Even if the stock price goes to zero Citadel paid $800m for a "distressed" $3b portfolio that is probably yielding 6% or more. 20%+ now and even if the defaults start aggressively they are still seeing double digit income and a portfolio worth far more than double what they paid. Citadel scored.

The scary thing going forward is who will fund the MBS paper in the future? We don't save near enough as a nation to do it. If we scare off the foreign capital with this garbage plan where will it come from??

Just a silly question .... doesn't this very clear and objective mark to market for the Etrade portfolio , with the mark being perhaps as low as 11 cents ( or perhaps as high as 27 cents ) to the dollar , significantly devastate the tier 2 and 3 assets for the Investment Banks.... especially since this occurred before November 30th ? Note that most of the portfolio involved prime first lien not subprime loans ..... just wondering ?

This is hilarious. This Citi analyst, Bhatia, by causing a run on E-trade, is now going to force Citi to mark down its own assets to the tune of $26B. I don't foresee a bright future at Citi for the lad.

What happens when the price of homes drop another 10%, 20% or even 30%?

If you need me come around the barn. There is a small opening by the round bail where the opening of my bunker is. Ill be drinking a bud doing an inventory of my soldier of fortune magazines.

CR: from etrade press release:
"Under the terms of the Citadel transaction, ETRADE will receive $2.5 billion in cash, of which $2.4 billion will fund today. The terms include:
-- ETRADE will receive $1.6 billion of capital in exchange for 12.5% senior unsecured notes and common stock. This includes a contribution of capital by investment funds managed by BlackRock, Inc.
-- Citadel has acquired ETRADE's entire ABS portfolio, including CDOs, for $800 million in cash.
-- Upon final closing, it is expected that Citadel will invest an additional $150 million in exchange for 12.5% senior unsecured notes and common stock."
The Citi analyst is wrong.
Link to press release:
https://investor.etrade.com/releasedetail.cfm?ReleaseID=279066

What IS a Writedown Anyway??

Allen C,
No need for a government study. Pick any blog from the right side of the CR homepage.

Interestingly we already have lots of examples of negative 20% HPA to study. Heck my house is off a lot more than 20% from its' theoretical high of Oct 6th 2005. Then there's entire communities like Merced, CA where 20% wasn't even a fence post on the downgrade.

The Citi analyst got it wrong, and he isn't doing his firm any favors as has already been noted.

However, he is making a feeble attempt to try to look at the entire deal. He left out the senior UNSECURED notes, the single most important part of the transaction.

Would anyone in their right mind buy a billion and a half in senior unsecured notes from etrade? It sounds like Blackrock bought some, but I couldn't find any details on the terms and conditions of their participation.

Anyway the Citi guy is making the argument that the other parts of the deal were favorable which means the effective cost of the ABS's was less.

I think he has it directionally wrong and that the notes and stock don't look all that great if you even glance at the remaining assets in etrade's portfolio.

Nevertheless, I think the informational value of the deal is low regarding the value of the ABS's.

Etrade is desperate for capital. Citadel is also trying to protect prior interests.

"Now, about 20 years ago, I could have understood this. But, what is it we export?"

I think the dollar rally might actually support the notion that our import/export imbalance beginning to tilt a little the other way. We still manufacture for export aircraft, arms, heavy machinery, food and quite a few other items that are in demand. The weaker dollar has increased desirability and the import numbers Stagflationary Mark has been posting via port shipments also seems to support the claims.

Will it hold up in a global slowdown? Doubt it.

by the way, the entire ny times business section was almost uniformly negative today.

Lets see: a big article on the short seller chasing MBIA. It pats him on the back saying that, yes, it does look like the emperor has no clothes where it comes to triple-A rated bond insurers. An article showing that US auto makers are in the dumps. An very skeptical article on the proposed mortgage rate freeze. An article about another doomed attempt by motorola to compete with nokia and samsung. An article entitled "It's December, and america is not in a buying mood" (need I say more). And last, but not least, an article about the move to allow people to charge their rent and mortgage payments direct to their credit cards and stating that US consumers had a lot of spare credit cards they can start using to pay bills (good grief). (And the bit about government stats on payrolls being screwed up).

