Wednesday, December 5, 2007

What ETFC did to GS, MS and BSC (Pricing Garbage w/o WMX's expertise)

Reminds me of the punch-line
"Well you know what B.S. stands for.
M.S. is more of the same,
and PhD. is Piled higher and Deeper."
Two from Dealbreaker:

The Citadel Purchase: Spinning It As A Floor

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....MORE

The Citadel Discount: Armageddon Scenario For Three Banks

One reply to our insistence about this Citadel discount thing has been to call it an "Armageddon Scenario" that is simply too horrible to contemplate. An old friend just wrote to us that what's keeping the banks from marking down their CDO portfolios based on Citadel is not wishful thinking but sheer terror.

What are they afraid of? Well Peter Cohan has helpfully showed exactly what there is to fear. In a recent column on blogging stocks he says that the capital of three banks would be wiped out if that 27 cents on the dollar valuation was applied to their Level 3 assets and written off from their most recent capital levels.

So who are the three banks who are imperiled by the 27 cents? After the jump, check out Cohan's list....MORE

*Climateer Investing referred to this phenomena Monday in "Climateer Line of the Day: From the Pithy to the Profound"

*Earlier today we posted, on the same topic:
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.