E*Trade’s not-quite-full disclosure of its deal with Citadel
Posted by: in Stocks Money NewsFiled under: Scandals
Legally, E*Trade (NASDAQ: ETFC)’s press release announcing its deal with Citadel might have been fine.
But according to Fortune’s Colin Barr, the 8-K detailing the transaction makes it sound a lot less appealing. Barr writes, “One reason the Citadel deal initially appeared so bullish for E*Trade was that Citadel was taking big, apparently unhedged, debt and equity stakes in the struggling online financial company — seemingly betting that it could oversee a recovery in the company’s fortunes.”
But the reality is that much of the debt Citadel bought could become more senior than the other senior debt in the event of a bankruptcy.
This looks a little bit like the infusion that Countrywide Financial (NYSE: CFC) got from Bank of America (NYSE: BAC). The $2 billion investment gave Countrywide notes paying a 7.25% interest rate to Bank of America and providing the bank an option to purchase Countrywide shares at $18 — 41% below their their market price back then (of course, the infusion has, long-term, done little to stop the bleeding: Countrywide now trades at just $10.42 per share.
The point is that hedge funds and banks, usually (Merrill Lynch (NYSE: MER) says hi) don’t dole out money with pathological stupidity. Citadel invested as a vulture, and got a great deal by preying on E*Trade’s desperation and fear of bankruptcy.
There’s nothing wrong with that, but it’s hardly bullish for E*Trade.
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