E*Trade Investor Rides to the Rescue

"This is -- at the very least -- a strong symbolic gesture," says Jason Ren, an analyst at Morningstar. "To me it kind of also sends out a message -- any deal regarding E*Trade's future will have to go through Citadel."

The brokerage firm is being prodded by regulators to raise capital, even though its November application for funding from the Troubled Asset Relief Program remains unanswered.

Griffin joining E*Trade's board is "almost an indication that they won't get any TARP funds," one former E*Trade executive says. "I can only assume that it means that the company is in worse shape than anyone believes."

Griffin's addition to the board "could possibly be the precursor of Citadel converting its debt into equity and taking a controlling stake in the company," he speculates. "The other option may be to try and sell the brokerage and get some return back for Citadel."

Others say that E*Trade will have to do something drastic to raise capital such as splitting into a good bank/bad bank structure or a possible sale of some or all of the company.

The Wall Street Journal, citing people familiar with the matter, reports E*Trade is is working on a deal with Citadel to to shore up its financial position. Terms of the deal aren't known but the two have been negotiating for weeks to try reach a deal to strengthen E*Trade's fortunes.

E*Trade said in a statement that "as a board member, Mr. Griffin will serve the interests of all shareholders." The firm declined to comment further.

Rivals such as Charles Schwab (SCHW Quote) and TD Ameritrade (AMTD Quote) could be interested in the firm's brokerage operations.