| 14 August 2009

Citadel Investment Group made a big bet on E*TRADE Financial Group (ETFC) and saved the company from almost assured destruction, but sustained huge losses in the process and now, today, they have decided to cut their losses and run. Well, mostly run. Kenneth Griffin, Citadel's founder and Chief Executive Officer, will remain a director at E*TRADE. But the firm is planning to cut its ownership in the company from near 17% down to about 4%.

E*TRADE made big bets on the banking and mortgage businesses which, since mid- to late-2007, have nearly wrecked the company. Citadel came to the rescue in late 2007 to buy a 20% stake in the company for $2.5 billion. It seemed like a good deal at the time; E*TRADE shares were trading down just over 80% from their peak just months earlier. Shares were stable at around $24 for the first six months of the year.

But of course the question every good trader asks is, "How low is low?" In this case, not low enough. Shares in E*TRADE went on to lose another 70 percent and the firm needed yet another rescue. The company successfully raised another $500 million, which we reported here. Citadel added another $100 million in E*TRADE equity to its already stuffed portfolio.

While some analysts claim the move is simply an effort to diversify Citadel's portfolio. We can't help but think they're cutting their losses while they still can, especially since executives from Citadel refuse to comment on the sale. E*TRADE has stabilized somewhat, of late. But as we reported here, eight consecutive quarterly losses can begin to weigh on an investor.

Citadel plans to continue selling shares through October and, we suspect, this will add significant downward pressure on E*TRADE shares that have recently stabilized around $1.50. Unfortunate news for those who decided to partake in the latest equity offering.