E*Trade Must Move Quickly to Raise Capital

E*Trade Financial (ETFC) needs to move expeditiously to raise money, after being prodded by regulators to boost its capital levels.

But as the company's application to the federal government for Troubled Asset Relief Program funds gathers dust without action, E*Trade may be running out of options of where to get capital -- unless it does something drastic.

The Office of Thrift Supervision is now requiring the firm's bank subsidiary to find capital "quickly" and reduce the level of corporate debt at the holding company level, according to recent comments by E*Trade. But the question is, given Citadel Investment Group's sway as the broker's largest equity and debt holder, where exactly will the capital come from?

Analysts estimate the firm would need between $150 million to $400 million in the near term.

E*Trade on Friday submitted filed a shelf registration with the Securities and Exchange Commission to offer up to $150 million worth of shares of the company's common stock.

A spokeswoman said in an email that the sale is "one component of our capital-raising plan," but did not elaborate.

E*Trade could look to find another outside investor, but any issuance would have to be "incredibly cheap to new investors," besides being incredibly dilutive to existing holders, says Jason Ren, an analyst at Morningstar.

"I don't know how attractive E*Trade would be [for] an outside investment, given Citadel's significant position," Ren says.

Market observers also speculated a possible good bank-bad bank scenario for E*Trade, in which it would split its troubled bank subsidiary from the more profitable brokerage operations. Citigroup (C) was forced to be split in two at the behest of regulators in January, amid capital constraints.