• 09 Jun 2008 at 12:27 PM
  • Banks

Is There A Market Gap In Post-Bear Investment Banking World?

David Ellis asks who might “fill the hole” in the investment banking world left by the collapse of Bear Stearns. The usual names get bandied about: Blackstone, JC Flowers and Citadel are the top contenders. All three have expanded into areas traditionally dominated by investment banks. And, as Ellis points out, in the not-so-distant past we’ve seen smaller firms–Lehman Brothers, for instance–grow into Wall Street powerhouses.
This kind of speculation is fun but it’s important to remember that the brokerages and investment banks as we know them are largely a child of regulation that split commercial banking and investment banking. Many of those regulations have been reversed, which has helped lead to the consolidation we’ve seen in the past decade or so. What’s more, investment banks may now face even greater regulation–and therefore higher barriers to entry–in the form of new regulations in exchange for access to the Federal Reserve’s borrowing window. New capital requirements and leverage limits could reduce the profitability of investment banking, making it less attractive to new entrants. Ironically, the problems of the investment banks could wind up shoring up their market positions by stifling competition.
Perhaps the best case scenario is a that the coming regulatory schema could allow for a division of investment banks–with some opting for access to the Fed window in exchange for increased regulatory supervision and leverage-lowering capital requirements while others–perhaps up-and-comers like Citadel–opting to operate with more risk, more leverage and less oversight.

Filling the Bear Stearns void
[CNN Money]

  • 04 Jan 2008 at 11:31 AM
  • Citadel

Citadel IPO: Business Week Says Maybe This Year, Or Maybe Not

Whenever people talk hedge fund IPOs, the name Citadel inevitably comes up. The $20 billion firm found by Ken Griffin is sometimes described as an investment bank masquerading as a hedge fund, with diverse operations that go far beyond ordinary hedge fund operations.
And now it seems that the much talked about initial public offering may finally happen later this year. The latest issue of Business week reports the Citadel “would consider” an IPO. It’s not clear what it means that they “would consider” an IPO. Doesn’t that kind of mean they are considering an IPO?
The hoopla was started when Citadel CFO Gerald Beeson told BusinessWeek that an “IPO is something we’d consider. It would be a byproduct of our wanting to expand our firm to create an even more diverse and permanent institution.”
A Hedge Fund’s Savvy Ascent [Business Week]

So after the New York Post reported this morning that Citadel Investment Group had taken a look at Bank of America’s prime brokerage unit, Citdadel attempted to throw cold water on the story by denying it was in negotiations to buy the unit.
But don’t take this denial at face value. The Post reported this morning that Citadel “has recently inspected the books of BofA’s prime brokerage business.” And the Citadel denial consisted of the statement that it is “not negotiating to buy” to buy the business. Which doesn’t mean they didn’t look at the books, consider buying it, have talks about buying it or even begin negotiating. Essentially, all the said was that they are not currently in negotiations.
What’s more, the denial comes from an anonymous source at Citadel. The spokeswoman, Katie Spring, declined to comment on the record. If there was nothing at all to the story, why wouldn’t Miss Spring deny it on the record? Bank of America also wouldn’t comment, which means they also haven’t denied shopping the prime brokerage or giving Citadel a look at their books.
None of this means that Citadel is buying the prime brokerage. But it does make the denial a little less plausible. Instead of “throwing cold water” on the Post’s story, it throws some smoke at it.
Citadel not eyeing BoA unit: source [Reuters]

Would You Make Citadel Your Prime Broker?

Citadel is often described as an investment bank masquerading as a hedge fund. And it looks like it may be moving even further in the direction of becoming a full-fledged investment bank. This morning Roddy Boyd and Zach Kouwe report for the New York Post that Citadel is in talks to buy Bank of America’s prime brokerage business.
It’s not surprise that Bank of America wants to get out of its investment banking business. Ken Lewis made that clear earlier this year, and BofA has been shedding senior bankers ever since. According to the Post, both the head of the prime brokerage unit and the head of its fixed-income business have recently left.
But would hedge funds be comfortable putting their trades through with CItadel on the other end of the line? There is already resentment about the way some prime brokers take positions conflicting with those of their clients. JP Morgan has been sued by Amaranth over such conflicts and there are perennial complaints about Goldman Sachs. Still, both JP Morgan and Goldman make good coin with their prime brokerage business, so the talk about conflicts hasn’t hurt them.
Still, there a plenty of folks who are suspicious of anything those boys with the white boards over at Citadel do. They have proven eerily apt at turning positions that ruin competitors into money makers. One hedge fund manager we spoke with this morning laughed out loud when we asked if he would run his trades through Citadel.
“Then again, they seem to know my positions and strategy anyway. So why not? Maybe they’ll accidentally tip me off,” he said.
Citadel, BofA In Brokerage Sale Talks [New York Post]

  • 29 Nov 2007 at 1:42 PM
  • Citadel

Will E*Trade Deal Cause More Write-Downs?

