Yeah but....there's a tax break for that kind of loss (800 million?) and Citadel got lots of shares. I would be very skeptical that this was the true cost of that portfolio.
The bubbleheads say this is a one off because of E Trades desperation. The people I try to talk to are a bunch clueless sheep. I thought maybe with Dancing with the Stars over people would pay more attention but I was wrong.
We are in an F-16 with the afterburner kicked in going straight into the ground and maybe .1% of the population has a damn clue. Some days I wish I was in the 99.9% trying to spend the last 10 dollars of credit I have left that is spread across 5 CC.
So basically I was right then? ETrade took the view that the equity cushions were at risk and thus decided better to sell now whilst there is still a buyer than be left with potentally unsellable exposure?
It feels right...
I guess this means we really are all sub-prime and that the view for the housing sector - even the 'safe' compoenents are at risk (or at least viewed as such).
We are in an F-16 with the afterburner kicked in going straight into the ground and maybe .1% of the population has a damn clue
Funny you should mention the F-16. Experts say that at 0:23 in this video, the F-16 pilot had committed his aircraft to hitting the ground; even though he had full control of the plane, the physics dictated the pilot could only choose the impact axis, nothing else.
The PtB are seemingly in a similar position WRT the larger economy, but who knows, maybe we'll catch a magic productivity updraft like what happened in the 90s.
The comments in the Times and elsewhere are highly speculative. The security by security composition of ETrade's portfolio isn't public. Much of the subprime backed paper may have been AAA. Some of the lower rated paper may have been riskier slices of prime mortgage cash flows (riskier because of structuring issues having nothing to do with defaults) that were performing just fine. All I would assume is that Citadel got the paper at a huge discount because the more reasonable 30% - 40% writedown that ETrade Bank needed to take this Q would have blown its regulatory cap absent the cash infusion from the Citadel bonds. I suspect the OTS had E*Trade by the short hairs before Citadel grabbed on.
Here is some news folks: Just like Etrade discovered to its surprise - a lot of people are going to get surprised - The treasuries are AAA+++ etc., rated; but they are subprime too! There is no way USA can pay back its debt in good money. So, either it is bad money or repudiation - pick your poison.
Why are people so unwilling to buy this and so come up with spurious explanations. It all got beaten to death in the earlier thread.
1.The composition of the portfolio IS public.
2. We are talking of AA or better assets here - and thats the point - so MUCH of their portfolio that was sold was AA or better that to make the math work, it had to be sold at around 50 cents in the dollar with NOTHING for the lower grades.
3. Just look at Brian's spreadsheet. See if YOU can come up with something that will stack with the final sale price.
Jeez... Either this is so counter-intuitive, like quantum mechanics, or its soooo scary, or its people talking their book.
Sorry, K, the CUSIPS of the portfolio are not public. Why do you think a spreadsheet with arbitrary percentages, not based on the actual portfolio, has any meaning? You're not assuming that the bond rating describes the collateral, are you? So only prime mortgages are backing AAA/AA paper and this entire credit crisis is just a misunderstanding?
Asian stocks rebounded from earlier declines after the Daily Telegraph reported the U.K. drafted a bill to nationalize Northern Rock Plc, boosting confidence that losses from U.S. subprime mortgages will be contained.
As an earlier poster in a past thread pointed out...
This was a tax ploy.
E*Trade under-values the securities and gets a huge loss which reduces future taxes.
The equity was over-valued and increases Citadel's basis in the stock.
Citadel "wins" because dumb future retail investors will see the stellar earning (because E*Trade isn't paying any taxes) and will over-value the stock. Citadel can dump the over-valued equity on the market.
The MBS recovers and Citadel makes another big killing selling the it back to the market at about par.
And the current investors are happy because the high valuation put on the equity supports the stock price.
If the price paid for those securities actually reflected their true value then the only safe investments on the planet are guns and food.
That is the 3B that they sold for 800 million, ok ? Do we have a disagreement about THAT ?
If not, then if we make an assumption that AA sells at a price better than something below it, then the equations (look at the totals row ) to solve are 1.77*x + 1.23y = .8
and x+y = 1; and x>=y>=0 then solving that forces y=0 ( meaning that anything below AA has no value) and x= .8/1.77 = .45; i.e that the AA or better rated has to take a haircut of 55%.
Once again, this analysis, which is NOT rocket science, shows that everything below AA was assigned a value of 0 and AA or better was assigned a value 55% below what E*Trade told us it had on 9/30/07.
Brian looked at the entire matrix and came up with more detailed numbers but its all in that ballpark.
