We greeted the news of announcement yesterday that Citadel had picked up an asset backed securities portfolio from E*Trade in our usual curmudgeonly style. While investors celebrated the news by pushing E*Trade’s share price up, we noted that this probably should have the accountants at many Wall Street firms scrambling to reassess their own ABS portfolios.
It turns our we weren’t alone on this. Paul Kedrosky filed a two-part analysis of the Citadel deal yesterday, and sounded many of the same notes.
“First things first, the price on E-Trade's ABS book. We just had a major mark-to-market event, in effect,” Kedrosky wrotes. “As more than a few people have argued to me via email, if most of the industry had to mark their ABS books to 27 cents on the dollar, the U.S. banking business would be in deep, deep trouble.”
So far the reaction from Wall Street has been mostly marked by silence, prompting one veteran Wall Streeter to remark over drinks last night, “How can you tell when a Wall Street bank is lying about the condition of its credit portfolio? It’s when they aren’t making any noise at all.”
E-Trade: Citadel Investment Analysis, Part 2 [Infectious Greed]
Posted by , Nov 30, 2007 11:09AM
Generally incorrect.
There is a huge differnce between observable inputs and prices.
Posted by just me , Nov 30, 2007 11:14AM
How ironic that the people who bankers, traders etc mock and have real disdain for, are now silently dictating how the bankers' bonus', jobs and even lifestyles will proceed. I love this irony
Posted by HAM'05 , Nov 30, 2007 11:15AM
not too familiar with structureds - can someone please explain how the transaction of a discounted portfolio of bonds counds as a mark to market event for the individual bonds in the portfolio?
Posted by michael schumacher , Nov 30, 2007 11:18AM
all the banks are doing is elongating the problem. It's not a credit issue it's a solvency issue...until they come clean with that part of it we will continue to be "surprised" and "dissapointed" by the firm's actual results.
Fear and mis-information is part and parcel in this business.
And witness to Goldman Sach's continued juicing of the SPX we see that 100 pt "gain" cut in half
Nice gap and fade......
Posted by , Nov 30, 2007 11:31AM
@11:15 The issue for banks is that a bucket of junk in many ways similar but not necessarily the same down to the CUSIP number to what they have in their portfolios has changed hands at a deeply discounted price. The debate is whether or not that means that their individual holdings are in fact priced correctly. Feels and smells to me like they aren't.
Posted by , Nov 30, 2007 11:40AM
HAM,
It doesn't. As I stated above, this is not a mark to market event. However, it will cause markdowns.
A very succint summary:
zicklin.baruch.cuny.edu/centers/cci/downloads/fasb-issues-fas-157.doc
Posted by michael schumacher , Nov 30, 2007 11:46AM
11:31am-
The bulk of level 3 assets are not valued correctly hence the reason for them being there in the first place. The banks say they HAVE to put them there but it;s just a game of semantics. IF they had fair value they would be placed in 2 or 1 FASB level.....currently there is a dearth of assets sitting in lala-land with no real value able to be attached to them. The sale at ETFC MAY start the price discovery(I love the phrases they come up with to describe losses) but as we've seen some bank "wonk" will say it's not a real sale or some crap like that...and the big problem is that the market will believe it...just like this morning. Oh and that money you THINK you are saving on that about to be adjusted upward loan??? That gets added on the back-end as a Neg. Am. loan....but let's let the populace THINK we're helping them when all we are doing is helping the banks...YET AGAIN.
Posted by Brian , Nov 30, 2007 11:51AM
See the Calculated Risk post on the implicit haircuts in the E-Trade transaction with Citadel.
http://calculatedrisk.blogspot.com/2007/11/etrade-abs-haircuts.html
Posted by Matt , Nov 30, 2007 11:53AM
Not a mark to market event in the true sense. Etrade got bids for only the ABS on their books but they dismissed them as 'bottom feeders' (Etrade CEO quote).
Etrade was essentially looking for someone to infuse cash into the core business - sort of a confidence booster for investors (and depositors). They traded that off for a lower price for the ABS stuff on their books.
Citadel was ready to bid higher for the assets. They backed down when they had to put money into the main business.
Hence, indicative (sort of) but definitely not mark to market.
Posted by , Nov 30, 2007 1:22PM
CARNEY! BOW TO OUR WISDOM! WE ARE SMARTER THAN KEDROSKY!