Hirendu Vaishnav

Citibank's Problems Are Far from Over

I agree with you on the larger reserves. But at this point I am obsessively looking at leading edge of defaults. The data I can get from the report is current losses and provisions for future reserves.
BOTH numbers were higher and specifically if the provisions are higher they must indicate that non-performing assets are still increasing. This I believe, is the key. Clearly, there are going to be two sides to any trade and you may believe Citi is a buy here. All I am saying is - things are not clear and if the readings from other fronts (unemployment, new loan defaults) are correct and if they affect Citibank (I don't see why not); things may get worse before they get better.

On Jul 19 03:26 PM Angry Banker wrote:

> Strange analysis. Yes, credit costs were higher, but partially because
> of significant building of loss reserves. This means the company
> is now in a better position from a balance sheet perspective than
> before (much better actually). So as the losses flow through, the
> company's capital will not take a significant hit because as the
> losses reduce in future quarters (granted, this may not be until
> the 1st quarter of 2010), the company will be able to release reserves.
> In fact, the company is in a much healthier position than previously.

Why Is E*Trade's CEO Giving the Company to Citadel?

Al the pal -- look carefully at their leading edge of loan portfolio performance. As of May 2009, as per my calculation, they are at about $75M per month negative after everything (without the current debt swap and PIK). And this is hugely decreasing. Indeed in a few months, over-provisions so far would have covered everything. Mark my words and come back and look at what happened here about 3-6 months from now. However, I strongly feel that Citadel and CEO will not allow that to happen. They might move quickly to take E*Trade private to sell it off to hide the true strength of E*Trade's balance sheet.

Because if they don't, there are going to be some serious questions as to what happened here. Indeed, they may move sooner.

If they take this private, not only they would have taken over the company through manipulation, they would then exclude current shareholders from any future gains.

I am not sure what is your motivation in defending Citadel so heavily. But I thank you for your feedback.

Why Is E*Trade's CEO Giving the Company to Citadel?

E*Trade has no Option ARMs or Alt-A. In addition, they have no exposure to commercial real-estate and negligible consumer debt. In my opinion, E*Trade would be completely unaffected by future waves of troubles.

Again -- today they slammed current shareholders with $1.034 conversion rate on the swap (not even $1.20). In addition, the secondary offering was priced at $1.10 -- substantially below yesterday's closing price and way below $1.97 closing price on Friday. Further $400M raise was inexplicably raised to $478 (even at the punitive $1.10 price) AND ON TOP OF THAT, they said it was oversubscribed and are authorizing 65M more shares.

If it was oversubscribed; wouldn't you think the prices could have been better as a result.

This has been ramrodded from the inside.

On Jun 18 01:44 PM gwinner wrote:

> Most emphatically, it may not matter that the mortgage loan portfolio
> performance is improving right now. The Option ARM/ALT-A reset/recast
> disaster begins this fall and will last 3 years. That "may" strike
> at the core of the E*Trade portfolio. Couple that with the ongoing
> HELOC bleeding and one would have to believe that management at E*Trade
> is very concerned.

Shorting E*Trade Just to Keep the Price from Going Up?

This was my point -- they shorted the stock mainly to keep the price low for the secondary offering. Since the SPO was for a fixed amount ($150M), lower prices would mean that greater amount of shares would have to be issued. Which would mean that current shareholders would be diluted more. They possibly did not care much about subsequent short-squeeze as their objective was greater dilution anyway (and maybe they were going to use shares obtained through SPO to cover those shorts).

This is what I was upset about -- they shorted E*Trade to dilute current shareholders more. If they shorted in absense of any SPO, I would not really care (as long as those were not naked-shorts with full intent of the company folding door when the time came to deliver).

Anyway -- gotta love todays price action :)

On Jun 11 10:17 AM 22thoroughbred wrote:

> I think Hirendu makes a good point, while the market was strong there
> were big short posns. taken, what probably happened was hedge funds
> sold short and used the shares they get from the secondary to cover,
> if the secondary is done below market price (as many have been) you
> have free profit. With the secondary done the pressure of the shorts
> dissipates and the stock can go up.

Shorting E*Trade Just to Keep the Price from Going Up?

I am super long (if there is such a word). I am hoping for NO BUYOUT. A buyout will cap our gains at 2-3x -- whereas an independent E*Trade can return us 10-15x over next 2 years (after the loan issues are behind us). This is a purely long term holding for me -- but in short term this stock may have a huge short-squeeze rise. In absense of manipulations, shorts and chokehold by Citadel -- I believe that a fair market value of E*Trade (even with loan issues) is 2x-3x right now. With loan issues behind -- it could easily be worth a lot more.

Anyway -- that is what I believe.

On Jun 10 05:01 PM User 90380 wrote:

> So Hirendu, in short can you describe what your expectations are
> for this stock (price, buyout, otherwise) and timing? Thanks

Shorting E*Trade Just to Keep the Price from Going Up?

Honestly - no one knows who is shorting E*Trade so heavily. Disclosure laws in our country are heavily geared towards being unfriendly to retail investor and regulators seem to be pretty much controlled by wall-street insiders.

The only point I was making was that Citadel was the most vehement opponent of short-sale disclosure requirements for options market-makers (as reported in news at that time). If options market makers are only shorting to cover put options that they wrote, why is there a need for non-disclosure of those positions? Open interest in put options is reported on a daily basis so disclosure of short positions from options market-makers should also be disclosed (and one would expect it to be close to a 1-1 match between put options written and stock shorted).