K: Here's one that I hope isn't rocket science. If you had to choose an A-rated tranche on 2002 vintage fixed-rate subprime loans from NYC or a AAA tranche on 2006 IO subprime loans from the inland empire, which would you pick? How about AA prime paper with the same dates and origination points?
Broad categories of prime, subprime and ratings buckets don't really mean much without the details.
=========================
Broad categories of prime, subprime and ratings buckets don't reall y mean much without the details.
Steve
I think I see what the disagreement is. I think that when developing that slide for 9/30/07, they looked at each CUSIP, looked at the rating assigned to them as of THAT date and put it in the appropriate bucket.
K: Yes, that's right. With bonds, the price relationship to ratings isn't a total ordering (AAA > AA > A, etc.) It's a partial ordering at best and particularly with MBS with the ratings constantly changing. I think there are questions to be asked about the legitimacy of the 10-Q valuations about the way they were framed, but I also believe this was a forced distressed-price sale brought about by a liquidity crunch at E*Trade Bank and that it's not an indicative price for other institutions. I'm thinking that Citadel was looking for a gain down the road of 50% - 100% on their $800M.And even that isn't indicative for other institutions, because the valuations will depend on the specifics of the paper.
"Citadel, a holder of E*Trade shares and debt, was losing money rapidly."
There was also a WSJ post mortem on the deal. Citadel wanted to immediately prop up etrade. They also went into negotiations with $800 as a starting number. No one bothered to negotiate on the bond prices because all that mattered was the total amount of cash etrade got -- not where they got it from. The tax angle, if true, is just gravy.
$800 was a starting point. It MIGHT be the market value, but who knows.
"Early in the talks, Mr. Griffin had proposed paying about $800 million for E*Trade's $3 billion asset-backed pool, and he was prepared to boost the bid as the negotiations heated up...
The first couple of paragraphs of the WSJ article.
On Monday, Nov. 12, Kenneth Griffin was boarding a plane to New York when he received an urgent call from Joe Russell, a lieutenant at Mr. Griffin's big hedge fund, Citadel Investment Group. Shares of online broker ETrade Financial Corp. were plunging in value, and Citadel, a holder of ETrade shares and debt, was losing money rapidly.
"We need to focus on this fast," said Mr. Russell, Citadel's head of credit investments, relaying word that an analyst report suggesting possible bankruptcy had sent shares of E*Trade reeling.
"Let's go," Mr. Griffin shot back, as he authorized a plan to begin buying up millions of shares of ETrade. The next morning, Mr. Griffin and his team reached out to ETrade, hoping to inject money directly into the company. Mr. Griffin was sensing that he could profit from a recovery at E*Trade and the overall financial markets, which have been in turmoil since the summer.
Final point. I wouldn't touch the billion and a half in E*trade notes. But I would take a slice of the distressed assets at 28% of par.
Do corporations still have to pay taxes once they go bankrupt? With Etrade near insolvency, I wouldn't think they would be putting a high value on tax writeoffs. It's more likely they desperately needed cash (bank run anyone?) so they sold some crap at a price that would be expected for crap.
Goldman with $100+ Billion of L3 and L2 assets, no doubt including these very same assets E-trade had, claims they have nothing substantial to mark down. With everyone else caught up in the net, one single fish claims its free and clear. Simply not credible, especially considering the amount they hold. Strong suspicion they're pushing bad news into the next fiscal year so current year bonuses won't be impeded.
Article in the Chicago Tribune talks about how ETrade will commit to routing 40 percent of stock orders and almost 100% of option orders to Citadel.
This is huge. Citadel is one of the biggest market makers in both equities and options. They can't peak at the flow but they can route the flow to where they make markets so if they are bid or offered they'll get to trade. More and more it looks like ETrade was truly at the edge of insolvency and hit the only bid they could find - more reason to NOT consider the sale of the ABS portfolio to be considered truly indicative of market clearing prices.
Au contraire... AA rated 'high quality' MBS, perhaps they are AA rated Alt-A hybrid ARM's are presently trading, and expected to perform terribly. There is a good reason some, not all, of those assets are impaired.
Bonzai!
The Nabob on Monday (Fifty Cent, Yo...) also had a take on this revision from 50cents on the dollar:
The Nattering Naybob Chronicles
Yeah but....there's a tax break for that kind of loss (800 million?) and Citadel got lots of shares. I would be very skeptical that this was the true cost of that portfolio.
Subprime Rate Five-Year Fix Agreed by U.S. Regulators (Update8) - Bloomberg.com
The bubbleheads say this is a one off because of E Trades desperation. The people I try to talk to are a bunch clueless sheep. I thought maybe with Dancing with the Stars over people would pay more attention but I was wrong.
