Hirendu Vaishnav's  Instablog

While there are a lot of numbers reported in CitiBank's recent quaterly earnings there is ONE critical comparison that is missing -- that is the sequential analysis of the credit losses (Q1 vs. Q2). I believe this is critical information not just for CitiBank but for all financials.

First here are the links to Q1 report (www.citigroup.com/citi/press/2009/090417a.htm) and Q2 report (www.citigroup.com/citi/press/2009/090717a.htm).

Getting to the point on credit losses: 

April 17th report: Credit costs of $10.3 billion, up 76%, consisted of $7.3 billion in net credit losses, a $2.7 billion net loan loss reserve build, and $332 million of policyholder benefits and claims. The total allowance for loans, leases and unfunded lending commitments was $32.7 billion.

July 17th report: Credit costs of $12.4 billion, up 81%, consisted of $8.4 billion in net credit losses, and $3.9 billion loan loss reserve build. The total allowance for loans, leases and unfunded lending commitments was $37.0 billion, up from $21.9 billion in the prior year period.  

As seen from these numbers, from Q1 to Q2 -- credit costs are STILL RISING. Losses were up by $1.1B and loan loss reserve is also higher by $1.2B. Unfortunately, from these reports, we do not get details of early delinquencies vs. late delinquencies; so a greater analysis of month to month trend is not possible based on these reports (companies like E*Trade financial provide such details).

Looking at Bank of America; things don't look any brighter. Indeed, the CEO himself admitted that after being profitable for two quarters, it would be tough to remain profitable for rest of 2009. Looking at Bank of America loan loss numbers in a sequential manner -- at least in this case BOA press release included loan details comparison with respect to prior quarter.

July 17th numbers: 

As can be seen above, while provisions were kept flat, charge-offs increased by nearly $2B at BOA. Even more critical, non-performing assets increased by more than $5B in second quarter. Indeed, after subtracting the charge-offs, non-performing assets increased by nearly $7B. These are all NEW delinquencies.

Given that on quarterly basis, loan performance numbers are still getting worse is an indication that problems at CitiBank and Bank Of America are FAR from being over. Indeed increasing unemployment and recent indication that early stage delinquencies may be on rise make it appear that things could get worse. For example, foreclosureradar.com's California report for June 2009 showed HIGHEST number of notice of default on record ever. Notice of default is the "first" step towards foreclosure and is the early stage indicator of things to come. June 2009 being worse than entire last year and this year is indeed quite scary and banks like Citi, Wells Fargo, Bank Of America, JPMorgan Chase etc. are more likely to be impacted by this than some of the other banks. And this is only mid-summer. Seasonally things get worse in real-estate late-summer and fall. So the impact of seasonality may indeed me much more severe this year than it was last year.

While I wish to remain optimistic, and have net long position on financials (through XLF) - it is hard to remain optimistic in light of these numbers. I have tried to hedge my long position in financials with some FAZ.

Disclosure: Long XLF. Long FAZ

Today was supposed to be a great day for E*Trade stock price. 

Most retail longs were waiting anxiously for the Loan performance data release as promised. It was widely expected that E*Trade will continue to see improvement in loan performance which should once and for all put an end to speculation that E*Trade's loans will destroy the company.  And indeed, the loan performance metrics released at 6.49am (link) showed that the delinquecies decreased further which would have meant that provisions would have been reduced in coming quarter and hence we could have seen a relief rally in the stock price today. 

However, within minutes of excellent loan performance data, at 6.52am to be exact, E*Trade announced that they are giving away majority of the company to Citadel for approximately $1 to $1.20 per share (link).

This is a massive take-under of the company with full co-operation (indeed active assistance) of the current management. The key point here is the timing of the two announcements. Clearly, if the Citadel announcement was done even a few hours after the metrics release - it would have looked VERY embarassing (or suspect), for the CEO to suggest a price of $1 to $1.20 since the stock price could have easily risen from closing price of $1.65 after the loan performance details.

Indeed, ever since it has been clear that E*Trade was putting it's trouble behind, every attempt has made to push the stock price down so that such a  "take-under" can be completed. Note that at last quarter's earnings report, earnings were missed by 1 cents to suppress the stock price (which at that point had risen to $2.90s). See my previous article about that release.

Subsequently price has been suppresed by continued short-selling.

