AP
E-Trade Gets $2.55B Infusion, CEO Out
Thursday November 29, 6:01 pm ET
By Joe Bel Bruno, AP Business Writer
E-Trade Secures $2.55B Cash Infusion From Citadel Group, CEO Out, Acting CEO Eyeing Deals


NEW YORK (AP) -- E-Trade Financial Corp., which flirted with collapse amid the growing mortgage crisis, said Thursday it is getting a $2.55 billion cash infusion from Citadel Investment Group in a bid to revive the battered discount brokerage.

Citadel, one of the nation's largest hedge funds, plans to buy E-Trade's troubled asset-backed securities portfolio and take it off the brokerage's books. Hemorrhaging in that portfolio caused massive writedowns since the summer, and triggered panic that further losses would push E-Trade into bankruptcy.

The deal also forced E-Trade's embattled chief executive, Mitch Caplan, out of the job he's held since 2003. He'll be replaced on an interim basis by President and Chief Operating Officer Jarrett Lilien. Former JPMorgan Chase & Co. vice chairman Donald Layton will become non-executive chairman.

It is the latest managerial shakeup at a financial house in the past few months as Wall Street suffered dramatic losses when borrowers with shaky credit began defaulting on their loans, sending credit markets into disarray. Earlier this month Merrill Lynch CEO Stan O'Neal and Citigroup Inc. head Charles Prince were forced out of their jobs.

Lilien said the deal with Citadel will not impede any future strategic moves, and that he's still quite interested in consolidation with competitors like TD Ameritrade Holding Corp. and Charles Schwab Corp. But, in the meantime, he plans on trying to win back the thousands of customers that fled to those rivals in the past few weeks.

"We've been under attack and we've been waiting for the opportunity to counterattack," he said in an interview with The Associated Press. "Some of the competition took some low blows, and we're looking forward to hitting back."

The online brokerage industry is known for being hyper-competitive, and a number of firms launched an advertising blitz this month aimed at luring worried E-Trade customers. He said E-Trade lost some 6,000 accounts since the crisis began, while customers pulled back about $14 billion worth of cash and assets. The New York-based brokerage has some $226 billion worth of customer assets.

During the past few weeks, E-Trade executives have met with about 40 bidders that made overtures to E-Trade -- including rival brokerages and other financial institutions. He said Citadel was the first to contact E-Trade, and had "really the best offer."

Both Schwab and Ameritrade had been circling E-Trade about a possible deal, but the chief executives of both brokerages said they were not interested in touch the company's banking assets. Lilien said E-Trade was not interested in being split up, and that the overall business was in fine shape.

E-Trade has not ruled out selling off some businesses in the future to solidify its business, but there are currently no plans to do so, he said.

The only problem was its mortgage portfolio, which included home loans and home-equity lines valued at about $29.3 billion. It also owns some $12 billion of mortgage-backed securities that were all but wiped out during the summer's credit turmoil.

"We view the capital from an established institution like Citadel as very positive," said William Tanona, an analyst at Goldman Sachs. "While we believe it removes some doubts about E-Trade's future, in our view the company still has difficult matters to navigate through in the next 12 months."

E-Trade has taken some $197 million in pretax writedowns on its securities portfolio. It will take a $2.2 billion charge as a result of the sale of the asset-based securities portfolio and will record a larger-than-expected fourth-quarter loss on its home equity loan portfolio that will result in an ending allowance of over $400 million.

The move allows E-Trade to get the troubled asset-backed securities off its books entirely, and that should begin to restore confidence of investors. The stock has plunged some 78 percent his year and has been trading near an all-time low.

On Thursday, its shares fell 46 cents, or 8.7 percent, to close at $4.82 after trading as high as $6.04 earlier in the session.

The Citadel-led investment includes immediate funding of about $2.4 billion, with the remaining $150 million expected to fund by Jan. 15. The investment fund is buying E-Trade's $3 billion mortgage-backed portfolio for about $800 million in cash.

E-Trade will receive $1.6 billion of capital, including contributions by BlackRock Inc.-managed investment funds, in exchange for 12.5 percent senior unsecured notes and common stock. When the investment closes, Citadel is expected to invest an additional $150 million in exchange for 12.5 percent senior unsecured notes and common stock.

The amount of common stock E-Trade is expected to issue totals just under 20 percent of outstanding shares.

AP Business Writer Jennifer Malloy contributed to this story from New York.