from the previous thread, this is a problem, and requires swift action. As stated many times previously, this Fed needs to WTFU to the possibility of a severe crisis of confidence.
It's this kind of shit that needs to be addressed immediately-
I would imaging that bring marking to model to reality will be similar to what happens in housing values and appraisals in a down market. The homeowners deny reality initially as sales dry up, then one or two below high watermark sales happen when someone is forced to liquidate, at some point enough below market comps come in to reach critical mass and push things over the edge as the appraisals go to hell. In the end the homeowners are forced to face reality by their realtor and/or lenders. The question I have is when have enough sales data points come in for that critical mass to be reached? I think we're close.
"NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Thursday that the central bank remains concerned about consumer spending strength and problems in the financial markets and will stay "alert and flexible" leading up to its next meeting on Dec. 11.
Addressing the Charlotte Chamber of Commerce in North Carolina, the central bank chief spoke candidly about developments since policymakers last met in October, but hedged whether the Fed would continue its interest rate cutting campaign.
"We at the Federal Reserve will have to remain exceptionally alert and flexible as we continue to assess how best to promote sustainable economic growth and price stability in the United States," Bernanke said in prepared remarks ..."
Futures are screaming higher on Bernanke's speech. He made 2 distinct references to equities,
"I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."
"The objectives of the LGIP are as follows:
Provide a short-term, very liquid, high quality investment vehicle to participating local governments
Purchase securities consistent with Section 215.47, Florida Statutes
Operate the pool as a 2a7-like fund using the Securities and Exchange Commission investment requirements for 2a-7"
OT: on Bernanke - since when does the Fed, even just by implication have a mandate to prevent declines in equity prices, IN GENERAL ?
On the issue at hand, I looked at the spreadsheet - Nice work ! and Bejezuz ! Doesn't this set a mark to market now for all the rest - with anything that is less than AA and not a first lien basically of zero value ? Even the AA or better only comes in at 50%.
"Flexible" means that what the Fed governors say in their publicly available pronouncements will have no relationship whatsoever to what they actually do, or to the tip offs they give the big Wall Street institutions.
Bernanke Says Fed Will Judge Risks From `Renewed Turbulence' in Markets. Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has ``affected'' the economy's prospects and policy makers must decide whether the risks between growth and inflation have now shifted.
Policy makers must decide whether they want to be invited to the kind of parties that Alan Greenspan is invited to or the kind of parties that Paul Volcker is invited to.
When many were nearly panicking out of the ETrade the day the "b" word was mentioned, I was calmly driving over to Ameritrade.
I joke. My driving wasn't all that calm!
Of course, I half expected Ameritrade to leverage up a seriously big bet to buy ETrade at the time, thereby moving me from the frying pan directly into the fire (and me being somewhat stuck between the two brokerage firms during the account transfer).
I should just bite the bullet and move all my money into treasuries. I keep thinking I'll need something relatively liquid though, in case bargains really do appear.
The TIP Barclays iShare fund I am in is supposed to be in US treasuries and I am supposed to be safe.
Just wish I wasn't reading the following on a nearly daily basis.
Barclays eases investor concerns The bank faces "a greater range of uncertainty" in 2008 and could not forecast earnings, its finance director, Chris Lucas, said during a conference call.
The headline doesn't quite match the contents in my opinion. Your opinion may vary.
10 cents on the dollar for ABS CDO double A or better... incredible. Single A or lower, basically nothing, zero, nil except for 12 cents on the dollar for Prime residential 1st lien. 12 cents for prime residential, Single A. More incredible. And even more incredible is as more examples of price discovery such as this come public, the major banks still try and claim they are being aggressive writing down these very same asset types by 5%, 10%..... and they're trying to be sincere in that assertion. Could they really be that clued out or that spellbound by their own BS.
Congratulations and thanks to Brian for his great work!
At the root of the value of this spreadsheet is a misunderstanding: the consensus view seems to be that Citadel paid 27 cents on the dollar for subprime garbage. Brian's work shows us that the portfolio had a hefty chunk of prime mortgages, and that therefore the implied marks on the "good stuff" were incredibly low.
Important analysis with obvious implications for the balance sheets of major banks and hedge funds. If nothing else, if the story is picked up on, it will make for some uncomfortable Q&A with the I-banks that report in a few weeks.
Just finished reading Compleat UberNerd explanation of Leverage, Rating and Forced Unwind. Based on that, can't mark to model consider ETrade's particularly distressed situation as a forced seller when coming up with an appropriate/more desirable mark?
Stag- get cash and get ready, this is going to be fun!!!
I can hardly wait to see the quality pickings soon to be available from the high end bk sales in Scottsdale- I want that used 360 bottle Vinotemp cheap.
Banker, is this starting to get you to consider panic mode? Or will a box landing on your desk induce it?
Financial services is essentially dead. I can hardly wait to see how long it takes to start even larger layoffs, followed by Tanta's servicing files put into boxes and driven around looking for a servicer!!!
Check that forty foot parked in the back lot- it might have your files in it!!! As for the fed- liquidity will be at a premium, and they will provide to RTC II.
Zillowed Away will be the next rude fact of life for people as their heloc available funds disappear in 2008!!!
How can you give people any money on their houses when the place next door might be selling for less than the first?!?!?
The time for panic is fast approaching, unless the fed uncorks vast amounts of monetary firepower and buys this stuff at or close to par!!!
Plus the falling dollar!!!
Nothing like a huge crisis to mark the worst presidency since carter/ford!!
Someday this war's gonna end...that wierd music is playing again...we still have to go up the river....
KnotPR, at the risk of coming off as one of those people who spews Warren Buffett mindlessly, one of my favorite quotes is: occasionally, a man must rise above principles
``The effectiveness of monetary policy depends critically on maintaining the public's confidence that inflation will be well- controlled,'' Bernanke said.
It's hard to actually have well-controlled inflation.
So we're settling for well-controlled public confidence about inflation. We don't really know where the inflation will end up, but the public confidence is well-controlled. A large part of being successful is in defining appropriate goals.
The discount broker sold Citadel its $3 billion portfolio of asset backed securities ... at a cut-rate price of around $.50 for AA and higher firsts, and virtually nothing for everything else. The combined discount came to $0.27 on the dollar.
Thanks Brian, kudos. Scary stuff. I would however caution against extrapolating these prices to the bulk of bank portfolios. This was a distressed seller taking what they could get, so i'd guess that cut the prices significantly. But even after bumping these up by say 75%, that still drains over 100% of many bank's capital. Scary Stuff.
I haven't found any SEC filings regarding the haircuts applied to each category so I assume you mucked around with the percentage hair cuts to ensure that the total haircut (27 cents in the dollar / 3 billion to 800 million ) worked out, given the starting portfolio , right ?
The mainstream media are catching on to what's important, some of them. Just caught CBS hourly news on the car radio during the commute, and their first two stories were:
1) It's almost a lock that Bernanke is going to reduce interest rates again, because the economy's tanking, and
2) Housing prices are taking the big dive.
Bill Clinton was right, back in the day -- for Americans, it's the economy (stupid). When this gets a head of steam, Iraq will be pushed to the sidelines for good, along with our fratboy Pres.
Zillowed Away will be the next rude fact of life for people as their heloc available funds disappear in 2008!!!
I just checked. My house has lost $25k in the last 30 days. I've been Zillowed!
I think there's an economist joke here somewhere.
Stagflation is when other people see their home prices decline. Deflation is what happens when YOUR house declines.
If the price of canned goods falls dramatically I shall move to the deflation camp. I'd probably already be there if the CPI tracked home prices directly, and not through owner equivalent rent (to avoid some of the effect of housing booms and busts).
I'm not complaining mind you. It beats the heck out of hyperinflation (since I'm a saver).
from the previous thread, this is a problem, and requires swift action. As stated many times previously, this Fed needs to WTFU to the possibility of a severe crisis of confidence.
It's this kind of shit that needs to be addressed immediately-
The Fed is the problem, not the solution.
It's like running to mommy everytime something goes wrong.
Some day mommy's not going to be there and you won't know what to do because you hid from reality your whole life.
Wow. Nice work, Brian. All I can think is maybe the ABS CDOs and 2nd liens were basically at zero - giving the prime RMBS slightly more value than the 50% you assign.
I haven't looked closely at the ETrade financials. Do they disclose whether the Prime Residential was non-agency? Just based on your spreadsheet I'm assuming that's the case.
The Fed's current situation reminds me of the saying "When all you've got is a hammer, everything looks like a nail."
But ac, a hammer is not very "flexible".
As you know, the Fed actually has a quite varied tool box, should they simply choose to open it. For example, they could make any of a variety of changes to the discount window:
the rate
the duration
the "haircut" for various collateral
the acceptable collateral
the eligible institutions...
If the current crisis persists, I suspect "flexible" means one or more of these will. Although perhaps not on Dec 11.
I'm not complaining mind you. It beats the heck out of hyperinflation (since I'm a saver).
Mark,
Your comment illustrates why the Fed might have trouble combatting deflation if it occurs -- deflation is popular with people who save, and people who save tend to be the people who vote.
what i don't get is this isn't the first time assets have been sold at a discount. its been goin on for months so why should this event force any further writedowns that have heretofore been ignored?
If you only consider prime residential AA or better (assuming everything else is worthless), Citadel basically paid 61 cents on the dollar (3.059 x 0.27 / 1.355). Hard to imagine delinquencies, foreclosures, etc will be so bad as to make this bucket worth only 61%.
Is my thinking on this correct, and if so, shouldn't there have been other buyers competing ? What am I missing ? Cash-strapped all around ?
As you know, the Fed actually has a quite varied tool box, should they simply choose to open it. For example, they could make any of a variety of changes to the discount window:
The point I was trying to make is that this isn't fundamentally an economic or financial problem.
The real issue is that people have forgotten how to use their brains after a generation of bailouts.
What tool does the Fed have that can suddenly make people smart?
I looked through E-Trade's 10-Q as well. I cannot reconcile this spreadsheet with anything I found there. Where is this data? Also if these spreadsheet is correct and they represent real ABS prices, then WM, BAC, LEH, even WFC are utterly insolvent.
There is a lot of confusion in the market and the media right now and I'm highly skeptical this spreadsheet is correct (e.g. "AAA"-rated CDOs of sub-prime and HELOC mezz debt is not the same as "AAA"-rated tranches of sub-prime RMBS, although people talk like they are). After all, even Thornburg sold off much of their mortgage book for 95 cents on the dollar, while under extreme duress.
