JPM, Citadel Tag Teaming Thornburg Mortgage?

I agree with many of the analysts on this site that Thornburg Mortgage (TMA) is operating in a fairly safe area of the mortgage market. Yet JPMorgan Chase (JPM) has decided to force their debt into default. Why? Well obviously leverage plays a huge factor, but what if JPM actually wanted the bonds for themselves? We are talking about a $28mm margin call and they supposedly received $920mm (from another source) on 3/3/08 to cover some exposure on other mortgages. TMA holds about $35b in LT and ST debt here, seems odd. Billions being thrown around to help out and $28mm will likely cause the demise of this company?

Now let's look at the big picture. What are the banks, and possibly hedge funds, looking to gain? The number one answer is probably market share and at any cost. One of the ways to achieve this goal is to work together in a partnership. Let’s look at some recent events, particularly focused on JPM and Citadel, and see if we can make sense of what could possibly be happening:

2006: JPM and Citadel “partnered” up on the Amaranth natural gas trade. JPM was probably the bank where Amaranth’s assets sat and once they realized that the trade would take time to unwind, used Citadel in a partnership as someone who could handle the risk of unwinding the trade.

2007: Citadel has begun sucking up small bankrupt mortgage companies and traders such as ResMae Mortage and Sowood Capital Managemet.

Late 2007: E*Trade (ETFC) faces issues with its toxic mortgages and is almost forced into bankruptcy. Citadel steps in as a “white knight” and takes several billion of mortgages off the books, providing a capital infusion, and appoints a JPM executive as CEO.

Now let’s’ consider the next potential step in this scenario:

Early 2008: JPM decides they want their money back on the loan that has gone a paltry $28mm in margin, thus forcing Thornburg to unwind huge leveraged positions and push them into a potential bankruptcy. Enter the “white knight” to bail out TMA, by purchasing great bonds at a discount and providing a capital infusion and maybe a 20% position in the stock. New CEO? Why not…

There are other steps we could put together in this scenario, but these appear to be the most relevant at the present. Citadel appears to be the group that has benefited the most from these events, but surely JPM receives big fees and reduced risk exposure in times of need so the relationship appears to be working and that is much more important then who receives the better end of the deal.

References:

• dealbreaker.com
• thestreet.com

Disclosure: none

Comments

[dan clue:]

Etrade (ETFC) is expected to release Feb. results according to Layton. Results will surprise the market. Expect Etrade to rise in afternoon trading.

2008 Mar 07 06:09 AM

[fxtrader07:]

iT's just another chapter of near-criminal behaviour of the big Investment banks. Being to a large extent respnsible for the current mess they do everything to destroy others and get the most out of it. Actually, a very close examniation of the trading books of all big brokers and investment banks as well as their analysts' calls should be undertaken. But heck, capitol hill surely won't tkae on mer, jpm and gs, right? after all, they need them way too much for running the banking system, the fed and hence allow govt to spend money on guns and wars it actually could never afford to spend

2008 Mar 07 06:56 AM

[helplessobs...:]

Wow, JPM destroyed Eire Pa. schools with interest rate swap options and now everything CEO Goldstone has created. I'd be a bit wary if I was a JPM officer, strong emotions are being stirred. I bet no JPM officer will go to Birmingham, Al and laugh at all the money Jefferson County has lost on its sewer bonds swaps. If it goes to bankruptcy court they had better wear bullet proof vests when they testify about their fees and the "good deal" they gave the county.

2008 Mar 07 11:45 AM

[Pablo:]

JPM is no longer an object of MY respect........I really wonder....

2008 Mar 07 12:21 PM

[john haskell:]

Yesterday's trivial $28 million margin call is today's $600 million margin call. They are working in a "fairly safe area of the mortgage market" like the Gaza Strip is fairly safe. Alt-A, or otherwise known as "pre-default" mortages, never existed before the current debt bubble was inflated. Now they are returning to well deserved oblivion.

Back to the future and 20% downpayments with income verification and self amortizing loans. Goodbye to TMA and their ilk who sold free puts to homedebtors.

2008 Mar 07 04:52 PM

[User 161630:]

Washington Mutual won't be the only bank to fail. I walked in to a Washington Mutual and requested a auto loan and they said they only do real estate. This should tell you that they will be loosing their jobs soon.

2008 Mar 07 04:54 PM

[Frozen Tundra:]

John Haskell - Do you even know what you are talking about ?
TMA's Alt A loans were made at 67% LTVs I believe.
That seems like a lot of cushion even in a bad housing market to high credit score borrowers.

Your comments might be more relevant to CFC.

As for WaMu, I have a WaMu credit card that I never use with a tiny credit line $3500 - most of my lines are 20k or more w/ other cards.

Anyway, I got a letter today from Wamu saying they have reviewed my account and decided to close it. My reaction ? These guys must be in deep doo doo if they are closing my account. Never had that happen before.

2008 Mar 07 07:58 PM

[HedgeTruth:]

this is comical reading all the whining longs who have lost their money...

you guys are fools to touch any of these toxic companies...

do you not understand what they were doing...

in a nutshell, with less than 1 billion in equity, they were borrowing between 20-30 billion and buying mortgage backed securities...(mbs)

if the MBS fall in value just 1 billion then all their equity IS WIPED OUT...

GONE...POOF

this is happening all over the street...

these leveraged idiots were trying to pick up nickels in front of a bulldozer and like everything else in its way, they got scooped up and dumped...

please all you bargain hunting fools who troll these boards, stop buying anything related to financials...

2008 Mar 07 08:11 PM

[HedgeTruth:]

my previous comments are about carlyle group as well as thornburg...

2008 Mar 07 08:13 PM

[chvzgrca:]

Could be JPM and others are showing up their cash resources to possibly purchase notes for deep discounts or a possible acquisition.

2008 Mar 08 11:03 AM

[jjason:]

The last I looked, on Yahoo.com, TMA had about 2 Billion dollars in shareholders equity and 34 Billion dollars in liabilities. Every week,it seems, TMA gets margin calls. Every week, it seems, the value of TMA's assets go down. If I had loaned TMA money, I would want it back too!

2008 Mar 08 02:00 PM

[User 131817:]

I personally own several thousand shares of TMA. They are a straight up company and Larry Goldstone nor Garrett Thornburg are out to take any lender ! I have a hard time understanding JP Morgan's sudden interest in trying to drive the company to it's grave. It was doing okay on share price until JPM started their heat, for no real good reason that I have seen so far.

2008 Mar 10 06:28 PM