gwinner

Why Is E*Trade's CEO Giving the Company to Citadel?

The magnitude of the problem exposed in the fall of 2007, a $3 billion dollar CDO and $42 billion mortgage/HELOC portfolio, is the Augean Stables for the mighty E*Trade brokerage. As a loyal and long-time E*Trade customer, it is easy to fall in love with this stock. However, previous management made terrible decisions the weight of which has been and will continue to be staggering.

Citadel knows E*Trade better than anyone. It would not be in their best interest to overpay or underpay for E*Trade stock. E*Trade management telegraphed that current shareholders would be diluted and the market discounted the statement. In fact, the market reacted insanely last week upon learning that Ken Griffin had joined the board and a deal was forthcoming.

Wouldn't common sense suggest that meant current shareholders were about to be significantly diluted, as promised?

Wouldn't E*Trade management wait until it had announced good May results before dropping the dilution bomb?

Wouldn't waiting to make the dilution announcement a day later have been more manipulative of the stock price than timing it the way they did?

Citadel also has, from the initial deal, a competency in disposing bad loans (on which I'm guessing it has mined a significant profit). It is uncertain what that may mean for the future of E*Trade, but they are going to be inseparable from Citadel for the near future and that business knowledge in a close partner could be invaluable for survival.

That E*Trade no longer offers industry leading rates on savings accounts has got to be hurting deposits. Perhaps by easing the debt burden payed on notes they will resume paying high-interest rates to attract new customers and retain current customer deposits. I hope so. If new account growth slows or deposits move elsewhere, they may be toast.

Most emphatically, it may not matter that the mortgage loan portfolio performance is improving right now. The Option ARM/ALT-A reset/recast disaster begins this fall and will last 3 years. That "may" strike at the core of the E*Trade portfolio. Couple that with the ongoing HELOC bleeding and one would have to believe that management at E*Trade is very concerned.