Citadel Investment Group has agreed to provide E*Trade with $2.5 billion in cash to bail it out of trouble, reports BusinessWeek. The cash includes a purchase of $3 billion worth of E*Trade’s “toxic, asset backed securities” at 29 cents on the dollar, for a total cost of about $800 million. In exchange, E*Trade’s CEO Mitch Caplan must resign.
Citadel’s help is sort of a mixed-blessing, because it comes at a high price and doesn’t guarantee that E*Trade will be able to recover if it loses too much money on other debts—for instance, on home equity loans “if housing prices continue to decline.”
By taking on an extra $1.7 billion in debt to Citadel, E*Trade will be on the hook for debt payments to the hedge fund at a high coupon rate of 12.5%. Citadel will also get 19.9% of E*Trade’s stock, diluting other shareholders’ stakes.