What Will Happen If Citigroup Gets Priced Like E*Trade?

by Florida's #1 Mortgage Planner on December 3, 2007

E*Trade experienced a fire sale of mortgage backed securities that resulted in a worst case scenario of pricing subprime assets lower than expected.  Analysts say E*Trade got as little as 11 cents on the dollar for its $3.1 billion portfolio of asset-backed securities.

Since this was among few observable trades, the negative connotations for the valuation of other financial institutions own portfolios, namely Citigroup’s.

Citigroups’ own analyst stated E*Trade received 11 cents on the dollar.  Goldman Sachs analysts said they were surprised by the size of the discount considering 73 percent of the E*Trade portfolio consisted of prime mortgages, loans to people with good credit.

So, what would happen if we are to see similar pricing with other financial companies, like Citigroup?  Simply put, it will be ugly, very ugly.  Here are numbers presented by Susan Katze of Credit Suisse, assuming 26 cents (numbers would be even higher with only 11 cents)…

  • Citigroup’s after tax write down would be around $26 billion
  • Merril Lynch’s after tax hit would be around $9 billion on subprime paper

One thing to note, Susan’s take on Merrill is on subprime paper only and E*Trade’s markdown was on all paper, including 73% of which was prime mortgages!

So, the government, including Bernanke (behind the scenes) backs a SIV bailout, which Treasury Secretary Paulson announced is a failure already.  With that failing, and the fact Citigroup is over leveraged, the losses if required to price to market would be enormous.

Citigroup may be facing major losses, even potentially exceeding the "equity" shown on their September 30th balance sheet.

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