E-Trade Rescue Package – 30 Cents On The Dollar?

| November 29, 2007

Word today from MarketWatch that the CEO of E-Trade is hitting the bricks as part of a $2.55 Billion deal with Citadel to pump enough money into the online broker to keep it running in face of losses connected to their Asset Backed Securities (ABS):

NEW YORK (MarketWatch) — The subprime crisis claimed a new scalp Thursday, as E-Trade’s CEO Mitch Caplan said he was stepping down as part of a deal that has private equity firm Citadel injecting $2.55 billion into the troubled firm.

Under the deal, Citdel will end up with about a 20% stake in E-Trade after acquiring its $3 billion asset backed securities portfolio for $800 million and making other investments.

“The way we look at it is, it is a package deal; we got cash, and in turn for that, Citadel took the asset backed problem from us,” he said. “Citadel is in a position to hold those securities. This was a great transaction for them, because it’s what they do, it was a good deal for us because it’s not what we do.”

He said the firm had several options for the asset-backed portfolio, but determined taking a loss on disposal was the best, because it couldn’t afford to hold them on the balance sheet and take quarterly write-downs indefinitely.

Trying to sell them off over time also was not a pleasant option, Lilien said. “I would say absolutely this is a good thing to do. Having that on our balance sheet was too much of a burden. It was bad for customer confidence beginning to hurt us.

Anyone else floored by how far this stuff is dropping now? An asset package that was valued at $3 Billion for $800 Million?

E-Trade is coming clean because they don’t have the deep pockets to live in denial for a long time, like some of the larger financial houses do. But what should terrify the big boys is that this now provides yet another data point on how much lower they should be marking their own securities.

It might come to pass that the firms that took their lumps early are the ones that come out the best in the end, rather than trying to play chicken with the market, maintaining dreams that tomorrow it will suddenly be the rosy go-go days of 2005 again.

Previous remarks on E-Trade here….

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Category: Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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