E*Trade Is Bailed Out, But At A High Price

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.

“E*Trade: Back from the Abyss” [BusinessWeek]
(Photo: Getty)


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  1. catcherintheeye says:

    Excellent – so lets give Mitch Caplan a $210M severance, and then he can go work at Chrysler…oh wait, that job’s already taken? Silly me…

  2. iamme99 says:

    Yeah, but this was mainly NOT sub-prime mortgage paper that was written off, it was supposedly very GOOD paper. If companies are becoming worried about good mortgages going south, then that says something about the direction they expect the economy to take. The potential write-off’s from all the mortgage could be much higher than anticipated. See below:

    E*Trade gets a Guido loan and marks to market their entire ABS paper – at a SEVENTY PERCENT DISCOUNT!

    I don’t think anyone is (yet) understanding the impact of this.

    Most of E*Trade’s portfolio was HELOCs; there were few purchase-money firsts in there.

    E*Trade’s paper is almost all comprised of this HELOC paper, essentially all of it written in the last three years, and most of it was written to people with significant assets; probably half to their brokerage customers.

    That is, most of these HELOCs were written to allegedly “good” credit risks.

    Now let’s apply some conservative valuation discounts, given that E*Trade just marked the entire thing to market at 30% of face value.

    $6.5 trillion X 33% = $2.14 trillion in HELOC paper.
    30% of original value = a $1.5 trillion dollar DIRECT LOSS on HELOC paper ALONE.

    Oh, this “subprime” problem is only “subprime” and is just a $100 billion problem eh?


  3. Wormfather says:

    Lets stop calling this just a “subprime” problem, as it has infected the whole market.

    “Prime” loans are finding their way into default at an alarming rate.

    Central banks pump cash into the markets, which in turn rise only to fall.

    Every SIV (structured investment vehicals) out there is turning out to be just that, a sieve.

    The most alarming thing is the LIBOR Index, which is the rate at which banks loan eachother money. The LIBOR is at all time highs which means the banks dont even trust eachother. Pretty soont he banks will be going to loan sharks for better rates.

    Where does etrade fit into all this? How much was E-Trade worth on the open market at close Wednesday? Roughly 2.25 Billion. Citadel “gave” them 2.5 Billion. Combine that with the fact that they pushed the CEO out and will put a puppet head there in it’s place and Citadel’s move becomes more than obvious.

    (Yes this post was scatterbrained, but it’s 9AM.)

  4. mac-phisto says:

    @iamme99: yeah, i read a pretty good dissection that stated similar. e*trade was in a pretty bad way though, so i don’t think this is indicative of the whole market.

    now, if banks don’t solve some of their liquidity issues in the near future, i think we’ll see a whole lot more stories like this. & that points to one thing: insolvency.

    so, it’s no longer a question of do we or do we not bailout. it’s a question of when – before or after the entire credit market collapses.

  5. iamme99 says:

    @MAC-PHISTO – Yes but why should tax payer monies be used to help a bunch of cheats and criminals who went out on a limb? If you bail out then the same thing will continue to happen in the future. I’d rather take the medicine now and get it over it. The world won’t end and recovery will be more certain. But if you keep band-aiding things, then recovery becomes less certain.

  6. Ass_Cobra says:


    Just to be clear, LIBOR is not at all time highs. It’s not even close. What has been alarming is the spread between the federal funds rate and libor. This spread, more than the absolute level of Libor is the better indicator of how banks view the risk of lending to other banks. Your general point on banks being reluctant to lend is correct, it’s just how you arrived at that conclusion.

    I can assure you that what happened at E-Trade is not representitive of what is going on in the market. They got well over their skis trying to be a full service financials company. The major financial institutions have much more diversified asset base and revenue generation capabilities than E-Trade. The market is very irrational right now and it’s more a case of the irrationality lasting longer than e-trade’s solvency. Also the analysis that one distressed trade on 1/1000th of the market should be extrapolated to the whole market is bankrupt from the start. I know Citadel very well and there’s not a shot in hell they pay anything close to fair value to a distressed seller. You can see their trade with Amaranth to verify that.

  7. mac-phisto says:

    @iamme99: yep. you’ve got a point. but how bad are we willing to let it go? things aren’t horrible now, but how about when banks start becoming insolvent? how about when lenders start calling loans due, whether you’re late or on-time, subprime or prime? how about when the sickness spreads throughout the economy & unemployment jumps to 10, 15, 20%?

    there’s only a handful still alive that can relate the last time things got that bad. it put our country on the verge of a social revolution & took a world to war before we fully recovered from that depression. i know that sounds like some scare-mongering, but we could draw a lot of parallels between the economic climate of the 20’s & that of the 2000’s.

    corrections are healthy, we just have to make sure the snowball doesn’t gain too much momentum rolling down the hill. it’s definitely too early to talk taxpayer bailout. typically, that’s a last resort (unless, of course, you’re a legacy airline). instead, i think we’ll see some more industry bailouts, maybe some brokered by the fed like the LTCM deal a decade ago. if we’re lucky, we’ll avoid a complete failure of our financial market. if we’re not…well, on the bright side, the ladies love a man in uniform. =OP

  8. pyloff says:

    My cunt stinks.

  9. iamme99 says:

    @Mac: We could go back and forth on this all day and night. Doesn’t matter though. It isn’t going to work.

    Take a read:

    Imagine you are an investor of some sort. Are you going to stand by and let a legal agreement you entered into be modified arbitrarily on the premise that it MIGHT forestall losses at some point in the future? We’re not talking individual investors here but massive pension plans, REIT’s, mutual funds and such. In the USA at least, few like the government meddling in private affairs and trying to dictate actions supposedly for the good of all.

    Second, if you forestall a foreclosure, as in investor, what guarantee do you have that the asset being foreclosed on will be worth the same or more at some undetermined point in the future? None I say. Might it not be better to try to sell your piece now rather than be forced to sell later at some lower price point?