Berkshire Hathaway, company of Warren Buffett, was named the lead bidder on Tuesday for the upcoming bankruptcy court auction of Residential Capital’s loan portfolio. They did not unfortunately win lead bidder for Residential Capital’s mortgage division, because that role landed in the lap of another bidder.
The lead was determined by a New York bankruptcy court judge who decided to go with the $1.44 billion bid from Berkshire Hathaway. Another name for this type of a bit is called a stalking horse bid. And in this case they are trying to purchase ResCap’s Loan Portfolio.
The lead bidder for Residential Capital’s mortgage unit goes by the name of Nationstar Mortgage, and they won by putting in a bit of $2.45 billion.
What exactly does a stalking horse bid do? It actually protects a company that is in bankruptcy when they are selling off their assets. They no longer have to worry about any lowball bids, because this protection is in place and it cannot happen because of it.
Other companies are obviously allowed to place competing bids to oppose the stalking horse bid. But no lower bids are guaranteed to take place, and it also does not guarantee that Berkshire Hathaway is going to win the loan portfolio, or that Nationstar Mortgage is guaranteed to win the mortgage assets.
Berkshire Hathaway also made a request to have an outside expert review all of ResCap’s dealings with Ally Financial which is their parent company. They want to know what happened prior to filing bankruptcy in May of this year. This request was approved by the judge since Berkshire Hathaway already owned a large portion of unsecured bonds from Residential Capital.
The problem lies in Residential Capital transferring billions of dollars worth of those bonds to Ally Financial prior to filing bankruptcy and gaining Chapter 11 protection. This move is obviously going to cost Berkshire Hathaway a lot of money so they definitely want to find out the truth so that they can do something about it.