Saturday, December 01, 2007

Storming the Citadel

Update: additional text in italics.
Did anyone understand the E*Trade sellout on Thursday? Is the portion of the portfolio backing the infusion actually worth 27¢? Did they decant the worst, typical or only the best portions of the entire asset class? looks more like insider trading than a bailout to me.

Doesn't matter. I'm sitting here doing the math much like the Abu Dhabi 11% yield math of the previous day. Say this E*Trade "portfolio" is some nasty bits of $3b face value in questionable asset backing. That said it must be earning, conservatively, 8% even if chunks are about to default. Okay 8% turns into 30% per annum next month based on the purchase price. That's pretty awesome. Say half of these nasty loans default over the next 6 months. Wow, only 15% return for what would be a worst case scenario. Better. The 15% return is after six months of decreasing returns; 2.7% (30%/yr) next month, 2.2% (27%/yr) two months, 2% ($24%/yr) three months, etc. So after 6 months you've earned like 11% of your principle back and have 50% still intact earning that 15% and valued at a solid $1.5 billion for which you paid $800 million. In 3 yrs your total return looks like a vanilla CDwhile reruning principle and your investment has had 3 years to recover from the low value of $1.5 billion you paid $800 million to buy. Even after 4 yrs returns total returns look pretty poor for such a risky venture and that's assuming all the defaults in the first six months. Clearly they don't expect anything near half to default/lose total value. After doing that extreme math neither do I. And that's the point of the exercise. Citadel robbed E*Trade blind.


Sac RE Agent said...

Good morning and first!

Rob Dawg said...

Up early. Showing houses today? Any good real estate stories? All I am hearing is "at least we aren't Merced!" I shudder to think what is going to happen to Sacto if the 15-20% cuts become necessary. What you only heard about 10%? Ahhh but that is assuming the cuts are applied equally. Yeah, and the CHP and prison guards are gonna do that. Right. No, staff positions all around the Capital are what are gonna get creamed.

Funny Circus Bears said...

That's why the stock retreated further after the deal - when the overall market was rising.

Citadel is the only winner in that deal.

ETFC is still left with $30B in mortgage paper (much of it subordinate 2nds), a new long term high coupon debt, and a diluted share pool.

Not Good!

Lex said...
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