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  • JWtechy JWtechy Apr 4, 2008 11:16 PM Flag

    Luminent Mortgage Capital v. HSBC Securities

    Excerpt from PM's excellent post...Merit merit merit...mho
    Luminent Mortgage Capital v. HSBC Securities
    Several recent lawsuits turn on the proper valuation of
    and method to liquidate collateralized debt obligations
    and related securities. In Luminent Mortgage Capital v.
    HSBC Securities Inc., the complaint alleges that HSBC
    wrongfully confiscated about $24 million in certain bonds
    its subsidiaries put up as collateral for loans under a repurchase
    agreement by misrepresenting the value of the
    bonds and making improper margin calls.5
    According to the complaint, Minerva Mortgage Finance
    Corp. and Mercury Mortgage Finance Statutory Trust, subsidiaries
    of Luminent, entered into repurchase agreements
    with HSBC whereby they would transfer securities to HSBC
    in exchange for a payment and HSBC would transfer those
    securities back to Minerva or Mercury at a certain date
    or upon demand against the transfer of funds. Plaintiff
    Luminent Mortgage acted as guarantor of Minerva and
    Mercury’s obligations under the repurchase agreements.
    HSBC was given control of the securities transferred to
    it under the repurchase agreements with respect to the
    determination of their value and their disposition in the
    event of an unsatisfied margin call (resulting from the drop
    in the security’s market value below an agreed-upon level).
    On Aug. 3 Mercury executed eight repurchase transactions
    with HSBC relating to eight bonds valued at an aggregate
    of almost $25 million, according to Luminent. Later
    that day the “perceived” crisis concerning the subprime
    market caused HSBC to issue margin calls with respect
    to the bonds, demanding a total of about $5.75 million
    in margin payments. Disagreeing with HSBC’s valuation,
    Luminent refused to make the payment.
    Luminent alleges that weeks later HSBC told it the bonds
    were sold at auction, despite HSBC’s knowledge that
    Luminent disagreed with its valuation. Luminent contends
    that HSBC said it “conveniently” submitted the highest bid
    for all the bonds and alleges breach of contract, breach of
    the covenant of good faith and fair dealing, conversion,
    and unjust enrichment. It claims that the auction process
    was flawed and that HSBC did not seek bids from typical
    commercial holders or act in a commercially reasonable
    manner and in good faith in valuing the securities.6

    HSBC and Barclays will pay this investment I'd bet at least 5X today's PPS. Adds a cushion to the down side protection with a potential sling shot to the upside.

    HSBC stole in assets, 25M, more than the company is worth today. The damages will be 25M plus punative. No doubt the same for Barclays. Likeyly paid out as a special the LLC shares.

    More reward for patience.

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    • Thanks JW. Any idea (ballpark) of a timeframe?

      I know that's a lame question but I don't have the resources to wait this thing out much longer. I know that's stupid and pathetic but reality is reality.

      Thanks again!

      • 1 Reply to glumster66
      • glumster, don't be so glum...

        I hope you bought recent, was looking for a quick pop, and now are impatient.

        The short term trade money on this, and most financials should have been, and has been on the short drop and cover side. Buyers in here, need to be investors.

        The beta and moves off these levels are extreme, so when the sector turns, heading into 2H08, then you can poach pennies on the way up.

        But if you think about the kind of money that sat in these stocks, before the collapse, it was folks who buy bonds, who buy fixed income funds, conservative long term income generating assets. Just like the land behind the house behind the mortgage, all long term investmets. We are like don't get into real estate for a quick flip.

        LUM has a 5 Billion in value sign hung on assets that could be worth, easily 8B, and will let you take ownership interest for .60, an interest that you will be reimbursed for with the settling of these lawsuits alone. An interest, that will pay in hundereds of percent per year returns.

        It's at times like these when we test the true footings of our financial system. Housing price declines leading to forclosures by under water unsuspecting sub prime mortgage holders, were actually never as big a threat to LUM. They have a remarkable loan to value ratio in the 70's, which translates to protection of the mortgage by its backing asset. The real enemy, and you can ask the Thornburg Ceo if he agrees, has been the bigger fish financial institutions.

        We see clearly now from these claims, just how unscrupulous these firms became. Borderline criminal.

        LUM looks for long term resolution by the courts.

        Yet, the bigger fish, like Bear Sterns, gets 24 hour notice, instant on site support, from the FED!

        They saved Bear, could have really saved them a day or 2 earlier, and let hundreds of small financials dissappear from the the landscape. LUM was high quality enough, with high enough quality management, to attract a big brother in ARCO.

        Oh, yeah, your question. Go ahead and sell, LUM is for landlords, not guys just passing by.


    • Will the lawsuits follow and benefit the LLC if and when the shares are converted?
      Or do they need to be settled before a conversion takes place for the current shareholders to benefit?
      Anyone know for sure.

      • 1 Reply to rntww
      • All they will do is add back value to the current assets(or cash on hand). How much of an impact.. well time will truly tell. For now what we have at hand is the negative stockholder equity (310M).

        The below amounts could be added back to the assets to offset the negatives:

        Would be Positives: Mark to market assets retaining value: 481.7M
        Taxes due to non-reit distributions: 21.3M
        Provision for loan losses: 39.3
        Warrant exercised: 51M@0.18
        New Add: Proceeds for share holder lawsuits: 25M + further amounts yet to come.

        Just wanted to add one more thing to PM and JW’s productive posts. Here is the main reason why LUM’s Assets are down from 5.4B to 4.7B (3Q to 4Q). Their 2007-2 trust worth 642.5M was taken off their balance sheet as they were no longer deemed to be the primary beneficiary of that trust. (NOTE 12 pg 92 10K).

        Their portfolio is indeed much more stable that I first thought add to that increased short covering (refer leebret47 post) and things are not as bad as they seem. I believe a lot of people now understand that they are not going to go bankrupt. Add to that the move to a PTP and a period to period based evaluation on whether a dividend is going to be paid out (Note: PTP’s have some rules that they need to abide by themselves and do benefit when they pay an amount out.).

        The Company consolidates variable interest entities if it is the primary beneficiary of the entity. During the third quarter of 2007, the Company sold some of its interests in its securitization trusts that were established to permanently finance its residential mortgage loans. These sales triggered a reconsideration event in accordance with FIN 46. As a result, the Company’s Luminent Mortgage Trust 2007-2, or 2007-2, securitization no longer qualified for consolidation in the Company’s consolidated financial statements. Residential mortgage loans in the amount of $642.5 million were removed from the Company’s balance sheet along with the related debt of $620.8 million. The Company recorded $12.8 million in losses on the deconsolidation of this securitization. The Company continues to hold mortgage-backed securities with a fair value of $6.4 million at December 31, 2007 related to the 2007-2 trust. These assets are included in the Company’s mortgage-backed securities portfolio as of December 31, 2007. All other securitizations other than the 2007-2 securitization continue to qualify for consolidation as of December 31, 2007.

    • Thanks JW for taking the time to read and add commentary