Can somebody please point me to where this data came from?
as a side comment, if all these prices were new information and tremendously out of line with current model guesses it is like that the ABX indexes would have cratered. instead they are up big. coincident with the stock market's rise has been a huge reversal in the lcdx, though for some reason there does not seem to be the converse of the daily plunge charts.... (guess its for marketing reasons)
BB speech may have had a more salutary effect on equity markets if he had done it before the market opened. Investors now have overnight to digest the fact that he's basically re-iterating what the vice chair said, and that the Fed is going to cut rates again.
"If you only consider prime residential AA or better (assuming everything else is worthless), Citadel basically paid 61 cents on the dollar (3.059 x 0.27 / 1.355). Hard to imagine delinquencies, foreclosures, etc will be so bad as to make this bucket worth only 61%."
yes, this is why the spread sheet must be wrong. the side note says that the average ltv is 71%, meaning that the break even price would be a 100% default rate with a recovery of 42 (.7 *.6) cents on the dollar. unless all the loans are in a single development which has gone bust and is overrun with malarial mosquitoes this is pretty unlikely. if it is true it is probably representative of some fraud rather than a reasonable sampling of the country.
It matches what Brian said the values were as at 9/30/2007. I'm just wondering whether he had actual data or he had to do a 1 equation, many variables exercise ( diaphantine equations anyone ) to convert to break out the haircut composition when all we know is that the 3.0 Billion portfolio was sold for 800 million.
In an effort to be as realistic as possible, lets remember that Citadel isn't going to come in there and pay full price for anything. They aren't up 27% this year paying full price. Combine that with extreme desperation elsewhere in E-trades business and you have a steal not an accurate market price.
I'm not saying the accurate market price is anything near 100 or even 80. We still don't know what the price should be.
Maybe someone would be kind enough to help me understand something I heard this evening. After Bernanke gave his fedspeak saying he would decrease the Fed funds rate, Kudlow and his cronies , with unconcealable excitement, all said that lowering the fed funds rate would stregthen the dollar. I am confused by this as I thought lower interest rates would weaken the USD. What am I missing?
As Jason pointed out this was a distress sale (E-Trade client account assets dropped 15% between 10/31 and 11/27 so they needed to do something pronto if they were still going to have a business), on the other hand, they spoke to 40 potential partners and entertained "a variety of proposals and structures" (the facts and figures here are from today's conference call) so it is unlikely that Citadel's bid was the only one.
The haircuts in the spreadsheets are purely conjecture on my part, informed by some ballpark knowledge of the relative values, that round out to the price that Citadel paid.
Keep in mind as well that the "prime first lien" contained some Alt-A paper. I think it is safe to assume these must be non-agency, but I'm still trying to confirm that.
So to summarize, a direct extrapolation to any other portfolio is hard to make, but this is a very savvy buyer and an arms length transaction so it is probably closer to the truth than the write downs we have seen to date.
I welcome any other data points that anyone has on the collateral.
Thanks.. I found your 9/31/07 values in the 10Q as well - As regards the haircut distribution across the rows and columns, if you can articulate your ballpark knowledge in sentences that can be translated into equations, for example:
Prime residential first lien AA or better sells at a better price than A which sells better than BB which .. etc
or
An AA ABS CDO cannot be worth more than 1/3 than a PRime residential first lien AA and is always worth more than a A first lien
etc.. then I can run my math package to do some "integer programming" and come up with some feasible solutions.
But of course with news so fast pacing, I can understand that solving something that's already history isn't high priority.
how can it be an arms length transaction? you have a distressed motivated seller. its like a foreclosure. you said it yourself, they had to do it to keep some sense of a 'business'.
this is like the forced sale on your block that doesn't really represent the value of your house.
oh wait
nonetheless, to say this was an arm's length transaction kinda clouds the issue
I think that Citadel will clear about 100% on their purchase as the assets were probably sold at half price due to Etrade's financial distress. It will take apprximately 5 years to find out how well Citadel will do.
Where is the data that shows the ABX is "up big" - it's not on the Markit web site?
If these are AA rather than AAA tranches, the securities would be wiped out with total losses of less than 20%. So it is not inconceivable the AA's could lose half their value. If most of them were AAA, they probably would have broken out the AAA in a separate bucket.
I think the real import of the transaction is that the Citadel discount is several multiples of the write down percentages that the big banks have taken to date, and while this is not a perfect comparable for those portfolios, it will not be possible for them and their auditors to pretend the trade didn't take place. Bottom line, write offs in Q4 are going to be bigger than they would have been had this trade not happened.
Thanks for directing me to the supplemental presentation.
This is amazing if E-trade's description of the ABS securities is accurate. Legitimate prime residential 1st lien mortgages are not trading at under 90 cents on the dollar. Not even close. The only the way a portfolio with that sort of LTV could be that cheap would be if they were all early 2006 teaser ARMs from Naples, FL. There must be something we are missing.
Either the portfolio is actually junk or Citidel got a really mediocre deal on the other paper they bought.
Perhaps for optics it made sense to trade the ABS in the hole and announce that, but not to announce the rest of the deal. I can think of several reasons why it would be in both Citadel and E-trade's interest to structure the trade that way.
hi brian,
i think that the answer is that the abs deal was part of the overall transaction and not a standalone. my guess is that they structured it that way for tax purposes. on a quick read which could definitely be wrong it looks like the rest of the deal has citadel putting up about 1.7 billion for about 20 percent of the company. givin that the whole market cap is 2 billion dollars it would appear that they vastly overpaid on that end. perhaps the real values are somewhere between....
50 cents on the dollar for "prime" alt a in bubble areas might not be a great buy.I expect a LOT more jingle mail in a couple of years when those who still are paying $3,600 a month,plus taxes and insurance on a home that is $200k underwater look at the next door neighbor paying $1200 a month rent...and start thinking that maybe they got better things to do with their money than enrich the folks they blame for screwing them.
DC 1000,
It was an arms length transaction, they are unrelated parties and cold hard cash was exchanged for the securities. It may have been a distress sale, but it was arms length.
More to the point, it was a market transaction as opposed to a mark that Merrill or Citi or Countrywide negotiated with itself. The banks are now in a position of having to argue why this shouldn't be used as benchmark as opposed to saying there are no transactions and so we'll use this handy dandy model (that looks like all the other models that have served the entire RMBS and CDO market so well these last few years) to come up with a mark. I think the implications of this are big.
dc100, pretending that low prices are somehow signs of a faulty market works for a little while, for a few transactions between marginal parties. But we're past that now. The market has changed. If banks and others holding mortgage securities believe the new fair market value is higher than in this transaction, then they should prove it by selling to a truly independent buyer for a higher price. Otherwise, this price should give some guidance.
I too found a 27 cents in the dollar far fetched and looked for a counter OVERPAYING balancing deal - meaning looking at the entire deal. Now there has been nothing filed yet at the SEC so everything I say is tentative but this is what we do know about the rest of the deal:
Citadel will also immediately buy $1.6 billion of notes paying annual interest of 12.5%. This includes an investment by funds managed by BlackRock.
And Citadel will buy another $150 million of notes and common stock at final closing, expected by Jan. 15, said E-Trade.
Well 12.5% isn't too shabby so I don't see that as counterbalancing OVERPaying, and in this context, $150 is peanuts ( to my jaundiced and too jaded by underhand dealing it looks like like a 1-1 payoff to someone there ) - so I see NO counterbalancing OVERPAYING - yet.
The overall 27 cents in the $ price paid for an ABS portfolio that was 55% AA or better looks right - at this moment in time. I await the SEC filing with interest.
eric,
if a financial company is bankrupt, the bond holders generally get zero. the non financial assets of etrade don't amount to squat. whatever citadel bought is going to act just like equity in the case of a bk.
You are right about the ABX, the charts don't reflect the last tick.
On the deal, Citadel got senior notes with a 12.5% coupon for the $1.6B, and 20% of the stock thrown in for good measure. I suppose it's possible taxes drove the ABS pricing, but wiping out over half the net worth of a regulated financial institution for the sake of a tax break seems a little far fetched.
when a bank sells a house because they dont want to own it, REO, rather than hang on to it and rent it or do whatever - that sale is not considered an arm's length transaction and NOT considered a comp.
the bank can very well keep it but they dont want to and make a decision that well, its the "right" thing to do, to sell it at a major discount and move on.
not a comp
therefore, my comment was rather tongue-in-cheek - simultaneously talking smack about that thought process and those who espouse it as well as assuming that market rate is set by a transaction that HAD to happen.
etrade doesn't sell now because they want to and think its a good time to sell
the assets they sold were sold and priced due to reasons beyond their fundamentals (which in this case is ironic because the very fundamentals of these assets is why they were in the position in the first place, but this fact is not the exclusive reason they were sold)
point is, the assets were sold for reasons other than it was the right price. they were going to be sold no matter what irrespective of their value
SK summarized it well. Citadel loaned Etrade $1.6Bn. You're right that, besides the interest earned, that loan is about as valuable as common stock in event of bankruptcy.
However, Citadel is investing in Etrade the brokerage, not Etrade the bank; the brokerage earns its money from stock trades, not lending out deposits. Its trading infrastructure and brand name are, apparently in Citadel's view, worth a good deal more than its current market cap.
So I don't see anything abnormal about Citadel's investment, which included only $150M of equity, bringing the total equity stake to 20%.
"The overall 27 cents in the $ price paid for an ABS portfolio that was 55% AA or better looks right - at this moment in time. I await the SEC filing with interest."
i repeat my math exercise above. if we assume everything but the prime first lien paper with 71% LTV was worth 0, then they paid about 61 cents for this paper. i know that the housing market is bad, but to think that the average prime mortgage with 71% LTV is worth 61 cents is just silly. for this to be true it would imply a 100% immediate default rate with a recovery rate of 43%. a little extreme no?
Your math is not right if it is a AA tranche in a securitization. It will get wiped out way before the losses reach the level you are quoting. You can't take the average collateral level losses and apply the same number to a given tranche, you have to know the level at which losses attach to that tranche.
"SK summarized it well. Citadel loaned Etrade $1.6Bn. You're right that, besides the interest earned, that loan is about as valuable as common stock in event of bankruptcy.