We are in an F-16 with the afterburner kicked in going straight into the ground and maybe .1% of the population has a damn clue. Some days I wish I was in the 99.9% trying to spend the last 10 dollars of credit I have left that is spread across 5 CC.
So basically I was right then? ETrade took the view that the equity cushions were at risk and thus decided better to sell now whilst there is still a buyer than be left with potentally unsellable exposure?
It feels right...
I guess this means we really are all sub-prime and that the view for the housing sector - even the 'safe' compoenents are at risk (or at least viewed as such).
Cheers
We are in an F-16 with the afterburner kicked in going straight into the ground and maybe .1% of the population has a damn clue
Funny you should mention the F-16. Experts say that at 0:23 in this video, the F-16 pilot had committed his aircraft to hitting the ground; even though he had full control of the plane, the physics dictated the pilot could only choose the impact axis, nothing else.
The PtB are seemingly in a similar position WRT the larger economy, but who knows, maybe we'll catch a magic productivity updraft like what happened in the 90s.
The comments in the Times and elsewhere are highly speculative. The security by security composition of ETrade's portfolio isn't public. Much of the subprime backed paper may have been AAA. Some of the lower rated paper may have been riskier slices of prime mortgage cash flows (riskier because of structuring issues having nothing to do with defaults) that were performing just fine. All I would assume is that Citadel got the paper at a huge discount because the more reasonable 30% - 40% writedown that ETrade Bank needed to take this Q would have blown its regulatory cap absent the cash infusion from the Citadel bonds. I suspect the OTS had E*Trade by the short hairs before Citadel grabbed on.
Here is some news folks: Just like Etrade discovered to its surprise - a lot of people are going to get surprised - The treasuries are AAA+++ etc., rated; but they are subprime too! There is no way USA can pay back its debt in good money. So, either it is bad money or repudiation - pick your poison.
Why are people so unwilling to buy this and so come up with spurious explanations. It all got beaten to death in the earlier thread.
1.The composition of the portfolio IS public.
2. We are talking of AA or better assets here - and thats the point - so MUCH of their portfolio that was sold was AA or better that to make the math work, it had to be sold at around 50 cents in the dollar with NOTHING for the lower grades.
3. Just look at Brian's spreadsheet. See if YOU can come up with something that will stack with the final sale price.
Jeez... Either this is so counter-intuitive, like quantum mechanics, or its soooo scary, or its people talking their book.
I reckon its because this is so scary.
-K
Sorry, K, the CUSIPS of the portfolio are not public. Why do you think a spreadsheet with arbitrary percentages, not based on the actual portfolio, has any meaning? You're not assuming that the bond rating describes the collateral, are you? So only prime mortgages are backing AAA/AA paper and this entire credit crisis is just a misunderstanding?
I saw this on Bloomberg:
Asian stocks rebounded from earlier declines after the Daily Telegraph reported the U.K. drafted a bill to nationalize Northern Rock Plc, boosting confidence that losses from U.S. subprime mortgages will be contained.
And the Telegraph
But it looks like the Nikkei rallied on the SPECULATION that a bill MIGHT be introduced, not that it had.
As an earlier poster in a past thread pointed out...
This was a tax ploy.
E*Trade under-values the securities and gets a huge loss which reduces future taxes.
The equity was over-valued and increases Citadel's basis in the stock.
Citadel "wins" because dumb future retail investors will see the stellar earning (because E*Trade isn't paying any taxes) and will over-value the stock. Citadel can dump the over-valued equity on the market.
The MBS recovers and Citadel makes another big killing selling the it back to the market at about par.
And the current investors are happy because the high valuation put on the equity supports the stock price.
If the price paid for those securities actually reflected their true value then the only safe investments on the planet are guns and food.
Hey Andrew Ross Sorkin,
If you are going to rip your stories from the blogs, a little ATTRIBUTION wouldn't kill ya.
Your uncle was my high school geometry teacher, and I'm going to guess your family expects more integrity than that.
Landon Forever
Re: Steve,
You want the CUSIPS for every damn thing they have before you are persuaded ? That's a tall order. What we do have is E*Trades's SEC filing of their portfolio that's under consideration here :
http://www.sec.gov/Archives/edgar/data/1015780/000115752307009928/slide24.jpg
That is the 3B that they sold for 800 million, ok ? Do we have a disagreement about THAT ?
If not, then if we make an assumption that AA sells at a price better than something below it, then the equations (look at the totals row ) to solve are 1.77*x + 1.23y = .8
and x+y = 1; and x>=y>=0 then solving that forces y=0 ( meaning that anything below AA has no value) and x= .8/1.77 = .45; i.e that the AA or better rated has to take a haircut of 55%.