Earlier today we pointed out that the seventy-four percent discount on the asset backed securities Citadel has acquired from E*Trade will likely trigger a good deal of consternation on Wall Street. For the past few months banks and brokerages have been struggling to re-asses their credit portfolios. Even after a series of write-downs on those assets, many investors and market watchers remain unconvinced that the best and the brightest of the financial world understand the extent of their losses or are willing to be forthcoming about them.
The reason why Citadel’s discount may have the bean-counters scrambling is that under new accounting standards—referred by those who enjoy talking in word and number jumbles as FAS 157 and FAS 159—companies are required to take into account easily available information about the market prices for their assets. With the Citadel trade blasted across Bloomberg screens and newspaper headlines, it’s hard to argue that the information is not available.
What’s more, one standard excuse for not writing-down assets should be unavailable. Under older standards, companies could claim that the assets had more value than could be achieved in a current market sale. No longer. These days companies are required to value even lightly traded assets in terms of the values they could achieve by selling or transferring the position. And that should mean they cannot blithely ignore the pricing of E*Trade’s ABS portfolio.
It’s still possible that other holders of asset backed securities on Wall Street will claim that E*Trades portfolio was especially weak or that they may continue to value the components of their own ABS portfolio as individual units rather than attempt to estimate the losses that would be incurred if a huge part of the portfolio was sold. This may provide some cover for the banks but it is not at all reassuring. We’re told constantly that this latest round of write-downs has been the last, that the banks and brokerages are writing-down more than they need to because they have suddenly become conservative about such things. But if they put their heads in the sand—or, other dark places—and ignore E*Trade, we’ll have to view these claims of a new conservatism on Wall Street with even more skepticism usual.

  • 29 Nov 2007 at 11:19 AM
  • Citadel

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

As has now been widely reported, Citadel has swooped down into E*Trade’s coffers and delivered the internet bank and brokerage $2.5 billion in cash. Investors seem to like this deal, pushing up E*Trade’s share price in early morning trading.
The lads and lasses at DealBook have a bit of a laugh this morning in a post titled “We’re From Citadel, and We’re Here To Help.” They run through the now familiar litany of Citadel’s quick asset purchases from distressed financial firms: Amaranth, Sowood, Sentinel. It would be tempting to describe these as bailouts by Citadel–indeed, DealBook reports that Citadel founder Ken Griffin pitches the deals as “helping” the troubled firms–except that each of the firms subject to Citadel’s attention went on to sink even further. Citadel’s help often seems to be a prelude to the ash-heap of financial history. E*Trade investors may want to take note: when Ken Griffin is on the phone, you are probably in more trouble than you think.
As part of the deal, Citadel is paying $800 million for asset backed securities that had a book value of $3 billion. That’s close to a 74% haircut for E*Trade. It’s worth paying attention to the possibly the secondary effects of this sale, which may be even more profound than most have acknowledged. The market for asset backed securities is one of those severely stricken in the credit crunch, and this trade is one of the few large, publicly announced sales of these assets in recent weeks. Surely those banks and brokerages which have been claiming to be adjusting their valuations to market realities will have to take a second look at their valuations in light of this 74% discount.
We’re not exactly going to hold our collective breath waiting for the banks to mark their ABS portfolios down by two-thirds. If we listen close enough we can already hear them whispering in their conference rooms that E*trade’s was a “firesale” and does not reflect underlying market fundamentals. Which makes us wonder whether they are truly confused about the difference between marking-to-model and marking-to-market.
We’re From Citadel, and We’re Here to Help [DealBook]
E*Trade to Get $2.55 Billion Cash Boost From Citadel [Bloomberg]

  • 12 Oct 2007 at 12:33 PM
  • Citadel

Citadel IPO?

When Citadel hired John Andrews, Goldman’s head of investor relations, last month, as a managing director, everyone was all, “oooh, IPO,” “oooh, already stacking the deck for next year’s softball playoffs” (Andrews is supposed to be decent on the mound, I don’t know, we hear weird stuff). Bringing in Andrews, who Goldman signed in 1999, just before it went public, hints at Kenny’s intent to have his papers in order before diving into the public markets. If Citadel were going to stay private, hiring Andrews, whose expertise is in dealing with a wide range of public market investors would be kind of pointless. Some skeptismos said they would find an IPO hard to believe, given the recent turmoil in the credit markets. We hadn’t heard anything else in a while, mostly because we weren’t listening, but today we were told that at a dinner last night where Griffin was in attendance, a friend o’ DealBreaker said that the manager “harped exclusively on taxation of public partnerships” and was “quite insistent that the “Blackstone bill” is a bad idea,” making the FoD, “even more confident he’s planning to IPO a piece of Citadel.” (Another DealBreaker reader-cum-dinner guest shared the less illuminating but more amusing tidbit that Griffin “tried- and failed miserably- to do that trick where you pull the table cloth off the table without moving any of the plates or silverware. The whole thing was really embarassing but it’s not like you could do anything but try and stifle the laughter, ’cause he’s Ken Griffin, you know?”) Anyway– signs point to IPO or just good Samaritan Griffin trying to protect the $45 billion crab legs of private-then-public rich guys everywhere, himself not included? You decide.
Citadel takes a step toward going public [Fortune]

  • 29 Aug 2007 at 11:54 AM
  • Citadel