The Citadel Purchase: Spinning It As A Floor

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It took a few days but the deep discount Citadel got when it picked up E*Trade's CDO portfolio is now being spun as a hopeful sign. How does getting 27 cents on the dollar become a sign of hope? Here's how it works: you describe it as a "floor" and claim it shows that buyers are returning to the market.
Yesterday's Heard On The Street column in the Wall Street Journal took exactly this tact. "While seemingly low, the Citadel price might emerge as something of a market floor, at least for some of the investments involved. It also might signal that some investors are now willing to step in and make a market for these stalled securities," the HOTSpurs wrote.
When we raised the possibility that Citadel's purchase might be a major mark-to-market event we were barraged with critical emails and comments. According to our critics, the information about the types of CDOs purchased by Citadel was too vague to force other CDO holders to revisit their CDO evaluations. What's more, they told us, CDOs were too heterogeneous of an asset class for the sale of one mixed bag portfolio to provide any market price indicators for other CDOs.
The Journal nicely summed this point of view yesterday, writing that "On its own, the Citadel investment might not be much of a guide for deciding how much other firms' debt portfolios are worth, some investors warned. That is because the kinds of debt securities included in such a portfolio aren't always standardized and so may not be directly comparable to holdings at other firms."
Maybe we're missing something but we don't understand how both these things can be true. If the debt securities Citadel picked up are too non-standardized to provide downside price guidance, how can the purchase indicate a floor? In our simple view of things, the 27 cents on the dollar either tells us something or it doesn't. But we don't get how it provides re-assurance without giving mark-to-market price signals. This seems like more wishful thinking than actual analysis.
But then again, wishful thinking seems to be the dominant strategy of many CDO holders on Wall Street these days. So perhaps we should be surprised.
A CDO Floor of 27 Cents on the Dollar? [Wall Street Journal]

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