If you just watched the dow this week I think the business sections are a rude reminder.

Got Gold?

No I'm shoting the hell out of it.

"Got Gold?

No I'm shorting the hell out of it."

I am inclined to think you're on the right side of that trade, if we are heading into a global slowdown. Metals in general seem bubbly, especially if emerging markets slow. Gold's only real demand is for jewelery. I can't see another productive use for it. It mystifies me why it went up over the past year except that it rose in relation to the dollar's fall. If the dollar gets stronger, gold only declines.

A question for Tanta,

How would a "model-driven" mod process handle the problem of stated income and 2nd liens?

The Hope Now plan will probably use DTI as the key metric to identify those that would benefit from/justify a mod.

But of course on two thirds of the loans that are stated income the DTI's are mostly fiction.

Then there's the problem of 2nd's. Do the servicers know from their database who has 2nd's? Doesn't that information have to be incorporated in the selection process? I would think that a mod for someone without skin in the game is not a good idea. Plus there are plenty of 90% CLTV loans from '06 that are now at 100% on appraised value. Skin is gone.

At the end of the day, it seems unrealistic to think that the mod process can be selective and model driven. There are two extremes: mod a small number of borrowers (full doc's with 33%-38% DTI's?), or mod across the board. It seems like the Hope Now has to go one way or the other.

Barely, I agree. Gold is a lousy store of value. However, there is, arguably, no good store of value available currently. (That is: none of the central banks can be trusted not to inflate in a global recession.)

In a stagflationary environment, all other asset classes can be expected to do badly. (Productive real assets will be hurt by recession and nominal assets will be hurt by inflation.)

If you have a better idea, I'd love to hear it.

Hope Now get screwed later

It was a quiet day today after all the drama on Friday. Anyone else think next week something big is going to happen? A big bank may use the cover of the "Freeze" to bring out some bad news? I'm not sure, but it feels like somethings coming. "Don't stand on the tracks when the trains coming through".

That's wuz me

Anonymous,

Unfortunately, subprime lending is rife with stated income. I'm basing this on New Centrury's percentage, and with close to 10% of the market I believe they represented the norm. Certainly Accredited and Novastar were not far off.

New Century's recent 10q's have disappeared from the SEC web site. 3q04 is still there, however. $10b in originations for the quarter, $5b full doc, the rest stated (with a little "limited doc"). In subsequent years, as is well known, the percentage of stated went higher. I believe it maxed out at 60%, so perhaps two-thirds was a slight exaggeration.

Form 10-Q for New Century TRS Holdings, Inc. (09/30/2004)

So, if gold has no inherent value, why does it cost more than silver? Did you get married with a Stainless Steel ring? No? Why not? Did you ever hear the saying, "as good as gold?"

Why is gold valuable? Scarcity, immutability, and beauty. Something like 95% of all gold ever mined is still in possession/circulation.

Question: What inherent value does a piece of paper with a dead President depicted on it have? Apparently, the answer is: not as much as you thought.

There must be some details we're missing on this E-Trade deal. The idea that a first lien AA or better mortgage portfolio would suffer such losses as to be worth .50 on the dollar seems crazy.

Or - is this price telling us that the delinquency/foreclosure problems is far, far worse than even the most bearish had imagined?

Goldman is the shadiest firm around. Play both sides of the trade. Sell the toxic then short it. Profit 2 ways! How ethical or legal is this?

Okay. If it isn't gold, it's arable land with water resources, owned outright. Not so easy to get (but I have been searching).

What is the benefit of doing a voluntary request for notice of default? I see a lawyer was involved with this.

Laughter.
Well, I am trying to live well, reading this on Saturday night drinking my fine Coppola pinot noir 2004.

Face it, the entire country is subprime, well extend that thought to how folks outside the US view it. As was pointed out above, people in India are wondering what we are jabbering about talking about spikes in gold. Gold is priced in dollars, and the dollar is falling. Does that mean the rest of the world is feeling our pain? Nope, and they are mystified that the mightiest military on earth is supported by a bunch of cracker house loans. That they bought. Those are the true suckers, our vendor finance guys.

