Second only to Stein-gate, the US has been chewing over the detail of the Citadel-sponsored rescue package of E-Trade.
E-Trade shares initially rose on news of the deal last week – that was before the hit E-Trade was taking to shed its ABS waste and the dilutive nature of the deal sank in.
In flogging its entire portfolio of ABS (assets with a book value of $3bn sold for a mere $800m, an average of 27 cents to the dollar), there was a sense that a floor had been placed under the valuation of CDOs and associated nasties.
No, no, no, pleaded Yves Smith at Naked Capitalism. “How exactly? Markets are volatile. Does someone buying a large block of stock put a floor under the price?” And that’s assuming we’re talking about a homogeneous chunk of securities, which when it comes to CDOs we’re not.
There’s also of late been more talk about what would happen if the big Wall St firms applied the E-Trade haircut to their level 3 assets (which include all sorts of things beside CDOs.) Peter Cohan at Blogging Stocks notes that if this wisdom were to hold then Morgan Stanley, Goldman Sachs and Bear Stearns would be among those whose capital would vanish.
Kudos to Brian at Calculated Risk who back on Thursday pulled up the details of E-Trade’s ABS positions, as of the end of September.
We don’t know who Brian is – but he built a spreadsheet to demonstrate his point, which is always nice. In it he picked up the breakdown of E-Trade ABS portfolio and wondered where that 73 per cent mark down came from. In fact, $1.35bn of the E-Trade bunch of assets was the good stuff: prime mortgage-backed securities rated ‘AA’ or better.
Dealbook got in on the action on Tuesday, noting that only $450m of the portfolio sold was the real junk, CDOs and second-lien:
Even if E*Trade got nothing — not a cent — for anything but [its] top-quality mortgage securities, it still sold $1.35 billion in prime mortgage assets for $800 million, or less than 60 cents on the dollar.
Why stop there, we think, with this numbers game? Value can be negative as well as positive.
There’s the intrinsic value of the ABS on E-Trade’s book. Then there’s the value to E-Trade of getting shot of the stuff. Teetering on the brink of its corporate existence, the latter rises to the extent that the former becomes irrelevant. The desperation factor kicks in.
But the trouble with paying Citadel – who are blessed with time to let sentiment towards ABS to shift – to take the nasty stuff off your hands is that the headline numbers in your press release aren’t going to make great reading. So voila – chuck in $1.35bn of decent stuff and you’re getting $800m cash in the door. Even if in reality you’re paying $550m to see the rest disappear.
It’s called value ascription for a reason – the outcome depends somewhat on who’s doing the ascribing, and what their priorities are. Look at Barings, flogged for £1 to ING in 1995.
This deal only provided a lower benchmark to E-Trade’s desperation.