We’re From Citadel, and We’re Here to Help
http://dealbook.blogs.nytimes.com/
2007/11/29/were-from-citadel-and-were-here-to-help/
We’re From Citadel, and We’re Here to Help
November 29, 2007, 10:07 am
When Amaranth Advisors was collapsing last summer because of energy trades gone bad, the firm’s chief operating officer, Charles Winkler, got a call from Kenneth Griffin. Mr. Griffin came right to the point: “Charlie,” he said, according to documents Amaranth filed in a recent lawsuit, “what can we do, and how can we help?”
The conversation probably began much the same way with E*Trade Financial, the Internet bank and brokerage that said Thursday it would receive a $2.5 billion cash infusion from a group led by Mr. Griffin’s firm, Citadel Investment Group. With its latest investment, Citadel has solidified its role as the cash machine for financial firms in distress. And these days, there’s a lot of distressed financial firms to choose from.
In the last year or so, Citadel has bought Amaranth’s troubled energy book and the entire portfolio of Sowood Capital, a hedge fund that lost more than half its value when the credit markets seized up. It also acquired some assets from Sentinel Management Group shortly before that cash-management firm filed for bankruptcy protection.
With Thursday’s deal, Citadel will pick up E*Trade’s collection of asset-backed securities. This portfolio includes collateralized debt obligations, which are complex bundles of debt whose value has slumped because of the recent rise in mortgage defaults.
Citadel is getting E*Trade’s portfolio for a cut-rate price: It is paying $800 million for assets that had a book value of $3 billion. E*Trade said Thursday it is taking a $2.2 billion haircut on the transaction. E*Trade’s advisers in the deal were Evercore Partners and J.P. Morgan Chase.
By most accounts, E*Trade is not nearly as troubled as Amaranth or Sowood were. It is well-capitalized by regulatory standards, and many analysts think its problems are manageable.
But E*Trade does need cash: Its recent write-downs had raised questions about whether it could maintain adequate capital ratios, and at least one analyst has speculated that E*Trade’s customers could cause a run on the bank by withdrawing their money en masse.
Putting a value on mortgage-related securities is difficult these days, because they are thinly traded and it is unclear how much worse the subprime mess will become. But if turns out that Citadel got E*Trade’s assets at a fire-sale price, it could mean big profits for Citadel and its investors. (Citadel is also getting unsecured notes and E*Trade stock as part of Thursday’s transaction.)
Few analysts think the mortgage-related turmoil is over, so Citadel is bound to have more opportunities to buy assets from firms in dire straits.
More distress could help Citadel in another way as well: Many of the other potential sources of capital — such as big investment banks — are nursing wounds of their own. That could mean even less competition for Citadel as it fishes in the pool of financial misery.
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1.
November 29th,
2007
10:42 am
Citadel has earned a reputation for agressively negotiating these types of deals. I’m sure they already have a 20-30% gain locked in on those distressed assets. When everyone is talking about financial firms falling on the sword many hedge funds are producing returns by shorting securities or employing capital on devalued assets.
- Richard
http://www.HedgeFundBlogger.com
— Posted by Richard Wilson