Once again, this analysis, which is NOT rocket science, shows that everything below AA was assigned a value of 0 and AA or better was assigned a value 55% below what E*Trade told us it had on 9/30/07.
Brian looked at the entire matrix and came up with more detailed numbers but its all in that ballpark.
-K
K: Here's one that I hope isn't rocket science. If you had to choose an A-rated tranche on 2002 vintage fixed-rate subprime loans from NYC or a AAA tranche on 2006 IO subprime loans from the inland empire, which would you pick? How about AA prime paper with the same dates and origination points?
Broad categories of prime, subprime and ratings buckets don't really mean much without the details.
=========================
Broad categories of prime, subprime and ratings buckets don't reall y mean much without the details.
Steve
I think I see what the disagreement is. I think that when developing that slide for 9/30/07, they looked at each CUSIP, looked at the rating assigned to them as of THAT date and put it in the appropriate bucket.
You aren't persuaded such a mechanism was used.
-K
K: Yes, that's right. With bonds, the price relationship to ratings isn't a total ordering (AAA > AA > A, etc.) It's a partial ordering at best and particularly with MBS with the ratings constantly changing. I think there are questions to be asked about the legitimacy of the 10-Q valuations about the way they were framed, but I also believe this was a forced distressed-price sale brought about by a liquidity crunch at E*Trade Bank and that it's not an indicative price for other institutions. I'm thinking that Citadel was looking for a gain down the road of 50% - 100% on their $800M.And even that isn't indicative for other institutions, because the valuations will depend on the specifics of the paper.
I think kicker has it about right.
"Citadel, a holder of E*Trade shares and debt, was losing money rapidly."
There was also a WSJ post mortem on the deal. Citadel wanted to immediately prop up etrade. They also went into negotiations with $800 as a starting number. No one bothered to negotiate on the bond prices because all that mattered was the total amount of cash etrade got -- not where they got it from. The tax angle, if true, is just gravy.
Why Citadel Pounced On Wounded E*Trade - WSJ.com
$800 was a starting point. It MIGHT be the market value, but who knows.
"Early in the talks, Mr. Griffin had proposed paying about $800 million for E*Trade's $3 billion asset-backed pool, and he was prepared to boost the bid as the negotiations heated up...
On Monday, Nov. 12, Kenneth Griffin was boarding a plane to New York when he received an urgent call from Joe Russell, a lieutenant at Mr. Griffin's big hedge fund, Citadel Investment Group. Shares of online broker ETrade Financial Corp. were plunging in value, and Citadel, a holder of ETrade shares and debt, was losing money rapidly.
"We need to focus on this fast," said Mr. Russell, Citadel's head of credit investments, relaying word that an analyst report suggesting possible bankruptcy had sent shares of E*Trade reeling.
"Let's go," Mr. Griffin shot back, as he authorized a plan to begin buying up millions of shares of ETrade. The next morning, Mr. Griffin and his team reached out to ETrade, hoping to inject money directly into the company. Mr. Griffin was sensing that he could profit from a recovery at E*Trade and the overall financial markets, which have been in turmoil since the summer.
Final point. I wouldn't touch the billion and a half in E*trade notes. But I would take a slice of the distressed assets at 28% of par.
RE: tax ploy
Do corporations still have to pay taxes once they go bankrupt? With Etrade near insolvency, I wouldn't think they would be putting a high value on tax writeoffs. It's more likely they desperately needed cash (bank run anyone?) so they sold some crap at a price that would be expected for crap.
Goldman with $100+ Billion of L3 and L2 assets, no doubt including these very same assets E-trade had, claims they have nothing substantial to mark down. With everyone else caught up in the net, one single fish claims its free and clear. Simply not credible, especially considering the amount they hold. Strong suspicion they're pushing bad news into the next fiscal year so current year bonuses won't be impeded.
Article in the Chicago Tribune talks about how ETrade will commit to routing 40 percent of stock orders and almost 100% of option orders to Citadel.
This is huge. Citadel is one of the biggest market makers in both equities and options. They can't peak at the flow but they can route the flow to where they make markets so if they are bid or offered they'll get to trade. More and more it looks like ETrade was truly at the edge of insolvency and hit the only bid they could find - more reason to NOT consider the sale of the ABS portfolio to be considered truly indicative of market clearing prices.
Etrade Order Flow To Citadel
So, what's the disagreement...whether the correct market price is 55cents or 65 cents or 75 cents?
Yeah, I feel better now.
Au contraire... AA rated 'high quality' MBS, perhaps they are AA rated Alt-A hybrid ARM's are presently trading, and expected to perform terribly. There is a good reason some, not all, of those assets are impaired.