Merrill Unloads $31B Of Mortgage-Tied Junk For 22 Cents On Dollar; Will Finance 75% Of Price; Stays On Hook For Additional Losses

The New York Times reports:

• John P. Grayken made a fortune buying investments no one else seemed to want during the savings and loan debacle in the early 1990s. Now he is trying to repeat that feat by buying the detritus of today’s mortgage crisis.

• On Monday night, Mr. Grayken’s private investment company, Lone Star Funds, agreed to pay $6.2 billion for most of the toxic, mortgage-linked investments held by Merrill Lynch. The deal was classic Grayken: Lone Star, which has a long history of swooping down on troubled assets, paid 22 cents on the dollar for investments with a face value of nearly $31 billion. Mr. Grayken’s firm even got Merrill to finance 75 percent of the purchase price. If the investments turn out to be worthless, Merrill, not Lone Star, will be on the hook for most of the losses.

***

• Companies like Loan Star — vulture investors is Wall Street’s term — root through loan files and try to determine how much the debt is worth. If the vultures buy the loans, they then seek to recoup that value, either by working out the loans with borrowers, pushing the properties through foreclosure or holding on to them until they can be sold. The process is slow and requires navigating the pitfalls of mortgage lending, such as understanding predatory lending laws.

For more, see An Investment Firm That Prospered From Past Crises Turns to Mortgages.