Learnbonds.com says, if Berkshire wins the auction, Buffett will have picked up a company on the cheap with the prospects of turning a  profit.

See how easy that is?