Two people smiling: Sowood/Citadel edition

This post “graduated” from the category Web Links. I’m doing this short post bit to Web Links for personal reasons…follow-up without having to traipse to some bookmarking site.

Somewhere, Nassim Taleb is sitting back, smiling, and saying “I told you so…”

And in Chicago, Ken Griffin is smiling because he went out for funding for these kinds of deals ahead of time.

UPDATE: Paul Kedrosky takes a shot at housing pessimism while noting Citadel made a potentially bullish move on the sub-prime market with the Sowood purchase. I won’t speculate as to whether that’s true, other than to say Kedrosky is a smarter cookie than I. But…

Citadel was born in arbitrage – specifically convertible bond/equity arbitrage. There are a lot of people in that market, and while Griffin’s group may well be top notch, I can’t imagine the spreads are as wide as they were in the late 80’s/early 90’s. You have to look elsewhere, and they certainly have. And there is still such a thing as hedging – a big sub-prime prime portfolio purchase could be used as either an arbitrage or hedging play against:

  • A short position in mortgage insurers;
  • A short position in other mortgage lenders;
  • A short position against broker/dealers; or
  • A short position in other housing-related investments, such as real estate brokers and/or suppliers such as Home Depot or Lowe’s.
  • Again, just ideas – and I’ll credit some folks I discussed this with as well. You can’t deny Jim Rodgers his peace either – this chart is hard to argue with. Also note that the fact the Sowood portfolio was purchased at a deep discount means less leverage (or opportunistically priced leverage) for Citadel – leverage is something that got Sowood and other funds into so much trouble in the first place.

    UPDATE: Why broker/dealers? Maybe this will help.


    Michael Gracie says:

    An email noted that Sowood’s portfolio wasn’t made up entirely of sub-prime mortgages. That is correct – Bloomberg commentary actually emphasized the corporate side as well. Therefore, there may be many more plays here than meets the eye.

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