Friday, December 08, 2006

Some points of interest at Citadel from Amaranth fall out

John Carney over at is following some of the loose threads hanging out at Citadel after the Amaranth implosion.

First, he points out that they're not all heart over at JPMorgan, who was the margin lending broker for Amaranth:
The basic outline of the story is that after gas prices sank and the spread between March 2007 and April 2007 natural gas futures shrank, Amaranth found itself in the troubling position of having to sell off assets, in part to meet the margin calls of its broker, which happened to be JP Morgan. Citadel and JP Morgan then teamed up and bought the portfolio at a steep discount—a move that some at the time thought looked like a bailout of Amaranth.

As it turned out, Amaranth collapsed anyway. And the “bailout” was anything but an act of charity or an LTCM-style attempt to shore up market stability. JPMorgan and Citadel had their eyes keenly on the prize—profits. In a matter of weeks, JPMorgan turned around and sold it’s half of the Amaranth position to Citadel, pocketing a cool $750 million.

It must be nice to be a JPMorgan prime brokerage client. First they squeeze you on the margin call, then scoop up your assets and make $750 million by selling them. Wonder how Amaranth founder Nick Maounis feels about JPMorgan these days.

And he describes the situation Citadel finds itself in:
Citadel acknowledged that there is still substantial risk connected to the remaining Amaranth trades, and it set aside cash reserves to cover those risks. “These reserves reflect the illiquidity of the portfolio and the operational risks involved in the initial assumption of the portfolio,” Citadel said.

Citadel said it expects to have eliminated those risks, and the need to reserve funds, by the end of the year.

Then he shines a bit of light, via a Bloomberg report, on how this is costing Citadel:
Citadel Investment Group LLC, the hedge fund controlled by Kenneth Griffin, sold $500 million of five-year notes today in the first-ever sale of bonds by a hedge fund, according to a person familiar with the transaction.

The fund sold the notes at a yield of 1.90 percentage points more than similar-maturity Treasuries, said the person, who declined to be identified because the sale is private. The average yield premium, or spread, on similarly rated notes is 1.22 percentage points, according to data compiled by Merrill Lynch & Co.

The sale by Chicago-based Citadel may allow it to rely less on financing from Wall Street investment banks.
Would that be JPMorgan?

Guambat, being a humbled and uninformed creature holed up way out in the middle of the Pacific, has to wonder if JPMorgan had some kind of bridging put arrangement all along, considering the way they've cleaned up whereas Citadel is being taken to the cleaners on its debt pricing simply to get from underfoot of its margin lender.

You'd also have to say that that kind of pricing suggests the possibility of a bit of desperation, and there's nothing that the hunters on Wall Street love so much as to track down and kill wounded beasts.

Guambat shudders at the thought and shuffles back to his burrow to lick his wounds.


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