However, Citadel is investing in Etrade the brokerage"
The debt is worth more than the common in BK. It is a step ahead of common. So essentially all the exisiting shareholder is screwed if they ever go to BK court. And the debt is at Etrade holding company level which own both brokerage and the bank... WSJ just ran an article about the behind the scene story of how Citadel struck the deal.. It is incredibly bearish for Etrade in that it is a very well examined auction process. A lot of different companies have close look on Etrade's book and only 2 bids on the bank side of the problem. At the end J.C. Flower back off and it's partner Ameritrade off the bid as well and left Citadel as the only bidder that can solve their immediate problem. So if you believe it is a harsh term for Etrade, Etrade have to take it becuase no one else step up after closely examine their book. Anyone still bullish on Etrade??
brian,
if the tranches they own are in the middle of the pool it is fair to look at them about as the same as if they were not tranches but a random sampling of the pool assuming each mortgage is of about the same qualitiy. since the paper is AA and above, i'll take the guess that it is on average at least in the center of the pool, with as much stuff above as below.
now if they owned some bunch of cdo retread junk rated AA, then i can believe the marks, but then the idea that this represented a sampling of first lien mortgages with 71%LTV's would be false.
in the deal, Citadel got senior notes with a 12.5% coupon for the $1.6B, and 20% of the stock thrown in for good measure
Not disagreeing with you about whether the 800B was really a valuation of the ABS or not ( I reckon it was ), but to clarify, that 20% was dilutive and with shares outstanding at 423m, 20% is about 84million which at dilutive rates is 355 million. Even if that can ALL be applied to a "scam" way of underpaying for the ABS's it only changes the 27c in the $ to 40 cents in the dollar.
My argument is worst case( including all possible fiddles ) , on the data so far, they have paid at most 40 cents in the dollar for a portfolio of ABS' that was 55% AA or better. That's STILL SOME haircut !
-Shantanu
{I really should do some discounting of that 20% equity for some loss of per share value risk but anyway )..
I get your point. Here's mine, extending your analogy. Let's say you live in FL or CA and no houses have traded in the last year and then a bank sells a REO down the street at 30-40% off the last trade. Which price is a better approximation of the current market, last year's price or the REO?
I think the bank are using last year's price, or something a lot closer to that than where the market really is. I think this trade will have the effect of forcing the banks' marks a fair way in the direction of the Citadel trade. But I did say in my comment above that a direct extrapolation to any other portfolio is hard to make.
The auditors have already laid down the gauntlet, banding together as a group to say they are not going to be the patsies in this cycle and allow clients to use chandelier bids. The all watched Anderson go down in flames post Enron, some of them used to work there. Won't get fooled again.
They get about 21% of market orders, 14% of non-directed orders etc.. What's the value there on the bid/ask spread and what's the value of Etrades' business relative to other brokerages for Citadel Derivatives Group ? I have no idea. Enquiring minds would want to know to demist this puzzle a little bit more.
then I can run my math package to do some "integer programming" and come up with some feasible solutions.
Sorry for brief technobabble interruption.
Out of the closet: I did a Ph D thesis on integer programming in 1975. I actually think the variables are continuous rather than discrete here.
The more I read the many excellent comments and think about this, the more I think we just don't know. Sure AA tranches could get wiped out in many securitizations according to what is trading on the ABX indices. But typically that would be in a sub-prime securitization of a bad vintage. Not in a real legitimate set of prime mortgages. This whole scenario of ten million people just walking away en masse from their houses is not realistic (maybe 1 million is). The banks and the media have done too good a job attaching a stigma to defaulting, even when it is rational. Retail does not use bankrupcty as a negotiating tool, only sophisticated investors do that.
E-Trade's portfolio was all 2006 and 2007, so all the worst years, and probably 90% ALT-A, applied for over the web from central CA. If it was actually good stuf, they would have broken it out more in the 10-Q. So it was probably not being very accurately characterized in 10-Q, is my guess.
I also think that commenters are being way too quick to assume that the BIG BANKS (BAC, WFC etc...) are ignoring market prices on their portfolios. There is too much at stake for the CEO and CFOs with respect to Sarbanes-Oxley. They'd all rather resign or lose lots of money (since they already have plenty) as opposed to going to jail.
"Only a handful [of prospective buyers] made serious proposals. Of those, nearly all were focused on ETrade's brokerage arm. Acquiring ETrade's bank would have required a buyer to mark its troubled debt-security portfolio to current market prices, making it unattractive to most strategic buyers."
=======================
Out of the closet: I did a Ph D thesis on integer programming in 1975. I actually think the variables are continuous rather than discrete here.
Billy Hill
Glad you are out of the closet. I don't disagree, what I mean is that since I don't want to hunt for feasible solutions to say 3 dec. places, I'll FORCE the problem into the integer space( you know haircuts allowed only at 10% 11% etc, NOT 10.11,10.342, 10.2 etc..) Then the feasible solutions will come out a lot faster on my PC. I might even be able to do it by hand ( And if I miss an optimal solution at a haircut combination of 10.234 of AA first lien and 34.345 of BBB etc, so be it )
Given that constraining of the problem and your expertise, maybe YOU'd like to tackle it ?
I don't see how you can take the $800 million 'sale' price outside of the context of the entire deal.
Citidel got $3 billion of assets marked down to $.8, a loan (preferred stock) of $1.75 and stock worth about $.4 at $5/share.
They give etrade $2.55b cash.
What is the mark to market of the etrade securities? $1.75 + $.4 or $2.15?
I don't think they could sell the preferred for anywhere near $1.75, even with warrents which is what the etrade stock effectively amounts to.
The economics of the deal would be identical if they had paid $2 billion for the securities and loaned them $.55 billion less an adjustment for the interest.
Citadel isn't a buy and hold outfit so the preferred interest isn't going to amount to all that much before etrade is flipped.
However, the low stated basis for the securities give them a lot of flexibility. Unless/until etrade tanks, they don't have to worry too much about writing down the securities, and they can book the preferred stock at cost. Maybe they can even sell some of the securities at a proft sooner rather then later.
This is based on the idea that etrade has lots of loans sitting on its books and the stock, preferred and common may be worth $0, but won't be faced with the difficult mark to market horrors every quarter. The difficult chunk -- ie the cdo's, have been heavily written down.
The brokerage business stand alone might be worth $5 + billion or more, but the remaining loans could totally wipe this out.
Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8.
I think it's also important to note that Citadel already had a large position in ETrade that had suffered losses (per the WSJ article), and so this "bailout" was also (they hope) a bailout of Citadel's existing position. That undoubtedly affected Citadel's appetite for a transaction. Does anyone know what Citadel's ownership stake in ETrade was before this deal? I guess you could back into that number, given that WSJ says their stake will now be close to 20%.
I think the real question is whether this will calm down the run on ETrade, or whether investors will still wonder whether it is safe to stay, given uncertainty regarding the remaining ETrade mortgage portfolio. It is a lot easier to switch than analyze.
Citadel is getting senior debt, not preferred stock. In addition, Blackrock is investing in the debt and warrants deal, but not the ABS purchase, so the debt and warrants would appear to be a deal that stands on its own terms.
loan (preferred stock) of $1.75 and stock worth about $.4 at $5/share
Can you give us a link to where it was called preferred stock please ? All the links I have calls it notes, e.g.
" Trade will get $2.4 billion in cash immediately, $1.6 billion of which is capital to be exchanged for 12.5% of the company's stock and senior unsecured notes. In addition, Citadel will buy ETrade's troubled asset-backed securities portfolio, which has a face value of about $3 billion, for $800 million. Later, upon closing, Citadel will give ETrade $150 million in exchange for 12.5% of stock and senior unsecured notes. In total, ETrade will give Citadel a stake of 20.0%."
" Citadel Storms E*Trade - Forbes.com
Also the notes pay off at 12.5% which should be included in the payoff side.
You need to provide more data to back up your statement that:
"Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8 "
The best, by stretching a LOT, I've come up with is 40 cents in the dollar i.e. 1.2 billion ( see my comments passim)
Or maybe the way to state it is that etrade, even after dumping the cdo's has a significant default risk, and if etrade blows up, Citadel paid $2.55, not $.8 billion for the cdo's.
==========================
Does anyone know what Citadel's ownership stake in E*Trade was before this deal? I guess you could back into that number, given that WSJ says their stake will now be close to 20%.
R
Metoo. I went looking for it and my scans produced no data. I agree - as you said a factor to factor in is the idea that Citadel wants to protect/salvage its existing stake - I'd love to know what they bought it at too. Any ideas anybody ?
It shows bad trader discipline though, IMO. TAKE YOUR LOSS ! THE FIRST CUT IS THE CHEAPEST.. How many more homilies are there like that ? But then I note that the Citadel guy was 39 years old... Sigh.
"Can you give us a link to where it was called preferred stock please ? All the links I have calls it notes, e.g."
My mistake. I was thinking if it seemed reasonable that they could get a 'cash infusion' on a stand alone basis similar to C.
"Blackrock is investing in the debt and warrants deal, but not the ABS purchase, so the debt and warrants would appear to be a deal that stands on its own terms."
I missed this. If the Blackrock investment is significant enough, that pretty much invalidates my point that the debt didn't make sense on a stand alone basis.
"You need to provide more data to back up your statement that:
"Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8 ""
All I am saying is that if etrade can't pay back the debt, then the ABS's cost whatever cash Citadel paid etrade, which is the $.8 + $1.4 + $.15 less whatever interest they collect and whatever Blackrock invested. I'm also assuming that if they can't pay back the debt, the common stock is also worthless.
The probability of default on the debt is a matter of opinion. Obviously senior notes are higher on the food chain then preferred, but they still have a lot of loans including a lot of home equity loans. Having casually glanced at their assets, I wouldn't be anxious to loan them money at the stated terms.
As a general rule panic is usually a dumb approach and I avoid it. You however seem to enjoy the reference almost as much as your tage line, so keep on keepin' on.
I would like to point out that Citadel actually bought the portfolio for a lot less than 27 cents on the dollar! An adjustment needs to be made for the 20% equity stake that they receive, whose value was built into both the ABS portfolio and the 12.5% bond deal. Using some rough assumptions on what the 20% equity is worth, and the fact that an actual bond deal would probably be done at a 20% coupon (not 12.5%), the ABS portfolio was purchased at something close to 17 cents on the dollar.
They structured it this way to anchor the "high" price of 27 cents on the dollar in people's minds.
The snooty attitude of bankers and financiers who thought they were cleverer than everyone else is largely to blame for the global credit squeeze disaster, Germanys finance minister has said.
In an interview with the Financial Times, Peer Steinbrück played down the impact on Europes largest economy of the turmoil but said steps had to be taken to raise risk awareness.
German proposals before the squeeze for increasing transparency had been mocked and sometimes deliberately misunderstood as an attempt to impose regulation rather than voluntary codes, Mr Steinbrück said, but were now winning support.
In a swipe at finance industry leaders, he said the quality of managers had proved a weakness. The snooty attitude that we have sometimes seen under the motto of we are cleverer than the others ended in disaster, he said."
If that helps:
Etrade sold their ABS book, they did not sell their [4 times bigger]mortgage [mbs] book.
spreadsheet and extrapolations about mortgage values most likely way off base.
But what (specific) policies would qualify as "flexible"? Or "inflexible"?
