E*Trade firesale seen hurting Wall St portfolios

This is a point that David Gaffen at the MarketBeat blog has been making for a month. He's got a post up this afternoon on a different part of the sub-prime mess/proposed solutions. Good stuff.

This story from Reuters has some potential write-down numbers:

E*Trade Financial Corp's (ETFC) firesale of mortgage-backed securities has conjured up a new worst-case scenario for Wall Street's portfolio of subprime assets by knocking their value even lower.

Financial analysts on Friday said E*Trade got anywhere from 11 cents to 27 cents on the dollar for its $3.1 billion portfolio of asset-backed securities. The portfolio sale was part of a $2.5 billion capital infusion from a group led by hedge fund Citadel investment Group.

"The portfolio sale, one of the few observable trades of such assets, has very clear, generally negative, implications for the valuation of like assets on brokers' balance sheets," Credit Suisse analyst Susan Roth Katzke said.

The portfolios are hard to value because demand has dried up for them and the brokerages sometimes use their own models to put a value on the assets. Any rare actual transaction could have an effect on other brokerages' valuations.

Using what she called a simplistic analysis, Katzke estimated Merrill Lynch & Co Inc (MER) could take a $9 billion after-tax hit to the valuation of assets underpinned by subprime mortgages. That estimate assumes the Merrill assets would be marked down to 26 cents on the dollar.

Katzke's write-downs reflect amounts that are incremental to charges taken in the third quarter. She estimated that Citigroup's (C) after-tax write-down could be $26 billion, if the assets were marked down to 26 cents on the dollar.

"Our analysis is far from perfect," Katzke said. "That said, it's our best take on a worst case scenario for valuation of like securities. ... Not all brokers are equal."

Merrill declined to comment. Before the E*Trade deal, analysts had already forecast huge write-downs at Merrill, with some estimates topping $13 billion. Katzke estimates Citigroup will take a write-down of up to $12 billion in the fourth quarter....MORE

No need to email on why ETFC/Citadel didn't set a clearing price. I'm pretty familiar with the arguments having used a few of them myself.