All this was in preparation of the take-under of a great American company - the only company that managed to survive after the same players who shorted Bear Stearns, Lehman Brothers, Merril Lynch, WAMU and Wachovia out of existence also attacked E*Trade. Today the final plan was executed - in a terrible haste - because otherwise the $1-$1.20 conversion price on debt-swap would have never been acceptable. By manipulations, they have diluted current E*Trade shareholders 2x to 3x more than what was necessary.

Note the extreme haste with which this deal is getting consumated and the events that lead to this deal. It started with surprisingly good loan performance numbers in March 2009. To avoid the stock from rising up too fast, my belief is that earnings were missed by 1 cent in Q1 by over-provisioning and OTS's requirements were suddenly brought forward with a threat of major dilution. When Schwab indicated that they may be interested in E*Trade, I suspect, that take-under plan had to be put in high-gear. Citadel CEO joined E*Trade board suddenly probably to make sure nothing goes wrong. Stock price was kept in control with heavy shorting, and then the deal had to announced within 3 minutes of loan performance data.

My question to E*Trade management is, did OTS require you to do this deal within 3 minutes of loan performance data being released? Or would they have been OK if the deal was done 1 week later or even 1 day later? Do you believe that good loan performance data and metrics would have helped current share-holders more and hence would have garnered us better conversion price on those debt swaps? And if so -- why not wait for 1 day -- or even few hours before the deal? Further - what is the hurry in closing this deal by June 18th (i.e., 1 day after the announcement) as indicated in filings today. It is all geared towards making sure that no-one has a chance to challenge "the deal".

The saga that started with Citadel approaching E*Trade in summer of 2007 for something (not realized), Stock Analyst Prashant Bhatia causing a run on the bank in Nov. 2007, which caused $3B in deposits leave the bank, which caused a shot-gun wedding to Citadel - has now come full circle. 

It is clear that only thing killing E*Trade is the debt it was forced to take on due to a manipulative report by an analyst. E*Trade would have survived it's loan portfolio fine (as it is clear now).  

I am only a small investor writing from my bedroom - I have no power to stop anything. Last few years have taught me that as a retail investor, you are up against an entire system that is working against you (wall-street professionals, analysts, reporters, politicians, regulators and maybe even the management).

I just hope that a large investor steps up to question this deal and that much better alternatives to this deal exist in an open and "free" market.

Disclosure: Author is long in E*Trade (sadly).

On June 9th, 2009, short interest numbers were released for E*Trade financial. Surprisingly, E*Trade had almost 25% increase in shorts during the period of May 16th to May 29th. This information is accessible here www.reuters.com/articl....

As per this data, at the end of trading day on May 15th, there were 73,136,352 shares of E*Trade that were shorted. This number had risen to 90,703,730 at the end of trading day on May 29th; an increase of 17,567,378&nbs... 24.02% in only 9 days.  

While this increase in short is alarming by itself, it becomes even more interesting if one analyzes the price and volume during these 9 trading days. I summarize this data below. I am including May 15th closing price as a starting price reference. This price and volume data was collected from yahoo finance website.

What is interesting to note here is during these 9 days, 9.55% of total volume was NEW short positions E*Trade. This is a substantial amount of volume which, in normal circumstances can create quite a serious price decline.

Surprisingly, during these 9 trading days, the price of E*Trade declined by only 2 cents (from $1.46 to $1.44). So, inspite of this heavy shorting, shorts only managed to push the price down by only 2 cents. One only has to wonder that in absence of such heavy shorting, E*Trade's stock price would have probably gone up along with the market. And indeed, it would have been a great news for E*Trade shareholders as E*Trade is in the middle of a secondary offering and higher price would have reduced the dilution due to the secondary offering. 

This indicates that all this shorting was done with the objective of keeping E*Trade price from going up.

This further affirms the belief by many unfortunate E*Trade shareholders that E*Trade stock price continues to be manipulated by wall-street professionals, hedge funds, analysts and even media reporters. Further, government agencies continue to do nothing to protect retail shareholders. Indeed, when the short-selling ban and disclosure requirements went into effect last year, Citadel was the most vocal opponent of that and managed to convince SEC and then Chairman Cox to exclude options market-makers from both short-selling and disclosure requirements.

Fortunately, things are really looking up for E*Trade on the operational side. Brokerage growth and revenues remain envy of the rest of the industry and loan performance has turned a corner. Citadel chief Ken Griffin has officialy joined E*Trade Board of Directors and one hopes that this would mark and end of stock price manipulation and never-ending shorting and E*Trade can start on the long and arduous road to unmanipulated recovery.

Disclosure: Author is long E*Trade Financial.