Tag: Citadel

“I didn’t open my browser all weekend” Monday

Cycled and fished instead – not regretting it either

  • Sam Zell “bought a terrible business” – newspapers. I think Zell has it right when he says newspapers have to give customers what they want, not what some internal agenda prescribes. As a result, I admire the man, and hope he doesn’t wind up paying a terrible price.
  • Is Yahoo! manipulating bloggers? Doubtful – such action would create even more of a black purple eye. If anything, it’s more likely a renegade faction within. Then again, blog manipulation (i.e. shutting them down) seems to have found its way into the political process. Quelling discontent, or just one more way of saying blogs are really starting to matter?
  • Should Congress let home prices fall? You’ll get a resounding “yes” out of me – propping up asset classes, particularly right before elections, is a way for politicians to feign working for the better good. Unfortunately, situations generally wind up worse as a result, and history has a way of repeating itself. You’ve been hearing about government’s plans for saving the housing market going on a year now – nothing seems to be sticking, and maybe that is the best possible outcome.
  • And my prediction for the week…

  • Citadel Investment Group will soon make an offer to purchase the country of Iceland. Citadel bought multi-strategy fund Amaranth Advisors when it made bad bets on natural gas. It bought Sowood and portions of E*Trade after their sub-prime dice rolls. Now banking is melting down, and the volcanic island of Iceland is going with it. Why not?

UPDATE: Via Steven Pearlstein

Since last June, we’ve seen a fairly consistent pattern to the economic mood swings. Every three months or so, there’s a round of bad news about housing, followed by warnings of more bank write-offs and then a string of disappointing corporate earnings reports.

Let’s not forget the government announcements of salvation immediately thereafter. Me thinks Mr. Pearlstein is spot on, and you should read the whole thing.

Citadel piles on E*Trade

The story begins:

Investors may do well by taking Citadel’s investment in E*Trade as a sign the worst of the mortgage market turmoil is behind us.

And while it goes on to tout Citadel’s incredible returns from buying up distressed assets as the big sign to jump on the bandwagon, there’s probably more reason to be cautious than to start accumulating the financials. There are two simple reasons for this.

Citadel invests in very specific asset classes (i.e. natural gas derivatives with Amaranth and credit spreads with Sowood) when doing these distressed buys. Second, the transactions are being consummated at enormous discounts. E*Trade has had specific trouble related to sub-prime assets on their books, and Citadel has done their due diligence – they know precisely what they are getting, including but not limited to what if any off-balance sheet items might be lurking around. And they have the capital to convince.

Many banks and broker/dealers still don’t know what their true exposure is to credit and rate derivatives and CDOs, what collateral they may be entitled to, or what lawsuits might be waiting in the wings. There are still a ton more sub-prime mortgages, as well as Alt-A and Jumbo classes, readying to reset just after the new year, and questions are begin to arise regarding the creditworthiness of derivative counterparties and commercial developers. All those issues will fall on…you guessed it…the banks and brokerages.

Unless you’re Citadel, you’d be wise to sit tight.

UPDATE: Paul Kedrosky has more in-depth commentary on the deal here and here.

UPDATE 2: Discount on the troubled portfolio was around 75%. Try getting that in the everymans’ marketplace.

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.