At risk of repeating what has already been said, it means cutting interest rates when inflation is high or rising, or raising them when inflation is low or falling. It seems that the Fed suffers from assymetrical flexibility (or assymetrical inflexibility if you prefer), which means that it can lower rates to counter a slowdown in the economy in the face of inflation risks, but is unable to increase rates to counter asset bubles in the absence of immediate inflation risks.
======================================
"You need to provide more data to back up your statement that:
"Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8 ""
All I am saying is that if etrade can't pay back the debt, then the ABS's cost whatever cash Citadel paid etrade, which is the $.8 + $1.4 + $.15 less whatever interest they collect and whatever Blackrock invested. I'm also assuming that if they can't pay back the debt, the common stock is also worthless.
I see where you are coming from - though it is rather unusual to value a particular component on the basis that the another component of the assets you bought will end up being worthless .
My biggest issue with that valuation metric is that that reasoning then bumps up the values of the Etrade's ABS's - and how this way of valuation affects a mark to market for other market participants.( They will have to an equivalent worthless transaction to bump up their ABS value )- doesn't that seem ABSURD to you ? but since Banker agrees with you then I'll say no more.
Today's morning performance by Larry Kudlow is champion btw- talk about absurd !
================================
If that helps:
Etrade sold their ABS book, they did not sell their [4 times bigger]mortgage [mbs] book.
spreadsheet and extrapolations about mortgage values most likely way off base.
jck
Doesn't help yet. All the serious participants in this discussion are referring to the 10Q or similar doc and we are all talking of their ABS(and CDO) book - if it helps, then its about JUST their ABS book.
Nobody is making arguments about "mortgage values".
People ARE making statements about the mark to market importance of this to OTHER market participants ABS and CDO book.
Here is a piece from their 10-q:
"Subsequent to September 30, 2007, we observed a significant decline in the fair value of our asset-backed
securities portfolio, specifically our asset-backed CDO and second-lien securities. Our total exposure to assetbacked CDO and second-lien securities at September 30, 2007 was approximately $450 million in amortized cost.
In addition to our asset-backed CDO and second lien portfolio, we hold approximately $2.6 billion in
amortized cost in other asset-backed securities, mainly securities backed by prime residential first-lien
mortgages. These securities have also declined in fair value subsequent to September 30, 2007; however, the
decline has not been as significant."
So out of the ABS portfolio, $450 ml ABS CDO are worthless and for the remaining $2.6 bn "the decline has not been significant"
Brian:
Are you sure you are not confusing MBS and ABS in your calculations ?
I remind you that the MBS portfolio was NOT sold and ticks in at $12 billion.Only the $3 billion ABS portfolio which itself has 2 parts ABS CDOs(worthless) and plain ABS(not as worthless as you think) has been sold.
Are you trying to say that the ABS dropped 70% in 3 weeks while the MBS was downmarked by less than 3%.
Sorry, I am not buying it, there is something here.
jck,
I think they both have suffered substantial hits in the last 3 weeks. Please take a look a the Wells Fargo write down of its HELOC portfolio. If you apply the discount they took to E-Trade's HELOC portfolio, then E-Trade has some serious capital adequacy issues.
My point was that their comment about "the decline has been significant" was made three weeks ago in a very different market environment.
I think the following passages from the 10Q (on the same page as the language you quoted above) are worth restating:
"Due to the inherent leverage within our asset-backed securities, even a slight deterioration in the performance of the underlying loans could result in a significant deterioration in the performance of our asset-backed securities. Therefore, continued deterioration in market conditions would likely cause additional write downs in our securities portfolio, primarily in our asset-backed portfolio.
The declines in fair value followed a series of rating agency downgrades of securities in this sector and occurred after the end of the third quarter. We believe there will likely be additional downgrades by the rating agencies of securities in this sector. Overall, approximately $208 million of our asset-backed securities were downgraded during the month of October and through November 7, 2007, including approximately $50 million of AAA rated asset-backed CDOs that were downgraded to below investment grade.
We expect these declines will result in significant write downs to these securities during the fourth quarter; however, we cannot predict the amount for the fourth quarter as the write downs will depend on future market developments, including potential additional downgrades"
It is clear from the remittance reports that the performance of the underlying collateral has deteriorated in the last month and that more downgrades are coming. So we can debate whether 27 cents on the dollar is the right mark, but it's clear there has been a signficant decline in value of the ABS in the last month.
I hope Mitch took his GC with him. That woman was a cast-iron beeatch. I'll shed no tears over E*Trade. They went out of their way to be obnoxious on every deal they made. Serves 'em right.
"All I am saying is that if etrade can't pay back the debt, then the ABS's cost whatever cash Citadel paid etrade, which is the $.8 + $1.4 + $.15 less whatever interest they collect and whatever Blackrock invested. I'm also assuming that if they can't pay back the debt, the common stock is also worthless."
No, this is not true. When you own the senior debt, you are several step ahead of common holder in BK proceeding. Citadel can easily own majority of Etrade asset becuase of the debt while the shareholder come out with nothing. The deal is terrible for Etrade but excellent for Citadel. The stock will guarantee them upside potential if Etrade can pick itself up and right the ship. The debt will gurantee them 12.5% a year if Etrade survive. If Etrade don't survive, they have a call on the asset ahead of any shareholder. And the ABS that they bought gurantee them immediate profit if they take the time to sell it slowly. It is terrible for Etrade becuase they have a forced sales situation. The sales did not reflect the value of the underlying ABS, it is more of an issue of the confident crisis that no one is willing to own this stuff except the vulture.
No, your democratically elected government is the problem and a ignorant populous that has the government they deserve.
\t
Um like those who don't know the difference between "populous" and "populace?"
One additional point, on the conference call, E*Trade said they need OTS approval to sell the ABS portfolio which increases the likelihood that the the price paid was a market price as opposed to a tax driven price.
Brian:
Thx for your answers.My view is that the CDOs and 2nd subprime 1st were all marked to 0, logical as etrade was most likely to be holding residual or equity tranches.
That leaves the main ($2.2bl) prime res 1st lien at 63 cents on the dollar more or less...and they still hold their mbs portfolio.Real market value ? A few month ago I posted a story about a CDO that was bid at 60 by dealers and was liquidated at 145 !!! Alea | Page not found
That's how the CDO market "works", add to that the reputation of Citadel as a grave dancer and you should take the market price with a large pinch of salt.
K at 12:45 on 11.30 (everybody else should probably skip this):
since I don't want to hunt for feasible solutions to say 3 dec. places, I'll FORCE the problem into the integer space( you know haircuts allowed only at 10% 11% etc, NOT 10.11,10.342, 10.2 etc..) ...( And if I miss an optimal solution at a haircut combination of 10.234 of AA first lien and 34.345 of BBB etc, so be it )
maybe YOU'd like to tackle it ?
This thread is probably dead, with the Florida run and the alleged freeze, among other hotter topics.
I supect the intended problem is something like (weight times one
class of paper) time (amount of paper)
summed over all classes totals to
something, together with inequality restrictions saying which classes have higher weight than which other classes. I'm not sure what would be an "optimal" solution within that, howeer.
I don't mean to be rude, but you don't seem to understand the purpose of integer programming. It's not needed when the underlying problem is a continuous or finely discretized one.
In addition, you don't seem to understand how integer programming works. It is significantly harder to find an integer solution than the closest approximate floating point one. There is no point to doing the extra work in this case.
It is certainly not the case that integer programming will give you a closes integer match to a real valued solution, as you seem to imagine. Sometimes it helps to understand how those blackbox tools actually work.
anonymous, I agree with you that this is not really an integer programming problem. However, you could assume that, when Brian created his spreadsheet, he did things like "prime is 5/4 times the price of alt-A" and "alt-A is 7/3 times the price of subprime".
You could view the task of trying to reverse-engineer the spreadsheet to figure out the weight fractions, using the smallest possible numbers as an integer programming problem.I admit that it is a rather artificial one. I'm sure Brian would be happy to tell us these details.
Hi! What a great blog. I do know something about the company you are talking about here. I learned it from this great site Pissed Consumer - Consumer Reports, Complaints and Company reviewsEtrade specializes in different financial services: trading and investing, retirement, banking and credit cards, planning, mortgage and home equity. Company's major business is on-line discount stock brokerage service, which I unfortunately decided to get engaged with.
At the risk of being pedantic, shouldn't it be "The importance of these marks can't be overstated."
from the previous thread, this is a problem, and requires swift action. As stated many times previously, this Fed needs to WTFU to the possibility of a severe crisis of confidence.
It's this kind of shit that needs to be addressed immediately-
https://www.sbafla.com/pool/
Anonymous, yes, thanks. I just reread the post myself and I started laughing!
risk capital, I'll have more soon on that issue very soon. That is a huge story.
Best to all.
I would imaging that bring marking to model to reality will be similar to what happens in housing values and appraisals in a down market. The homeowners deny reality initially as sales dry up, then one or two below high watermark sales happen when someone is forced to liquidate, at some point enough below market comps come in to reach critical mass and push things over the edge as the appraisals go to hell. In the end the homeowners are forced to face reality by their realtor and/or lenders. The question I have is when have enough sales data points come in for that critical mass to be reached? I think we're close.
OT - Bernanke stating that Fed is "alert" and "flexible"
Bernanke: Fed 'alert' and 'flexible' - Nov. 29, 2007
"NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Thursday that the central bank remains concerned about consumer spending strength and problems in the financial markets and will stay "alert and flexible" leading up to its next meeting on Dec. 11.
Addressing the Charlotte Chamber of Commerce in North Carolina, the central bank chief spoke candidly about developments since policymakers last met in October, but hedged whether the Fed would continue its interest rate cutting campaign.
"We at the Federal Reserve will have to remain exceptionally alert and flexible as we continue to assess how best to promote sustainable economic growth and price stability in the United States," Bernanke said in prepared remarks ..."
God, i'd hate to be BB
Futures are screaming higher on Bernanke's speech. He made 2 distinct references to equities,
"I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead."
Shocking admissions.
[OT] I have a question.
What does the word "flexible" mean in the context of monetary policy?
"Nimble" I think I understand; it implies moving around a lot.
But what (specific) policies would qualify as "flexible"? Or "inflexible"?
CR-
This just blows me away from that link-
"The objectives of the LGIP are as follows:
Provide a short-term, very liquid, high quality investment vehicle to participating local governments
Purchase securities consistent with Section 215.47, Florida Statutes
Operate the pool as a 2a7-like fund using the Securities and Exchange Commission investment requirements for 2a-7"
Nice analysis/summary, Brian.
Seems reasonable/plausible.
Time to take your hits, schmucks!
OT: on Bernanke - since when does the Fed, even just by implication have a mandate to prevent declines in equity prices, IN GENERAL ?
