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Citadel’s $2.5 Million Investment into E-Trade Raises New Questions About Mortgage-Backed Securities

Citadel Investment Group is investing $2.5 million into E*Trade Financial Corp, which has been negatively affected by shaky mortgage investments. The “bailout” will increase the hedge fund’s stake in E*Trade from 2.5% to 18%. Citadel will pay $800 million for E*Trade’s $3 billion in asset-backed securities. This will allow E-Trade to take off the riskiest assets from its balance sheet.

Citadel says the investment is a good business opportunity. The hedge fund cited E*Trade ‘s online brokerage platform as a big reason for making the large investment.

The investment deal is an indicator of how much hedge funds have become involved in both sides of the mortgage crisis, sometimes as a victim and at other times as a rescuer. It also shows the growing influence that hedge funds have in the financial arena.

E*Trade met with 40 potential financial and strategic buyers before making the deal with Citadel. E*Trade says that out of all potential buyers, Citadel offered the “most comprehensive solution” to the company’s problems.

The Citadel-E*Trade deal has some people wondering whether a long-awaited price can now be placed on mortgage-backed securities. People familiar with the details of the E*Trade deal, however, say that the portfolio being talked about includes collateralized debt obligations and a number of securities that make a uniform price seem unlikely.

Citadel will nominate a representative on E*Trade s board of directors. E*Trade CEO Mitchell Caplan resigned last week.

This is not the first time that Citadel has searched for and bought assets in distress. In June, Citadel paid $180 million for assets of ResMae Mortgage Corp. at a bankruptcy auction. It also recently acquired assets of Sowood Capital Management LP.

The law firm of Shepherd Smith and Edwards represents investors who have lost money because of the misconduct of members of the securities industry. Please contact Shepherd Smith and Edwards and ask for your free consultation. We have helped thousands of investors get their money back.

Related Web Resources:

Citadel boosts E*Trade stake with $2.5 billion investment, Chicago Tribune, November 30, 2007
What the E*Trade Bailout Says About “Marking to Market”, The Wall Street Journal, November 29, 2007
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