One of the US' biggest hedge funds, Citadel, has agreed to pump US$2.5 billion into the troubled online brokerage ETrade to help shore up its ailing balance sheet, the firms said on Thursday.
The deal, if approved by regulators, will enable Chicago-based Citadel to amass a hefty 20 percent shareholding in ETrade, which also markets banking services.
The online broker's share price has plummeted in recent weeks as it has been forced to writedown the value of mortgage-backed securities it holds which have been hit by a lingering US housing slump and rising home foreclosures.
ETrade's stock surged after the deal was announced, but closed down 8.7 percent at US$4.82.
"The cash infusion of 2.5 billion dollars as a result of the transaction does provide much-needed support to ETrade.
However, we believe that this transaction is a transitional step toward stabilizing the business," the credit ratings agency Standard & Poor's said.
The online broker also announced chief executive Mitchell Caplan had relinquished his post and had been replaced by acting CEO R. Jarrett Lilien, who joined ETrade in 1999.
Caplan is the latest chief executive to lose his job at a financial firm amid rising losses tied to mortgage-backed securities.
"The company will conduct an executive search for the CEO position, which will include Mr Lilien and external candidates," ETrade said.
Caplan had expressed disappointment last month when ETrade revealed it made a third-quarter loss of US$58 million compared with a net profit of US$153 million in the same period of last year.
ETrade's finances slipped into the red mainly because it was forced to write down US$197 million in stressed securities.
The former CEOs of Citigroup and Merrill Lynch, Charles Prince and Stanley O'Neill respectively, stepped down in the past month.
The banks are also suffering from mortgage-related writedowns, but their multibillion-dollar losses dwarf ETrade's writeoffs.
Citigroup, the US' second-biggest financial firm, won a vast cash injection of US$7.5 billion from a United Arab Emirates investment fund earlier this week.
Although primarily known as an online brokerage, ETrade holds a substantial portfolio of mortgage-backed securities and other investments. It said Citadel will take over ownership of some of ETrade's stressed securities.
ETrade also markets mortgages, home improvement loans, savings accounts and credit cards among other financial offerings.
Under the deal, ETrade will gain immediate funding of US$2.4 billion and a remaining US$150 million by mid-January.
"The investment fortifies the company's balance sheet, allows the company to focus on its core retail business and provides additional capital to manage credit risk," ETrade said.
Citadel CEO Ken Griffin said the US$2.5 billion deal showed a strong vote of confidence in ETrade and expressed hope it would restore customer confidence in the online broker.
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