Bridge Street Journal, Vol. 3.10: ETFC Halved (But Not Via Stock Split); BX Fascinating but Unpredictable

Bridge Street — Mon, 12 Nov 2007 11:44:51 -0500

Yahoo! Finance reports that E-Trade Financial lost about 50% of its market value on Monday after reporting - what else - big subprime writedowns. Companies like E-Trade, which have other lines of businesses besides investing in worthless assets, are hurt doubly by such write-downs. First, they obviously lose money by writing down the value of what they own (though presumably they could "write-up" the value if the assets suddenly started performing, but don't hold your breath for that). Second, their other lines of business are hurt as clients leave for competitors. For instance, the Yahoo! article notes that half of ETFC's clients' deposit accounts are over the $100,000 FDIC-insured limit. People usually don't keep their money in an account at a bank they think might fail (an analyst cited by the article claims there's a 15% chance of bankruptcy). And, one might be less inclined to make equity trades and the like through a broker that is in shaky financial shape. This one-two punch can have big effects (like make a company fall by 50% in a day). Of course, if you have been eyeing ETFC for a long time, and believe it has closer to a 0% chance of failing, you might be tap-dancing your way to your broker to buy shares. Just be careful which broker you use - I hear some have a 15% chance of being insolvent soon.

Forbes reports that Blackstone reported a 3Q07 loss of $113M versus a profit of $373M last year (before its IPO). The loss, according to cited filings, was due to various charges associated with the IPO. That is pretty typical for newly-public companies, but there are some notable lines in the article. CEO Schwartzmann noted that, "while it will be difficult to structure very large leveraged transactions in corporate private equity and real estate until the credit markets improve, pricing of assets is more favorable." In other words, "the bad news is that the debt markets are falling apart such that it costs too much to borrow to finance deals attractively, but the good news is that the debt markets are falling apart such that those with cash (i.e. BX) can snap up assets that others are selling on the cheap out of necessity." BX is an interesting beast, and I'm not sure how any value investor could ever own any shares of it except as a Grahamian speculation (Graham noted that, if the desire to speculate was high, take a small bit of your portfolio and speculate with it, but don't expect much success). By its very nature, BX is an unpredictable black box. It's hard to see how one could get any handle on a future (or current) value of any kind, given the virtual impossibility to ascertain what its assets will be (or are) worth.

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