On the issue at hand, I looked at the spreadsheet - Nice work ! and Bejezuz ! Doesn't this set a mark to market now for all the rest - with anything that is less than AA and not a first lien basically of zero value ? Even the AA or better only comes in at 50%.
This IS a huge story.
-K
FYI. Florida freezes fund after withdrawals. Schools unable to withdraw money to meet payrolls (Bloomberg TV interview)
Yup, they "invested" in SIVs
Florida Halts Withdrawals From Local Investment Fund (Update3) - Bloomberg.com
"Flexible" means that what the Fed governors say in their publicly available pronouncements will have no relationship whatsoever to what they actually do, or to the tip offs they give the big Wall Street institutions.
Time for an analogy quiz. (Remember when the SAT was actually challenging?)
"very liquid" : "halt redemptions" ::
(a) "nimble" : 25 bps
(b) "flexible" : 50 bps plus chop the discount rate
(c) "AAA" : 27 cents on the dollar
(d) "South America" : "take it away"
Bloomberg's headline on BB's address:
Bernanke Says Fed Will Judge Risks From `Renewed Turbulence' in Markets. Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has ``affected'' the economy's prospects and policy makers must decide whether the risks between growth and inflation have now shifted.
Her's the link:
Bernanke Says Fed to Judge Market `Turbulence' Impact (Update2) - Bloomberg.com
Brian -
Thanks!
So much for contained. Most of their "junk" was in fact "quality". OMG.
Policy makers must decide whether they want to be invited to the kind of parties that Alan Greenspan is invited to or the kind of parties that Paul Volcker is invited to.
When many were nearly panicking out of the ETrade the day the "b" word was mentioned, I was calmly driving over to Ameritrade.
I joke. My driving wasn't all that calm!
Of course, I half expected Ameritrade to leverage up a seriously big bet to buy ETrade at the time, thereby moving me from the frying pan directly into the fire (and me being somewhat stuck between the two brokerage firms during the account transfer).
I should just bite the bullet and move all my money into treasuries. I keep thinking I'll need something relatively liquid though, in case bargains really do appear.
The TIP Barclays iShare fund I am in is supposed to be in US treasuries and I am supposed to be safe.
Just wish I wasn't reading the following on a nearly daily basis.
Barclays eases investor concerns
The bank faces "a greater range of uncertainty" in 2008 and could not forecast earnings, its finance director, Chris Lucas, said during a conference call.
The headline doesn't quite match the contents in my opinion. Your opinion may vary.
10 cents on the dollar for ABS CDO double A or better... incredible. Single A or lower, basically nothing, zero, nil except for 12 cents on the dollar for Prime residential 1st lien. 12 cents for prime residential, Single A. More incredible. And even more incredible is as more examples of price discovery such as this come public, the major banks still try and claim they are being aggressive writing down these very same asset types by 5%, 10%..... and they're trying to be sincere in that assertion. Could they really be that clued out or that spellbound by their own BS.
Prime Residential First Lien should be marked at 35% instead of 50%. Change that and you will be closer.
Congratulations and thanks to Brian for his great work!
At the root of the value of this spreadsheet is a misunderstanding: the consensus view seems to be that Citadel paid 27 cents on the dollar for subprime garbage. Brian's work shows us that the portfolio had a hefty chunk of prime mortgages, and that therefore the implied marks on the "good stuff" were incredibly low.
Important analysis with obvious implications for the balance sheets of major banks and hedge funds. If nothing else, if the story is picked up on, it will make for some uncomfortable Q&A with the I-banks that report in a few weeks.
flexible is usually the nice way of saying I have principles, but I may misplace them from time to time.
Just finished reading Compleat UberNerd explanation of Leverage, Rating and Forced Unwind. Based on that, can't mark to model consider ETrade's particularly distressed situation as a forced seller when coming up with an appropriate/more desirable mark?
Stag- get cash and get ready, this is going to be fun!!!
I can hardly wait to see the quality pickings soon to be available from the high end bk sales in Scottsdale- I want that used 360 bottle Vinotemp cheap.
Banker, is this starting to get you to consider panic mode? Or will a box landing on your desk induce it?
Financial services is essentially dead. I can hardly wait to see how long it takes to start even larger layoffs, followed by Tanta's servicing files put into boxes and driven around looking for a servicer!!!
Check that forty foot parked in the back lot- it might have your files in it!!! As for the fed- liquidity will be at a premium, and they will provide to RTC II.
Zillowed Away will be the next rude fact of life for people as their heloc available funds disappear in 2008!!!
How can you give people any money on their houses when the place next door might be selling for less than the first?!?!?
The time for panic is fast approaching, unless the fed uncorks vast amounts of monetary firepower and buys this stuff at or close to par!!!
Plus the falling dollar!!!
Nothing like a huge crisis to mark the worst presidency since carter/ford!!
Someday this war's gonna end...that wierd music is playing again...we still have to go up the river....
KnotPR, at the risk of coming off as one of those people who spews Warren Buffett mindlessly, one of my favorite quotes is: occasionally, a man must rise above principles
Montana investment fund sees withdrawals in wake of Florida woes - MarketWatch
Montana fund sees $247 mln of withdrawals
Florida's investment woes spark subprime fears in other states
``The effectiveness of monetary policy depends critically on maintaining the public's confidence that inflation will be well- controlled,'' Bernanke said.
It's hard to actually have well-controlled inflation.
So we're settling for well-controlled public confidence about inflation. We don't really know where the inflation will end up, but the public confidence is well-controlled. A large part of being successful is in defining appropriate goals.
Nothing like a huge crisis to mark the worst presidency since carter/ford!!
I beg to differ, worst president ever. Worst ruler since caligula.
God, i'd hate to be BB
The Fed's current situation reminds me of the saying "When all you've got is a hammer, everything looks like a nail."
Brian,
Nice work. Dow Jones should have reported:
The discount broker sold Citadel its $3 billion portfolio of asset backed securities ... at a cut-rate price of around $.50 for AA and higher firsts, and virtually nothing for everything else. The combined discount came to $0.27 on the dollar.
Cheers,
Thanks Brian, kudos. Scary stuff. I would however caution against extrapolating these prices to the bulk of bank portfolios. This was a distressed seller taking what they could get, so i'd guess that cut the prices significantly. But even after bumping these up by say 75%, that still drains over 100% of many bank's capital. Scary Stuff.
Brian,
I haven't found any SEC filings regarding the haircuts applied to each category so I assume you mucked around with the percentage hair cuts to ensure that the total haircut (27 cents in the dollar / 3 billion to 800 million ) worked out, given the starting portfolio , right ?
-K
The mainstream media are catching on to what's important, some of them. Just caught CBS hourly news on the car radio during the commute, and their first two stories were:
1) It's almost a lock that Bernanke is going to reduce interest rates again, because the economy's tanking, and
2) Housing prices are taking the big dive.
Bill Clinton was right, back in the day -- for Americans, it's the economy (stupid). When this gets a head of steam, Iraq will be pushed to the sidelines for good, along with our fratboy Pres.
Now, now, give the devil his due. He's an evil frat boy Pres.
AllenM,
Zillowed Away will be the next rude fact of life for people as their heloc available funds disappear in 2008!!!
I just checked. My house has lost $25k in the last 30 days. I've been Zillowed!
I think there's an economist joke here somewhere.
Stagflation is when other people see their home prices decline. Deflation is what happens when YOUR house declines.
If the price of canned goods falls dramatically I shall move to the deflation camp. I'd probably already be there if the CPI tracked home prices directly, and not through owner equivalent rent (to avoid some of the effect of housing booms and busts).
I'm not complaining mind you. It beats the heck out of hyperinflation (since I'm a saver).
from the previous thread, this is a problem, and requires swift action. As stated many times previously, this Fed needs to WTFU to the possibility of a severe crisis of confidence.
It's this kind of shit that needs to be addressed immediately-
The Fed is the problem, not the solution.
It's like running to mommy everytime something goes wrong.
Some day mommy's not going to be there and you won't know what to do because you hid from reality your whole life.
ac,
I think your mommy reference is a good one.
Q: How do you get a child to take more risks?
A: Don't ever let him fall.
He'll keep testing the limits and determine that he's invulnerable.
Wow. Nice work, Brian. All I can think is maybe the ABS CDOs and 2nd liens were basically at zero - giving the prime RMBS slightly more value than the 50% you assign.
I haven't looked closely at the ETrade financials. Do they disclose whether the Prime Residential was non-agency? Just based on your spreadsheet I'm assuming that's the case.
The Fed's current situation reminds me of the saying "When all you've got is a hammer, everything looks like a nail."
But ac, a hammer is not very "flexible".
As you know, the Fed actually has a quite varied tool box, should they simply choose to open it. For example, they could make any of a variety of changes to the discount window:
If the current crisis persists, I suspect "flexible" means one or more of these will. Although perhaps not on Dec 11.
I'm not complaining mind you. It beats the heck out of hyperinflation (since I'm a saver).
Mark,
Your comment illustrates why the Fed might have trouble combatting deflation if it occurs -- deflation is popular with people who save, and people who save tend to be the people who vote.
Text of Bernanke's speech today:
FRB: Bernanke, National and regional economic overview
Fed Chief Offers New Hint on a Rate Cut (NY Times)
Fed Chief Reinforces Suggestions of Rate Cut - NY Times
A Haircut?
These guys are lucky if they had any scalp left...
"The Fed is the problem"
No, your democratically elected government is the problem and a ignorant populous that has the government they deserve.
what i don't get is this isn't the first time assets have been sold at a discount. its been goin on for months so why should this event force any further writedowns that have heretofore been ignored?
Brian, thanks for the analysis.
Looks like Citadel got a good deal...
If you only consider prime residential AA or better (assuming everything else is worthless), Citadel basically paid 61 cents on the dollar (3.059 x 0.27 / 1.355). Hard to imagine delinquencies, foreclosures, etc will be so bad as to make this bucket worth only 61%.
Is my thinking on this correct, and if so, shouldn't there have been other buyers competing ? What am I missing ? Cash-strapped all around ?
But ac, a hammer is not very "flexible".
As you know, the Fed actually has a quite varied tool box, should they simply choose to open it. For example, they could make any of a variety of changes to the discount window:
The point I was trying to make is that this isn't fundamentally an economic or financial problem.
The real issue is that people have forgotten how to use their brains after a generation of bailouts.
What tool does the Fed have that can suddenly make people smart?
I looked through E-Trade's 10-Q as well. I cannot reconcile this spreadsheet with anything I found there. Where is this data? Also if these spreadsheet is correct and they represent real ABS prices, then WM, BAC, LEH, even WFC are utterly insolvent.
