Friday, November 30, 2007

Why Citadel Pounced (ETFC, C)

See post below on the problems Citadel may have exposed for Citigroup's pricing of their junk paper. This could be the story of the week.*

From the Wall Street Journal Online:

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 E*Trade Financial Corp. were plunging in value, and Citadel, a holder of E*Trade 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 E*Trade. The next morning, Mr. Griffin and his team reached out to E*Trade, 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.

Late Wednesday night, a deal was reached to invest $2.55 billion into E*Trade, which is best known as a discount brokerage firm but also runs a federal savings and loan. That unit's ventures into mortgage securities have taken a devastating toll, sinking E*Trade's stock to 78% below its price at the start of the year. The stock closed yesterday in Nasdaq Stock Market trading at $4.82 a share, down 46 cents....MORE

*Here's David Gaffen at the Wall Street Journal's MarketBeat blog, Nov. 9, with as succinct an explanation as I've seen:
The truth about this CDO nonsense is that at this moment, the last thing the banks holding the paper want is the sudden appearance of an efficient market. Which is why the announcement from Standard & Poor’s that a CDO managed by State Street Global was being forced to liquidate its holdings should scare the heck out of them. In a sense, what’s kept the lid on these losses is that nobody knows just what these various pieces of paper are worth, and many of the financial services firms held the paper in part because they felt the market would recover to a point that would satisfy whatever “mark to model” or “mark to myth” they were doing. After all, Merrill Lynch’s once-CEO Stan O’Neal wouldn’t comment on the firm’s earnings conference call as to whether their CDO exposure had been marked down to a level that could “clear the market.” Because when no price exists, the price is whatever you want it to be — but if a liquidation has begun, investors can no longer can keep up the charade of paying no attention to the man behind the curtain, hence the desire by these big banks to create a presumably shape-shifting form that would eat up these assets without showing any details, sort of like the Blob. S&P said the trustee of the CDO, called Carina CDO, “has not informed us when the collateral will be liquidated, we believe the liquidation process has begun.” State Street is down 2.7% today, and it doesn’t even own assets in the CDO, it merely acts as a manager. –With Aparajita Saha-Bubna of Dow Jones Newswires