Some Details of the E-Trade Deal with Citadel

The mortgage business caused another casualty, this time E-Trade. Text in bold is my emphasis. Once again many of these firms have value, so the chances of them failing is limited. From Market Watch:

The subprime crisis claimed a new scalp Thursday as E-Trade Chief Executive 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 deal gives Citadel a nearly 20% stake in E-Trade and a seat on the board.

Lilien told MarketWatch in an interview Thursday that the deal provides some immediate benefits for the firm. "It gets the asset-backed securities portfolio off the balance sheet. That was the biggest source of issues for E-Trade," he said.

He added that it also injects capital, strengthens the balance sheet and allows E-Trade to boost reserves and raise capital.

"With the capital infusion and removal of the problem ABS portfolio, E-Trade has essentially bolstered its balance sheet & near-term capital position. We believe that answering near-term fears that E-Trade could not meet regulatory capital requirements is a positive," Sandler O'Neill analyst Rich Repetto said in a research report Thursday morning.

Under the terms, Chicago-based Citadel acquired E-Trade's $3 billion of asset-backed securities for about $800 million, or about 27 cents on the dollar.

That leaves E-Trade with a $2.2 billion writedown on that portfolio, analysts cautioned, but Lilien said getting rid of the portfolio was the best option.

"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.

"The $2.2 billion effective loss on the ABS is an excessive cost to the company, and indicates just how weak the secondary market for these securities actually is," BMO Capital markets said in a research note Thursday. "While the risk on those securities has been removed, E*Trade still effectively absorbed a 73% writedown on that portion of the portfolio. The company retains the risk on its remaining loan and mortgage-backed securities portfolio," they added. . . . .

. . . . The deal, "gets the problem in the rearview mirror, it gets us back on a more sure footing, Lilien said. "It has made the franchise healthier and stronger, makes one more attractive. What's good for the franchise has got to make us look better to others," Lilien said.