There is a lot of confusion in the market and the media right now and I'm highly skeptical this spreadsheet is correct (e.g. "AAA"-rated CDOs of sub-prime and HELOC mezz debt is not the same as "AAA"-rated tranches of sub-prime RMBS, although people talk like they are). After all, even Thornburg sold off much of their mortgage book for 95 cents on the dollar, while under extreme duress.
Can somebody please point me to where this data came from?
as a side comment, if all these prices were new information and tremendously out of line with current model guesses it is like that the ABX indexes would have cratered. instead they are up big. coincident with the stock market's rise has been a huge reversal in the lcdx, though for some reason there does not seem to be the converse of the daily plunge charts.... (guess its for marketing reasons)
BB speech may have had a more salutary effect on equity markets if he had done it before the market opened. Investors now have overnight to digest the fact that he's basically re-iterating what the vice chair said, and that the Fed is going to cut rates again.
Kudlow got a boner this evening.
"flexible" means:
BOHICA!
"If you only consider prime residential AA or better (assuming everything else is worthless), Citadel basically paid 61 cents on the dollar (3.059 x 0.27 / 1.355). Hard to imagine delinquencies, foreclosures, etc will be so bad as to make this bucket worth only 61%."
yes, this is why the spread sheet must be wrong. the side note says that the average ltv is 71%, meaning that the break even price would be a 100% default rate with a recovery of 42 (.7 *.6) cents on the dollar. unless all the loans are in a single development which has gone bust and is overrun with malarial mosquitoes this is pretty unlikely. if it is true it is probably representative of some fraud rather than a reasonable sampling of the country.
============================
re:
Can somebody please point me to where this data came from?
Lordkar
You can find the ABS breakdown in the 10Q on page 24 at
a5520447ex99_2.htm
It matches what Brian said the values were as at 9/30/2007. I'm just wondering whether he had actual data or he had to do a 1 equation, many variables exercise ( diaphantine equations anyone ) to convert to break out the haircut composition when all we know is that the 3.0 Billion portfolio was sold for 800 million.
-K
In an effort to be as realistic as possible, lets remember that Citadel isn't going to come in there and pay full price for anything. They aren't up 27% this year paying full price. Combine that with extreme desperation elsewhere in E-trades business and you have a steal not an accurate market price.
I'm not saying the accurate market price is anything near 100 or even 80. We still don't know what the price should be.
The real issue is that people have forgotten how to use their brains after a generation of bailouts.
What tool does the Fed have that can suddenly make people smart?
ac | 11.29.07 - 9:37 pm | #
Well saiud. A good ass kicking is the only real cure for that disease. Liquidate...
Why Citadel Pounced On Wounded E*Trade - WSJ.com
Maybe someone would be kind enough to help me understand something I heard this evening. After Bernanke gave his fedspeak saying he would decrease the Fed funds rate, Kudlow and his cronies , with unconcealable excitement, all said that lowering the fed funds rate would stregthen the dollar. I am confused by this as I thought lower interest rates would weaken the USD. What am I missing?
Folks,
The data concerning the outstanding amounts in the various categories were taken from the 10/17 presentation that accompanied the Q3 earnings release on slide 24 http://files.shareholder.com/downloads/ET/180804533x0x137810/4cac596b-d1c0-4269-ac64-fc9560e85f03/SPD%2010.17.07.pdf
As Jason pointed out this was a distress sale (E-Trade client account assets dropped 15% between 10/31 and 11/27 so they needed to do something pronto if they were still going to have a business), on the other hand, they spoke to 40 potential partners and entertained "a variety of proposals and structures" (the facts and figures here are from today's conference call) so it is unlikely that Citadel's bid was the only one.
The haircuts in the spreadsheets are purely conjecture on my part, informed by some ballpark knowledge of the relative values, that round out to the price that Citadel paid.
Keep in mind as well that the "prime first lien" contained some Alt-A paper. I think it is safe to assume these must be non-agency, but I'm still trying to confirm that.
So to summarize, a direct extrapolation to any other portfolio is hard to make, but this is a very savvy buyer and an arms length transaction so it is probably closer to the truth than the write downs we have seen to date.
I welcome any other data points that anyone has on the collateral.
re: Brian
Thanks.. I found your 9/31/07 values in the 10Q as well - As regards the haircut distribution across the rows and columns, if you can articulate your ballpark knowledge in sentences that can be translated into equations, for example:
Prime residential first lien AA or better sells at a better price than A which sells better than BB which .. etc
or
An AA ABS CDO cannot be worth more than 1/3 than a PRime residential first lien AA and is always worth more than a A first lien
etc.. then I can run my math package to do some "integer programming" and come up with some feasible solutions.
But of course with news so fast pacing, I can understand that solving something that's already history isn't high priority.
It would be interesting though.
-K
how can it be an arms length transaction? you have a distressed motivated seller. its like a foreclosure. you said it yourself, they had to do it to keep some sense of a 'business'.
this is like the forced sale on your block that doesn't really represent the value of your house.
oh wait
nonetheless, to say this was an arm's length transaction kinda clouds the issue
I think that Citadel will clear about 100% on their purchase as the assets were probably sold at half price due to Etrade's financial distress. It will take apprximately 5 years to find out how well Citadel will do.
David in ct,
Where is the data that shows the ABX is "up big" - it's not on the Markit web site?
If these are AA rather than AAA tranches, the securities would be wiped out with total losses of less than 20%. So it is not inconceivable the AA's could lose half their value. If most of them were AAA, they probably would have broken out the AAA in a separate bucket.
I think the real import of the transaction is that the Citadel discount is several multiples of the write down percentages that the big banks have taken to date, and while this is not a perfect comparable for those portfolios, it will not be possible for them and their auditors to pretend the trade didn't take place. Bottom line, write offs in Q4 are going to be bigger than they would have been had this trade not happened.
Thanks for directing me to the supplemental presentation.
This is amazing if E-trade's description of the ABS securities is accurate. Legitimate prime residential 1st lien mortgages are not trading at under 90 cents on the dollar. Not even close. The only the way a portfolio with that sort of LTV could be that cheap would be if they were all early 2006 teaser ARMs from Naples, FL. There must be something we are missing.
Either the portfolio is actually junk or Citidel got a really mediocre deal on the other paper they bought.
Perhaps for optics it made sense to trade the ABS in the hole and announce that, but not to announce the rest of the deal. I can think of several reasons why it would be in both Citadel and E-trade's interest to structure the trade that way.
hi brian,
i think that the answer is that the abs deal was part of the overall transaction and not a standalone. my guess is that they structured it that way for tax purposes. on a quick read which could definitely be wrong it looks like the rest of the deal has citadel putting up about 1.7 billion for about 20 percent of the company. givin that the whole market cap is 2 billion dollars it would appear that they vastly overpaid on that end. perhaps the real values are somewhere between....
50 cents on the dollar for "prime" alt a in bubble areas might not be a great buy.I expect a LOT more jingle mail in a couple of years when those who still are paying $3,600 a month,plus taxes and insurance on a home that is $200k underwater look at the next door neighbor paying $1200 a month rent...and start thinking that maybe they got better things to do with their money than enrich the folks they blame for screwing them.
according to markit
the aaa 7-02 closed at 73.56
the low of the week was 66.41.
so about a 10% bounce.
other series up about the same percent.
DC 1000,
It was an arms length transaction, they are unrelated parties and cold hard cash was exchanged for the securities. It may have been a distress sale, but it was arms length.
More to the point, it was a market transaction as opposed to a mark that Merrill or Citi or Countrywide negotiated with itself. The banks are now in a position of having to argue why this shouldn't be used as benchmark as opposed to saying there are no transactions and so we'll use this handy dandy model (that looks like all the other models that have served the entire RMBS and CDO market so well these last few years) to come up with a mark. I think the implications of this are big.
dc100, pretending that low prices are somehow signs of a faulty market works for a little while, for a few transactions between marginal parties. But we're past that now. The market has changed. If banks and others holding mortgage securities believe the new fair market value is higher than in this transaction, then they should prove it by selling to a truly independent buyer for a higher price. Otherwise, this price should give some guidance.
david in CT, the $1.75Bn Citadel investment in ETrade is debt, not equity. So the fact that ETrade has only a $2Bn market cap is irrelevant.
re various sceptics - e.g. Lordkar, dave_in_ct
I too found a 27 cents in the dollar far fetched and looked for a counter OVERPAYING balancing deal - meaning looking at the entire deal. Now there has been nothing filed yet at the SEC so everything I say is tentative but this is what we do know about the rest of the deal:
Citadel will also immediately buy $1.6 billion of notes paying annual interest of 12.5%. This includes an investment by funds managed by BlackRock.
And Citadel will buy another $150 million of notes and common stock at final closing, expected by Jan. 15, said E-Trade.
Well 12.5% isn't too shabby so I don't see that as counterbalancing OVERPaying, and in this context, $150 is peanuts ( to my jaundiced and too jaded by underhand dealing it looks like like a 1-1 payoff to someone there ) - so I see NO counterbalancing OVERPAYING - yet.
The overall 27 cents in the $ price paid for an ABS portfolio that was 55% AA or better looks right - at this moment in time. I await the SEC filing with interest.
-K
eric,
if a financial company is bankrupt, the bond holders generally get zero. the non financial assets of etrade don't amount to squat. whatever citadel bought is going to act just like equity in the case of a bk.
David in ct,
You are right about the ABX, the charts don't reflect the last tick.
On the deal, Citadel got senior notes with a 12.5% coupon for the $1.6B, and 20% of the stock thrown in for good measure. I suppose it's possible taxes drove the ABS pricing, but wiping out over half the net worth of a regulated financial institution for the sake of a tax break seems a little far fetched.
i dont think you get my point.
when a bank sells a house because they dont want to own it, REO, rather than hang on to it and rent it or do whatever - that sale is not considered an arm's length transaction and NOT considered a comp.
the bank can very well keep it but they dont want to and make a decision that well, its the "right" thing to do, to sell it at a major discount and move on.
not a comp
therefore, my comment was rather tongue-in-cheek - simultaneously talking smack about that thought process and those who espouse it as well as assuming that market rate is set by a transaction that HAD to happen.
etrade doesn't sell now because they want to and think its a good time to sell
the assets they sold were sold and priced due to reasons beyond their fundamentals (which in this case is ironic because the very fundamentals of these assets is why they were in the position in the first place, but this fact is not the exclusive reason they were sold)
point is, the assets were sold for reasons other than it was the right price. they were going to be sold no matter what irrespective of their value
SK summarized it well. Citadel loaned Etrade $1.6Bn. You're right that, besides the interest earned, that loan is about as valuable as common stock in event of bankruptcy.