Will E*Trade Survive? Four Ways It Can

Great article. I am a serious (read -- "too many shares") long in E*Trade. However, I believe that your contention that Citadel's and E*Trade share-holder's interests are aligned is wrong (in my opinion). Look at the numbers. Citadel has $2.1B loaned to E*Trade and they own 89M E*Trade shares. Even if E*Trade share had to be at $10, that would make Citadel's share-stake worth only $890M.

So Citadel's main interest has to be in protecting their $2.1B in notes.

If so, Citadel's interest is EXACTLY opposite of current share-holder's interest. Their interest should be to merely let E*Trade survive so it continues to payback debt and company's intrinsic value is preserved while the stock price struggles. If E*Trade is so valuable, they will benefit much more if they can get the company for cheap (what you describe as "taking private" -- which I would dare to call a controlled "take-under"). I don't see how E*Trade current shareholders can benefit from such a move.

Given this scenario, indeed your assertion that CEO Layton is Citadel puppet is not very comforting. In such a scenario Layton's task would be to push stock price as low as possible to get maximum dilution for Citadel debt conversion (e.g., maximum ownership to Citadel or whoever gets hand-picked for that debt conversion). Indeed, this is the scenario which many longs who follow this stock worry about. The company is great and is doing good lately, but the stock price is being kept depressed (read my article on seeking alpha).

So in my own interest, I have to hope and pray that CEO Layton is not Citadel's puppet (as you state). Because if that is true, the whole game rigged to leave current shareholders with nothing while Citadel walks away with the loot.

Who is SEC supposed to serve?

Let me be the first one to critique my article. Yes, there is some rhetoric and hyperbole in above article.

Of course SEC should get feedback from all parties concerned and indeed also from those they are supposed to regulate. My point was that such a reply from those SEC is supposed to regulate should not surprise them and most importantly, SEC/FINRA should not forget WHO it is supposed to protect -- which is common shareholders like us.

E*Trade: Why the Strange Earnings Report?

Schwab is now saying they are interested in E*Trade. This makes it Layton's fiduciary duty towards E*Trade shareholders now to exhaust that additional possibility before handing over the company to someone else in a private dilutive deal.

E*Trade's Mortgage Snafu: Will It Prompt a Sale?

There is a bit of fear-mongering in this article which is ignorant at the least and fradulent at the worst.

Let us break down the $2.243B in delinquent loans:
HELOC delinquencies $724M -- Current Provisions $818.6M
1-4Family delinquencies $1469M -- Current Provisions $308.8M

HELOC delinquecies are down this quarter. Yet they are provisioned more than total delinquencies even assuming 100% loss on all delinquencies.

1-4 Familly loans; which are mostly 1st liens, usually have a much reduced loss rate depending on the LTV and recovery rates. Yet E*Trade is provisioned assuming at 21% loss on that. Delinquency rates on 1-4 Family is likely to come down in future, though charge-off will be at current level for one more quarter.

So in my opinion, using $2.243B deliquencies without mentioning over-provisions and improving future delinquencies is dishonest.

If anything, E*Trade seems to have finally put all loan problems behind and it seems it is suffering now from too much provisions intended to push the stock price lower so that private placement of equity offerings can be done at sweetheart of stock prices.

In other words, a great company that will be taken over by unscrupulous means, aided and abetted by people like this author.

E*Trade: Why the Strange Earnings Report?

On Apr 29 06:33 PM danS wrote:

> I'm guessing that their equity partner is going to be Citadel and
> that Citadel is going to get a BIG chunk of the company for a song.
> Layton and company want to make the strongest case for the need for
> an equity partner so the stock holders don't feel too ripped off
> I'm guessing Citadel is going to get 2/3 of the company for about
> 2 billion dollars.

That does not sound right. If they had taken a mere $5.7M less provisions they would have met earnings estimate. That would be FIRST time since the whole crisis begin in August 2007. Along with that, if they had talked about great improvements on all fronts, the stock would be at $3 or higher today instead of $1.60.

If this drive down of stock price leads to greater ownership by Citadel or any other private investor; this should be considered violation of fiduciary duties towards current shareholders of E*Trade. I do not mean to cast doubt about CEO's intentions. He has done a great job in steering this company back to path of success. And I hope he has best interest of current shareholders at heart. I also hope that our regulatory and legal systems are strong enough to protect against such actions.

E*Trade is the only company in financial markets which has die-hard fans (similar to Apple in hi-tech). I am hoping for this company to come out of this with flying colors and stronger than ever to the benefit of all stakeholders.

Exchanges Propose Weakened Uptick Rule

On Mar 27 06:02 PM Tradermike wrote:

> Your explanation of the old uptick rule is totally wrong, it was
> not that restrictive, once an uptick was established an infinite
> number of short sales could be initiated at that price, on the ask
> or bid, as long as the stock never traded above that sale price,
> and there was no restriction on shortsellers making the first sale
> on an uptick

I believe you are mistaken with the details. Once an uptick was established, an infinite number of shorts sales would be allowed as long as there was no "downtick". The moment there was a downtick, one would have to wait for an uptick before shorting more. In the world of ask/bid price -- if the ask and bid price did not move, every market buy order followed by a market sell order will create a downtick which will stop short-selling. So in the original uptick rule if the short-seller executes a market sell order; it will automatically establish a down-tick. The only way this could have been avoided under original uptick rule was to short-sell with a limit order on the ask price and then front-run other limit orders (another illegal activitity - which also happens quite frequently).