E*Trade gets $2.55 billion Citadel cash infusion

By Lilla Zuill

NEW YORK (Reuters) - E*Trade Financial Corp (ETFC.O: Quote, Profile, Research, Stock Buzz) is getting a $2.55 billion cash infusion from investors led by Citadel Investment Group, which is also buying the mortgage-related securities portfolio that has been the primary source of the discount brokerage's recent woes.

Chicago-based Citadel, which often invests in troubled assets and companies, will gain about 18 percent ownership of E*Trade and a board seat, E*Trade said on Thursday.

E*Trade shares, which have lost about 80 percent since January, surged at first on news of the deal but wound up falling 46 cents, or 8.7 percent, to close at $4.82 on Nasdaq, as investors soured on a deal that didn't meet expectations.

BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz), the largest publicly traded U.S. asset manager, is also an investor in the Citadel bail-out, E*Trade said.

Mitch Caplan, E*Trade chief executive since 2003, is stepping down, the company said. Donald Layton, a former vice chairman of J.P. Morgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) who has been advising the brokerage, will become E*Trade's chairman. Jarrett Lilien, now chief operating officer, will become acting chief executive.

The deal includes immediate funding of about $2.4 billion and rids E*Trade of its troubled $3 billion asset-backed securities (ABS) portfolio. Citadel will pay $800 million for the portfolio.

Another component of the deal is the purchase of $1.75 billion worth of 10-year notes and stock that will pay an annual interest rate of about 12.5 percent, E*Trade said.

E*Trade said it will take a fourth-quarter pretax charge of $2.2 billion as a result of the portfolio sale. It will also increase its allowance for bad home equity loans to $400 million and will issue common stock equal to about 20 percent of its outstanding shares.