In a plan overseen by the federal Office of Thrift Supervision, Citadel will make a two-part investment in E*Trade.The first component is the purchase of E*Trade's entire $3 billion portfolio of asset-backed securities for a value of around $800 million. The second component is the purchase of $1.75 billion worth of 10-year notes, paying an annual interest rate of about 12.5%.
After regulatory approvals, Citadel is expected to own almost 20% of E*Trade, including the approximately 3% of the broker it already holds, and gain a seat on the company's board.
As a result of the sale of its ABS portfolio, E*Trade said it will take a charge of $2.2 billion. The company also expects to take a provision in the fourth quarter related to its portfolio of home-equity loans in excess of the quarter's expected losses that will result in an ending allowance of more than $400 million.
The deal also signals the end of the tenure for E*Trade Chief Executive Officer Mitch Caplan, who has led the firm since 2003. President Jarrett Lilien will serve as acting chief executive until a new CEO is found. Donald H. Layton, a former vice chairman of J.P. Morgan Chase & Co., will replace the firm's current nonexecutive chairman. Mr. Caplan will retain a seat on the board.
E*Trade is known for its discount brokerage operations but in recent years it has built up a big business in mortgages, lines of credit and mortgage securities. The strategy produced several years of record revenue. That came to an end this year when borrowers with shaky credit began defaulting on their home loans, sending shock waves through financial markets, and through firms that had invested heavily in the mortgage business.