Chicago hedge fund to buy part of E-Trade
NEW YORK -- 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.
Chicago-based 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, Mitchell 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 home 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. "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.
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.