However, Citadel is investing in Etrade the brokerage, not Etrade the bank; the brokerage earns its money from stock trades, not lending out deposits. Its trading infrastructure and brand name are, apparently in Citadel's view, worth a good deal more than its current market cap.
So I don't see anything abnormal about Citadel's investment, which included only $150M of equity, bringing the total equity stake to 20%.
"The overall 27 cents in the $ price paid for an ABS portfolio that was 55% AA or better looks right - at this moment in time. I await the SEC filing with interest."
i repeat my math exercise above. if we assume everything but the prime first lien paper with 71% LTV was worth 0, then they paid about 61 cents for this paper. i know that the housing market is bad, but to think that the average prime mortgage with 71% LTV is worth 61 cents is just silly. for this to be true it would imply a 100% immediate default rate with a recovery rate of 43%. a little extreme no?
David,
Your math is not right if it is a AA tranche in a securitization. It will get wiped out way before the losses reach the level you are quoting. You can't take the average collateral level losses and apply the same number to a given tranche, you have to know the level at which losses attach to that tranche.
"SK summarized it well. Citadel loaned Etrade $1.6Bn. You're right that, besides the interest earned, that loan is about as valuable as common stock in event of bankruptcy.
However, Citadel is investing in Etrade the brokerage"
The debt is worth more than the common in BK. It is a step ahead of common. So essentially all the exisiting shareholder is screwed if they ever go to BK court. And the debt is at Etrade holding company level which own both brokerage and the bank... WSJ just ran an article about the behind the scene story of how Citadel struck the deal.. It is incredibly bearish for Etrade in that it is a very well examined auction process. A lot of different companies have close look on Etrade's book and only 2 bids on the bank side of the problem. At the end J.C. Flower back off and it's partner Ameritrade off the bid as well and left Citadel as the only bidder that can solve their immediate problem. So if you believe it is a harsh term for Etrade, Etrade have to take it becuase no one else step up after closely examine their book. Anyone still bullish on Etrade??
Why Citadel Pounced On Wounded E*Trade - WSJ.com
brian,
if the tranches they own are in the middle of the pool it is fair to look at them about as the same as if they were not tranches but a random sampling of the pool assuming each mortgage is of about the same qualitiy. since the paper is AA and above, i'll take the guess that it is on average at least in the center of the pool, with as much stuff above as below.
now if they owned some bunch of cdo retread junk rated AA, then i can believe the marks, but then the idea that this represented a sampling of first lien mortgages with 71%LTV's would be false.
Re: Brian
in the deal, Citadel got senior notes with a 12.5% coupon for the $1.6B, and 20% of the stock thrown in for good measure
Not disagreeing with you about whether the 800B was really a valuation of the ABS or not ( I reckon it was ), but to clarify, that 20% was dilutive and with shares outstanding at 423m, 20% is about 84million which at dilutive rates is 355 million. Even if that can ALL be applied to a "scam" way of underpaying for the ABS's it only changes the 27c in the $ to 40 cents in the dollar.
My argument is worst case( including all possible fiddles ) , on the data so far, they have paid at most 40 cents in the dollar for a portfolio of ABS' that was 55% AA or better. That's STILL SOME haircut !
-Shantanu
{I really should do some discounting of that 20% equity for some loss of per share value risk but anyway )..
DC,
I get your point. Here's mine, extending your analogy. Let's say you live in FL or CA and no houses have traded in the last year and then a bank sells a REO down the street at 30-40% off the last trade. Which price is a better approximation of the current market, last year's price or the REO?
I think the bank are using last year's price, or something a lot closer to that than where the market really is. I think this trade will have the effect of forcing the banks' marks a fair way in the direction of the Citadel trade. But I did say in my comment above that a direct extrapolation to any other portfolio is hard to make.
The auditors have already laid down the gauntlet, banding together as a group to say they are not going to be the patsies in this cycle and allow clients to use chandelier bids. The all watched Anderson go down in flames post Enron, some of them used to work there. Won't get fooled again.
One other thing to be aware of here is that Citadel Derivatives Group LLC ( yes its part of Citadel Investment Group) gets orders routed by E*trade. The ratio of orders is at
https://content.etrade.com/etrade/powerpage/pdf/OrderRouting11AC6.pdf
They get about 21% of market orders, 14% of non-directed orders etc.. What's the value there on the bid/ask spread and what's the value of Etrades' business relative to other brokerages for Citadel Derivatives Group ? I have no idea. Enquiring minds would want to know to demist this puzzle a little bit more.
-K
then I can run my math package to do some "integer programming" and come up with some feasible solutions.
Sorry for brief technobabble interruption.
Out of the closet: I did a Ph D thesis on integer programming in 1975. I actually think the variables are continuous rather than discrete here.
The more I read the many excellent comments and think about this, the more I think we just don't know. Sure AA tranches could get wiped out in many securitizations according to what is trading on the ABX indices. But typically that would be in a sub-prime securitization of a bad vintage. Not in a real legitimate set of prime mortgages. This whole scenario of ten million people just walking away en masse from their houses is not realistic (maybe 1 million is). The banks and the media have done too good a job attaching a stigma to defaulting, even when it is rational. Retail does not use bankrupcty as a negotiating tool, only sophisticated investors do that.
E-Trade's portfolio was all 2006 and 2007, so all the worst years, and probably 90% ALT-A, applied for over the web from central CA. If it was actually good stuf, they would have broken it out more in the 10-Q. So it was probably not being very accurately characterized in 10-Q, is my guess.
I also think that commenters are being way too quick to assume that the BIG BANKS (BAC, WFC etc...) are ignoring market prices on their portfolios. There is too much at stake for the CEO and CFOs with respect to Sarbanes-Oxley. They'd all rather resign or lose lots of money (since they already have plenty) as opposed to going to jail.
DC,
From the WSJ story mentioned above:
"Only a handful [of prospective buyers] made serious proposals. Of those, nearly all were focused on ETrade's brokerage arm. Acquiring ETrade's bank would have required a buyer to mark its troubled debt-security portfolio to current market prices, making it unattractive to most strategic buyers."
=======================
Out of the closet: I did a Ph D thesis on integer programming in 1975. I actually think the variables are continuous rather than discrete here.
Billy Hill
Glad you are out of the closet. I don't disagree, what I mean is that since I don't want to hunt for feasible solutions to say 3 dec. places, I'll FORCE the problem into the integer space( you know haircuts allowed only at 10% 11% etc, NOT 10.11,10.342, 10.2 etc..) Then the feasible solutions will come out a lot faster on my PC. I might even be able to do it by hand ( And if I miss an optimal solution at a haircut combination of 10.234 of AA first lien and 34.345 of BBB etc, so be it )
Given that constraining of the problem and your expertise, maybe YOU'd like to tackle it ?
-K
I don't see how you can take the $800 million 'sale' price outside of the context of the entire deal.
Citidel got $3 billion of assets marked down to $.8, a loan (preferred stock) of $1.75 and stock worth about $.4 at $5/share.
They give etrade $2.55b cash.
What is the mark to market of the etrade securities? $1.75 + $.4 or $2.15?
I don't think they could sell the preferred for anywhere near $1.75, even with warrents which is what the etrade stock effectively amounts to.
The economics of the deal would be identical if they had paid $2 billion for the securities and loaned them $.55 billion less an adjustment for the interest.
Citadel isn't a buy and hold outfit so the preferred interest isn't going to amount to all that much before etrade is flipped.
However, the low stated basis for the securities give them a lot of flexibility. Unless/until etrade tanks, they don't have to worry too much about writing down the securities, and they can book the preferred stock at cost. Maybe they can even sell some of the securities at a proft sooner rather then later.
This is based on the idea that etrade has lots of loans sitting on its books and the stock, preferred and common may be worth $0, but won't be faced with the difficult mark to market horrors every quarter. The difficult chunk -- ie the cdo's, have been heavily written down.
The brokerage business stand alone might be worth $5 + billion or more, but the remaining loans could totally wipe this out.
Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8.
is the implied default rate realistic even in the most bearish of cases?
I think it's also important to note that Citadel already had a large position in ETrade that had suffered losses (per the WSJ article), and so this "bailout" was also (they hope) a bailout of Citadel's existing position. That undoubtedly affected Citadel's appetite for a transaction. Does anyone know what Citadel's ownership stake in ETrade was before this deal? I guess you could back into that number, given that WSJ says their stake will now be close to 20%.
I think the real question is whether this will calm down the run on ETrade, or whether investors will still wonder whether it is safe to stay, given uncertainty regarding the remaining ETrade mortgage portfolio. It is a lot easier to switch than analyze.
Zigurrat,
Citadel is getting senior debt, not preferred stock. In addition, Blackrock is investing in the debt and warrants deal, but not the ABS purchase, so the debt and warrants would appear to be a deal that stands on its own terms.
==================
Zigurrat
loan (preferred stock) of $1.75 and stock worth about $.4 at $5/share
Can you give us a link to where it was called preferred stock please ? All the links I have calls it notes, e.g.
"
Trade will get $2.4 billion in cash immediately, $1.6 billion of which is capital to be exchanged for 12.5% of the company's stock and senior unsecured notes. In addition, Citadel will buy ETrade's troubled asset-backed securities portfolio, which has a face value of about $3 billion, for $800 million. Later, upon closing, Citadel will give ETrade $150 million in exchange for 12.5% of stock and senior unsecured notes. In total, ETrade will give Citadel a stake of 20.0%."
"
Citadel Storms E*Trade - Forbes.com
Also the notes pay off at 12.5% which should be included in the payoff side.
You need to provide more data to back up your statement that:
"Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8 "
The best, by stretching a LOT, I've come up with is 40 cents in the dollar i.e. 1.2 billion ( see my comments passim)
-K
Or maybe the way to state it is that etrade, even after dumping the cdo's has a significant default risk, and if etrade blows up, Citadel paid $2.55, not $.8 billion for the cdo's.
==========================
Does anyone know what Citadel's ownership stake in E*Trade was before this deal? I guess you could back into that number, given that WSJ says their stake will now be close to 20%.
R
Metoo. I went looking for it and my scans produced no data. I agree - as you said a factor to factor in is the idea that Citadel wants to protect/salvage its existing stake - I'd love to know what they bought it at too. Any ideas anybody ?
It shows bad trader discipline though, IMO. TAKE YOUR LOSS ! THE FIRST CUT IS THE CHEAPEST.. How many more homilies are there like that ? But then I note that the Citadel guy was 39 years old... Sigh.
-K
"Can you give us a link to where it was called preferred stock please ? All the links I have calls it notes, e.g."
My mistake. I was thinking if it seemed reasonable that they could get a 'cash infusion' on a stand alone basis similar to C.
"Blackrock is investing in the debt and warrants deal, but not the ABS purchase, so the debt and warrants would appear to be a deal that stands on its own terms."
