Citadel’s $2.5 Million Investment into E-Trade Raises New Questions About Mortgage-Backed Securities

Citadel Investment Group is investing $2.5 million into E*Trade Financial Corp, which has been negatively affected by shaky mortgage investments. The “bailout” will increase the hedge fund’s stake in E*Trade from 2.5% to 18%. Citadel will pay $800 million for E*Trade’s $3 billion in asset-backed securities. This will allow E-Trade to take off the riskiest assets from its balance sheet.

Citadel says the investment is a good business opportunity. The hedge fund cited E*Trade ‘s online brokerage platform as a big reason for making the large investment.

The investment deal is an indicator of how much hedge funds have become involved in both sides of the mortgage crisis, sometimes as a victim and at other times as a rescuer. It also shows the growing influence that hedge funds have in the financial arena.

E*Trade met with 40 potential financial and strategic buyers before making the deal with Citadel. E*Trade says that out of all potential buyers, Citadel offered the “most comprehensive solution” to the company’s problems.

The Citadel-E*Trade deal has some people wondering whether a long-awaited price can now be placed on mortgage-backed securities. People familiar with the details of the E*Trade deal, however, say that the portfolio being talked about includes collateralized debt obligations and a number of securities that make a uniform price seem unlikely.

Citadel will nominate a representative on E*Trade s board of directors. E*Trade CEO Mitchell Caplan resigned last week.

This is not the first time that Citadel has searched for and bought assets in distress. In June, Citadel paid $180 million for assets of ResMae Mortgage Corp. at a bankruptcy auction. It also recently acquired assets of Sowood Capital Management LP.

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Related Web Resources:

Citadel boosts E*Trade stake with $2.5 billion investment, Chicago Tribune, November 30, 2007
What the E*Trade Bailout Says About “Marking to Market”, The Wall Street Journal, November 29, 2007
E*Trade Financial