Housing is the first sign of the end of the dollar that is not easily dismissed by our government. Now the bailout has to be sweet enough to keep the real folks in their houses, induce investors to suck up the slack in houses due to flopped flippers and prop things up before MSM starts quoting my Zillowed Away shot at HELOCS.

I am not confident these yoyos in congress and this administration are up to a bipartisan giant bailout monetizing this fiasco. If they are not going to do this, borrow all the cash you can, buy some silver to pay for some bread, and hunker down with your investments sent to Switzerland for the duration. 3% in a basic swiss muni fund sounds pretty safe today, doesn't it.

The wine is almost done, as are we, as is this economy. I will do what I can to survive and profit from this fiasco, but ultimately, we are all going to pay through a much lower standard of living.

I see no other course.

Someday this war's gonna end...

Robert, I note that folks are still digging up coin hoards from the Romans, and that gold was quite valuable then, as now.

A CMO buried in the backyard is just so much waste paper.

That is the perspective of history, which says that our government will eventually fail, and may I be long dead and my descendents safely on to the next bright light of western civilization.

Someday this war's gonna end...

Either that or start to go long guns

Guns are selling well at the auctions I've been to these are pros that are showing up now not just the bumpkins they know what they are looking for and are willing to pay to get them.

Ben Stein raises some excellent points in his article.

(link above posted by randy)

"My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, ABAlert.com (for “asset-backed alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.
The Goldman spokesman would not comment on this except to note that other firms sold C.M.O.’s too.

The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.

The Goldman Sachs spokesman said that the company routinely shorts the securities it underwrites and said that this is disclosed. He noted candidly that Goldman is much more short in this sector than usual."

The truth is, I think etrade did this so that they would no longer carry any risk and could advertise this to their trading segment. (their bread and butter) The loans were making people (me included) leave Etrade for fear that their money would get tied up in a weird bankruptcy. By getting rid of it, ETrade no longer has this liability, and customers can restore faith in them.

customers can restore faith in them.

They be like a cheating wife, it ain't gonna happen.

I'm trying to hedge the portfolio 45% inflation/55% deflation. I hold gold and silver as insurance against a $USD collapse.

As Jeremy Grantham of GMO says, it's a bubble everywhere. Grantham called TIPS the last undervalued asset class this summer, which have had a nice 10%+ run up since. However, do we really want to cough own more bonds now?

Paid-up arable land would work for me, preferably far removed from an urban center.

"Gold's only real demand is for jewelery."

Hey, hey, You are posting on the internet without realizing EVERY silicon chip communicates with the outside world via thin strands of GOLD! Gold is the bridge between Silicon in the chips and copper legs that protrude outside. Any other conductor would corrode and pollute the silicon.

"Marcus Aurelius" Okay. If it isn't gold, it's arable land with water resources, owned outright. Not so easy to get (but I have been searching).

Outstanding alternative. Perhaps nothing comes close. Oil companies have most of it. Good luck finding any that remains."

If you check I think you will find that farmland is also in a bubble and priced above its productive capability

"That's why it has to be owned outright."

It sounds like you recommend it as a hedge against political breakdown, rather than as an inflation hedge.

Unless I am missing something, borrowing to buy it would be better in an inflationary scenario (the loan is nominal, the asset is real).

Paid-up arable land would work for me, preferably far removed from an urban center.

but you may not want to be more than about a 4-hour horse ride to the city because you're going to need to be able to get your crops to market somehow.

hmmm,

what's the name of game?

The spokesman for Goldman also noted the company’s bearishness on housing since 2006. He also noted that in the recent past, Goldman Sachs has moved to a considerably larger short posture and that the firm is net short.

For more "yellow" journalism go to:
EVERYBODY'S BUSINESS; The Long and Short of It at Goldman Sachs - NY Times

ok, i found it...

agent provocateur extraordinaire

i thought it was only Jim Cramer, so count Mr (Ein)Stein in now, too.

Marcus Aurelius, I like your idea and searching for plots with water rights has actually been a pet project of mine. I am not preparing for a total social collapse. I just don't think it can happen with such a dominant military.

I think water very soon will be the next oil, with supplies scarce and demand growing. Whether the government honors rights or confiscates those rights in a time of extreme shortages is another story.