E-Trade: Citadel Investment Analysis, Part 2
I posted some (quick) positive aspects of the Citadel deal for E-Trade assets this morning, and now some more critical commentary -- as I listen, for the second time, to the E-Trade conference call.
First things first, the price on E-Trade's ABS book. We just had a major mark-to-market event, in effect. As more than a few people have argued to me via email, if most of the industry had to mark their ABS books to 27 cents on the dollar, the U.S. banking business would be in deep, deep trouble.
Second, there is a troubling absence of specifics about the E-Trade loan book, and about some of the more nitty-gritty specifics of the deal, like the loan loss provisions embedded in the portfolio. While the management team is ducking the question on the conference call, there were 60 Citadel staffers apparently pouring through E-Trade's books, so I have a hard time buying that they don't have a very specific view of what is going on among these troubled assets. (Relatedly, there is no Edgar filing yet on the deal. Why not?)
Related to the preceding, why no info on the breakdown of the $1.6-billion infusion between equity and notes? That seems, you know, big and material, but I am old-fashioned that way.
Next, E-Trade CEO Mitchell Caplan has made out nicely, which will piss off shareholders to no end. Not that he needed to be hung over a river for E-Trade's subprime misadventures, but it's deeply galling that he has been able to cash out so completely from a wobbling business.
Finally, this deal is awfully dilutive to existing shareholders. The total dilution from the deal is something like $0.50, which, on top of lost customers (most of whom were more active and sophisticated) over the last few weeks, pretty much takes E-Trade's earnings power to zero.
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Overall, this deal shores up E-Trade, but it's tough to tell what more (or less) it currently does. We just don't have enough specifics, and management was light on facts in the conference call. In the absence of more data I'll call it mildly positive for E-Trade, great for Citadel, and near-term negative for the industry (if only because it will drive more mark-downs), but that's it -- and, of course, subject to change as we see more specifics.
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