E*Trade Falters, Despite Cash Infusion

Updated from 12:55 p.m.

E*Trade Financial(ETFC) surged more than 14% Thursday after a $2.55 billion cash infusion, only to end lower as concerns about the valuation of its mortgage-related assets remain.

Hedge fund Citadel Investments will pay $1.6 billion of capital in exchange for roughly 20% of E*Trade stock, as well as senior unsecured notes, providing much-needed liquidity for the online brokerage as its mortgage business struggles amid the ongoing credit crisis and housing slump. Upon closing, expected by Jan. 15, Citadel will provide an additional $150 million.

The investment calls for the fund to buy E*Trade's entire asset-backed securities portfolio for $800 million. As a result, E*Trade will record a $2.2 billion charge.

In addition, E*Trade said CEO Mitch Caplan plans to step down immediately. E*Trade named R. Jarrett Lilien as its acting CEO. Lilien has been E*Trade's president and chief operating officer since 2003.

The news bumped the stock as high as $6.04 Thursday morning, before it quickly flattened and eventually reversed course. Shares closed down 8.7% to $4.82.

"While the removal of certain problem [asset-backed securities] from the [E*Trade] Bank balance sheet is helpful, there are material risks around the company's home equity loan portfolio," writes Rich Repetto, an analyst at Sandler O'Neill & Partners.

Analysts also pointed out E*Trade's sale of its asset-backed portfolio for $800 million amounts to just 27 cents on the dollar -- a move that is considered desperate by some.