Citadel To The Rescue?
The WSJ offers a fascinating inside look (subscription required) at Citadel Investment Corp.'s move to inject $2.55 billion in cash into troubled E*Trade. The big hedge fund run by Chicago-based Kenneth Griffin was already an investor in the discount brokerage and banking company, so it had skin in E*Trade's decline. But the Journal says it also has become the go-to player on Wall Street for companies in crisis.
"In the past year, Citadel has profited by swooping in and buying a range of investments from troubled hedge funds Sowood Capital and Amaranth LLC, Still, the hedge fund has underestimated the extent of the housing market's problems in the past year, according to people close to the firm, and the E*Trade deal has risk. If the housing market continues to tumble and the economy sinks into a recession, Citadel can still be hurt by declines in the mortgages and other assets."
Here's what else the Journal had to say:
"Citadel's big gamble comes at a key moment in the global financial crisis. After largely treating mortgage portfolios and banks for months as if they were so much toxic waste, hedge funds and private investors are starting to make some big investments, hoping to pick off opportunities. Abu Dhabi's investment arm agreed to pump $7.5 billion into Citigroup Inc. earlier this week, while hedge funds have been fighting over the carcass of failed British bank Northern Rock.
"If they've timed an investment plunge right, there are fortunes to be made. And the new money could help set a realistic floor value for the hundreds of billions in mortgage-related securities that have been peddled around the globe. But bottom-fishing has its risks. Since Bank of America Corp. made its $2 billion investment in Countrywide Financial Corp. three months ago, the value of the U.S.'s biggest mortgage lender has tumbled. The stake is now estimated to be worth around $1 billion, though it pays a 7.25% dividend."
November 30, 2007; 8:20 AM ET
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Posted by: Avraam Jack | December 2, 2007 5:08 PM
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