Will Banks Mark ABS To The Citadel-E*Trade Market?

Discussion in 'Wall St. News' started by ASusilovic, Nov 29, 2007.

  1. As has now been widely reported, Citadel has swooped down into E*Trade's coffers and delivered the internet bank and brokerage $2.5 billion in cash. Investors seem to like this deal, pushing up E*Trade's share price in early morning trading.

    The lads and lasses at DealBook have a bit of a laugh this morning in a post titled "We're From Citadel, and We're Here To Help." They run through the now familiar litany of Citadel's quick asset purchases from distressed financial firms: Amaranth, Sowood, Sentinel. It would be tempting to describe these as bailouts by Citadel--indeed, DealBook reports that Citadel founder Ken Griffin pitches the deals as "helping" the troubled firms--except that each of the firms subject to Citadel's attention went on to sink even further. Citadel's help often seems to be a prelude to the ash-heap of financial history. E*Trade investors may want to take note: when Ken Griffin is on the phone, you are probably in more trouble than you think.

    As part of the deal, Citadel is paying $800 million for asset backed securities that had a book value of $3 billion. That's close to a 74% haircut for E*Trade. It's worth paying attention to the possibly the secondary effects of this sale, which may be even more profound than most have acknowledged. The market for asset backed securities is one of those severely stricken in the credit crunch, and this trade is one of the few large, publicly announced sales of these assets in recent weeks. Surely those banks and brokerages which have been claiming to be adjusting their valuations to market realities will have to take a second look at their valuations in light of this 74% discount.

    We're not exactly going to hold our collective breath waiting for the banks to mark their ABS portfolios down by two-thirds. If we listen close enough we can already hear them whispering in their conference rooms that E*trade's was a "firesale" and does not reflect underlying market fundamentals. Which makes us wonder whether they are truly confused about the difference between marking-to-model and marking-to-market.


    We’re From Citadel, and We’re Here to Help

  2. Maybe this helps to explain why bonds are getting bid up strong again today, a shift in valuations is a comin' to these books.
  3. Daal


    etrade essentialy marked down its assets but got the payment upfront, its such a huge number that makes me wonder if there is any tangible equity left and what this guys were thinking