So, now we know what some of this toxic crap is worth -- 27 cents on the dollar.
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E*Trade to Get $2.55 Billion Cash Boost From Citadel (Update3)
By Sebastian Boyd and Bradley Keoun
Nov. 29 (Bloomberg) -- E*Trade Financial Corp., the online bank and brokerage, ousted its chief executive and got a $2.55 billion infusion from Citadel Investment Group LLC after an analyst's bankruptcy warning spurred customers to withdraw cash.
Chief Executive Officer Mitchell Caplan stepped down and Chief Operating Officer Jarrett Lilien took over as acting CEO, New York-based E*Trade said today in a statement. Investors led by Citadel, the Chicago-based hedge-fund manager run by Kenneth Griffin, will get a 17 percent stake in E*Trade, and will pay about $800 million, or 27 cents on the dollar, for asset-backed securities with a face value of $3 billion.
Caplan's plan to boost lending revenue by expanding the company's banking business backfired as borrowers defaulted on mortgages. Citigroup Inc. analyst Prashant Bhatia earlier this month said there was a 15 percent chance E*Trade would be forced to seek protection from creditors. The report made customers ``concerned about the safety of their assets,'' and since September they've pulled about $6 billion, or 15 percent, of the cash held in E*Trade accounts, according to Lilien.
``Our expectation is that the money will move back now that people see that there is this strong deal, this strong investment led by Citadel,'' Lilien, 45, said in an interview. ``We feel it takes concerns off the table.''
E*Trade rose 57 cents, or 11 percent, to $5.85 at 9:35 a.m. in Nasdaq Stock Market trading. The shares have lost about 74 percent this year, making the company the worst performer on the 12-member Amex Broker/Dealer Index.
Lowered Forecast
E*Trade reported its first quarterly loss in five years on Oct. 17 instead of the profit that analysts predicted. The company also cut its 2007 earnings forecast for the fourth time this year.
``This capital infusion will restore investor and customer confidence in the company,'' Griffin, who turns 39 this month, said in the statement. E*Trade is ``well-positioned to execute on its growth strategy for its core retail business.''
Citadel and investment funds managed by New York-based BlackRock Inc. will pay $1.6 billion immediately in return for stock and senior unsecured notes paying 12.5 percent, E*Trade said. Citadel will pay another $150 million for bonds and shares in January. In total, the group will get shares worth 19.99 percent of the common stock currently outstanding.
E*Trade will take a $2.2 billion charge for the sale of the asset-backed debt portfolio.
Cash from Chaos
Donald Layton, a former vice chairman of JPMorgan Chase & Co. will take over as non-executive chairman, the company said.
The world's biggest banks have written down more than $50 billion in bad debts and trading losses after rising U.S. subprime defaults led to a surge in credit costs in August. The losses have also cost the jobs of the CEOs of New York-based Citigroup Inc. and Merrill Lynch & Co. and Zurich-based UBS AG.
Citadel manages about $17 billion and has thrived by buying distressed assets. The company took over the energy trades of Amaranth Advisors LLC after the Greenwich, Connecticut-based hedge fund collapsed in September 2006 under the weight of $6.6 billion in wrong-way bets on the price of natural gas.
In July, Citadel bought most of the assets of Sowood Capital Management LP after two hedge funds managed by the Boston-based firm lost more than 50 percent from credit investments.
Bankruptcy Speculation
E*Trade said Nov. 9 that it would write down the value of asset-backed securities because of downgrades by credit rating agencies.
``What this deal does is, it takes the asset-backed securities portfolio off the table,'' said Lilien, the acting CEO. ``That's our biggest source of concern that's totally behind us.''
The U.S. Securities and Exchange Commission began a formal inquiry on Oct. 17 into ``matters related to the company's loan and securities portfolios,'' E*Trade said Nov. 9.
E*Trade, the fourth-largest discount brokerage by assets, may fetch between $10 to $11 a share in a potential takeover by TD Ameritrade Holding Corp., David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote to clients this week.
Ameritrade is the third-biggest U.S. discount brokerage behind top-ranked Charles Schwab Corp. and Fidelity Investments.
To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net ; Sebastian Boyd in London on sboyd9@bloomberg.net or
Last Updated: November 29, 2007 10:05 EST |