I missed this. If the Blackrock investment is significant enough, that pretty much invalidates my point that the debt didn't make sense on a stand alone basis.
"You need to provide more data to back up your statement that:
"Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8 ""
All I am saying is that if etrade can't pay back the debt, then the ABS's cost whatever cash Citadel paid etrade, which is the $.8 + $1.4 + $.15 less whatever interest they collect and whatever Blackrock invested. I'm also assuming that if they can't pay back the debt, the common stock is also worthless.
The probability of default on the debt is a matter of opinion. Obviously senior notes are higher on the food chain then preferred, but they still have a lot of loans including a lot of home equity loans. Having casually glanced at their assets, I wouldn't be anxious to loan them money at the stated terms.
Allen,
As a general rule panic is usually a dumb approach and I avoid it. You however seem to enjoy the reference almost as much as your tage line, so keep on keepin' on.
BTW Ziggurat is closest to correct on how to look at this in my view.
I would like to point out that Citadel actually bought the portfolio for a lot less than 27 cents on the dollar! An adjustment needs to be made for the 20% equity stake that they receive, whose value was built into both the ABS portfolio and the 12.5% bond deal. Using some rough assumptions on what the 20% equity is worth, and the fact that an actual bond deal would probably be done at a 20% coupon (not 12.5%), the ABS portfolio was purchased at something close to 17 cents on the dollar.
They structured it this way to anchor the "high" price of 27 cents on the dollar in people's minds.
"Snooty bankers blamed for crisis
The snooty attitude of bankers and financiers who thought they were cleverer than everyone else is largely to blame for the global credit squeeze disaster, Germanys finance minister has said.
In an interview with the Financial Times, Peer Steinbrück played down the impact on Europes largest economy of the turmoil but said steps had to be taken to raise risk awareness.
German proposals before the squeeze for increasing transparency had been mocked and sometimes deliberately misunderstood as an attempt to impose regulation rather than voluntary codes, Mr Steinbrück said, but were now winning support.
In a swipe at finance industry leaders, he said the quality of managers had proved a weakness. The snooty attitude that we have sometimes seen under the motto of we are cleverer than the others ended in disaster, he said."
Source:
FT.com / Registration / Sign-up
9a9446ae-9ec8-11dc-b4e4-0000779fd2ac.html
If that helps:
Etrade sold their ABS book, they did not sell their [4 times bigger]mortgage [mbs] book.
spreadsheet and extrapolations about mortgage values most likely way off base.
At risk of repeating what has already been said, it means cutting interest rates when inflation is high or rising, or raising them when inflation is low or falling. It seems that the Fed suffers from assymetrical flexibility (or assymetrical inflexibility if you prefer), which means that it can lower rates to counter a slowdown in the economy in the face of inflation risks, but is unable to increase rates to counter asset bubles in the absence of immediate inflation risks.
======================================
"You need to provide more data to back up your statement that:
"Meaning that etrade effectively sold the cdo's for $2.55 billion, not $.8 ""
All I am saying is that if etrade can't pay back the debt, then the ABS's cost whatever cash Citadel paid etrade, which is the $.8 + $1.4 + $.15 less whatever interest they collect and whatever Blackrock invested. I'm also assuming that if they can't pay back the debt, the common stock is also worthless.
I see where you are coming from - though it is rather unusual to value a particular component on the basis that the another component of the assets you bought will end up being worthless .
My biggest issue with that valuation metric is that that reasoning then bumps up the values of the Etrade's ABS's - and how this way of valuation affects a mark to market for other market participants.( They will have to an equivalent worthless transaction to bump up their ABS value )- doesn't that seem ABSURD to you ? but since Banker agrees with you then I'll say no more.
Today's morning performance by Larry Kudlow is champion btw- talk about absurd !
We'll see.
-K
================================
If that helps:
Etrade sold their ABS book, they did not sell their [4 times bigger]mortgage [mbs] book.
spreadsheet and extrapolations about mortgage values most likely way off base.
jck
Doesn't help yet. All the serious participants in this discussion are referring to the 10Q or similar doc and we are all talking of their ABS(and CDO) book - if it helps, then its about JUST their ABS book.
Nobody is making arguments about "mortgage values".
People ARE making statements about the mark to market importance of this to OTHER market participants ABS and CDO book.
What statement can you assert in THAT context ?
-K
Here is a piece from their 10-q:
"Subsequent to September 30, 2007, we observed a significant decline in the fair value of our asset-backed
securities portfolio, specifically our asset-backed CDO and second-lien securities. Our total exposure to assetbacked CDO and second-lien securities at September 30, 2007 was approximately $450 million in amortized cost.
In addition to our asset-backed CDO and second lien portfolio, we hold approximately $2.6 billion in
amortized cost in other asset-backed securities, mainly securities backed by prime residential first-lien
mortgages. These securities have also declined in fair value subsequent to September 30, 2007; however, the
decline has not been as significant."
So out of the ABS portfolio, $450 ml ABS CDO are worthless and for the remaining $2.6 bn "the decline has not been significant"
JCK,
Those statements in the 10Q were as of Nov 9. There is a lot of water under the bridge since then.
Brian:
Are you sure you are not confusing MBS and ABS in your calculations ?
I remind you that the MBS portfolio was NOT sold and ticks in at $12 billion.Only the $3 billion ABS portfolio which itself has 2 parts ABS CDOs(worthless) and plain ABS(not as worthless as you think) has been sold.
Are you trying to say that the ABS dropped 70% in 3 weeks while the MBS was downmarked by less than 3%.
Sorry, I am not buying it, there is something here.
jck,
I think they both have suffered substantial hits in the last 3 weeks. Please take a look a the Wells Fargo write down of its HELOC portfolio. If you apply the discount they took to E-Trade's HELOC portfolio, then E-Trade has some serious capital adequacy issues.
My point was that their comment about "the decline has been significant" was made three weeks ago in a very different market environment.
I think the following passages from the 10Q (on the same page as the language you quoted above) are worth restating:
"Due to the inherent leverage within our asset-backed securities, even a slight deterioration in the performance of the underlying loans could result in a significant deterioration in the performance of our asset-backed securities. Therefore, continued deterioration in market conditions would likely cause additional write downs in our securities portfolio, primarily in our asset-backed portfolio.
The declines in fair value followed a series of rating agency downgrades of securities in this sector and occurred after the end of the third quarter. We believe there will likely be additional downgrades by the rating agencies of securities in this sector. Overall, approximately $208 million of our asset-backed securities were downgraded during the month of October and through November 7, 2007, including approximately $50 million of AAA rated asset-backed CDOs that were downgraded to below investment grade.
We expect these declines will result in significant write downs to these securities during the fourth quarter; however, we cannot predict the amount for the fourth quarter as the write downs will depend on future market developments, including potential additional downgrades"
It is clear from the remittance reports that the performance of the underlying collateral has deteriorated in the last month and that more downgrades are coming. So we can debate whether 27 cents on the dollar is the right mark, but it's clear there has been a signficant decline in value of the ABS in the last month.
I hope Mitch took his GC with him. That woman was a cast-iron beeatch. I'll shed no tears over E*Trade. They went out of their way to be obnoxious on every deal they made. Serves 'em right.
"All I am saying is that if etrade can't pay back the debt, then the ABS's cost whatever cash Citadel paid etrade, which is the $.8 + $1.4 + $.15 less whatever interest they collect and whatever Blackrock invested. I'm also assuming that if they can't pay back the debt, the common stock is also worthless."
No, this is not true. When you own the senior debt, you are several step ahead of common holder in BK proceeding. Citadel can easily own majority of Etrade asset becuase of the debt while the shareholder come out with nothing. The deal is terrible for Etrade but excellent for Citadel. The stock will guarantee them upside potential if Etrade can pick itself up and right the ship. The debt will gurantee them 12.5% a year if Etrade survive. If Etrade don't survive, they have a call on the asset ahead of any shareholder. And the ABS that they bought gurantee them immediate profit if they take the time to sell it slowly. It is terrible for Etrade becuase they have a forced sales situation. The sales did not reflect the value of the underlying ABS, it is more of an issue of the confident crisis that no one is willing to own this stuff except the vulture.
No, your democratically elected government is the problem and a ignorant populous that has the government they deserve.
\t
Um like those who don't know the difference between "populous" and "populace?"
ExMBS Lawyer,
Care to elucidate?
One additional point, on the conference call, E*Trade said they need OTS approval to sell the ABS portfolio which increases the likelihood that the the price paid was a market price as opposed to a tax driven price.
Brian:
Thx for your answers.My view is that the CDOs and 2nd subprime 1st were all marked to 0, logical as etrade was most likely to be holding residual or equity tranches.
That leaves the main ($2.2bl) prime res 1st lien at 63 cents on the dollar more or less...and they still hold their mbs portfolio.Real market value ? A few month ago I posted a story about a CDO that was bid at 60 by dealers and was liquidated at 145 !!!
Alea | Page not found
That's how the CDO market "works", add to that the reputation of Citadel as a grave dancer and you should take the market price with a large pinch of salt.
K at 12:45 on 11.30 (everybody else should probably skip this):
since I don't want to hunt for feasible solutions to say 3 dec. places, I'll FORCE the problem into the integer space( you know haircuts allowed only at 10% 11% etc, NOT 10.11,10.342, 10.2 etc..) ...( And if I miss an optimal solution at a haircut combination of 10.234 of AA first lien and 34.345 of BBB etc, so be it )
maybe YOU'd like to tackle it ?
This thread is probably dead, with the Florida run and the alleged freeze, among other hotter topics.
I supect the intended problem is something like (weight times one
class of paper) time (amount of paper)
summed over all classes totals to
something, together with inequality restrictions saying which classes have higher weight than which other classes. I'm not sure what would be an "optimal" solution within that, howeer.
SK,
I don't mean to be rude, but you don't seem to understand the purpose of integer programming. It's not needed when the underlying problem is a continuous or finely discretized one.
In addition, you don't seem to understand how integer programming works. It is significantly harder to find an integer solution than the closest approximate floating point one. There is no point to doing the extra work in this case.
It is certainly not the case that integer programming will give you a closes integer match to a real valued solution, as you seem to imagine. Sometimes it helps to understand how those blackbox tools actually work.
anonymous, I agree with you that this is not really an integer programming problem. However, you could assume that, when Brian created his spreadsheet, he did things like "prime is 5/4 times the price of alt-A" and "alt-A is 7/3 times the price of subprime".
You could view the task of trying to reverse-engineer the spreadsheet to figure out the weight fractions, using the smallest possible numbers as an integer programming problem.I admit that it is a rather artificial one. I'm sure Brian would be happy to tell us these details.
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