R. Jarrett Lilien, E-Trade Financial Corp.’s newly named acting chief executive, vowed Thursday to bolster its struggling banking arm and sought to squash rumors of a sale after the embattled company unveiled a shake-up in its executive ranks and a $2.55 billion capital injection.
Mr. Lilien, who remains president and chief operating officer, became acting CEO Thursday. Former JPMorgan Chase & Co. executive Donald H. Layton, who had been an adviser to the E-Trade board, was named the company’s chairman. The changes follow E-Trade’s well-publicized mauling by the credit markets in the third quarter, which prompted concerns about the health of its banking business.
Banking products will stay on the menu, Mr. Lilien said Thursday.
“Mr. Layton has a very broad-based banking experience and he knows our commitment to our business model,” Mr. Lilien said in an interview. “Our integrated model, which provides our customers with banking and investment services, has been successful, and we are committed to the model.” E-Trade said Mr. Layton was not available for an interview Thursday.
On Thursday morning E-Trade said that Citadel Investment Group had taken a nearly 20% stake in the New York company. As part of the deal, CEO Mitchell H. Caplan and chairman George A. Hayter stepped down.
Mr. Lilien said the board has begun a CEO search that it expects to last two to three months. “I am a CEO candidate and I obviously hope I get the job,” he said.
Mr. Layton spent 29 years at JPMorgan Chase. When he retired in 2004 he was a vice chairman of the company and the head of its consumer banking arm.
E-Trade, which had specialized in online brokerage, moved aggressively into banking, including subprime home loans, in 2001. But it got burned by the mortgage meltdown and took $197 million in third-quarter writedowns on its mortgage-backed securities portfolio.
Analysts have speculated that E-Trade would have to unload its bank or sell its brokerage business to one of its chief rivals, such as TD Ameritrade Holding Corp. or Charles Schwab Corp.
William Doyle of Forrester Research Inc. said that in addition to brokerage firms, large banking companies could be interested.
But Mr. Lilien said Thursday’s announcement should put an end to the speculation. A sale “is not our intention, it is not our vision, and it’s certainly not what we’re interested in,” he said.
Mr. Lilien said that in recent weeks, in an effort to shore up its finances and restore investor confidence, E-Trade executives talked with “about 40 different parties” and entertained “eight to 10 serious proposals.”
“Some were interested in investing, some in mergers, some in buying off pieces,” he said, declining to give names. “Citadel was the first to come to us and they happened to be the last standing.”
Mr. Caplan is the third CEO of a major financial services firm to step down in recent weeks over ballooning credit market writedowns. On Oct. 30, E. Stanley O’Neal was ousted from Merrill Lynch & Co. Inc., followed a week later by Charles O. Prince at Citigroup Inc. Citi said Monday that it had secured a $7.5 billion investment from the Abu Dhabi government to help it boost its capital level.
Mr. Lilien said Citadel’s capital injection goes directly to solving that problem, because Citadel agreed to pay $800 million to acquire E-Trade’s troubled securities portfolio, including collateralized debt obligations.
Mr. Lilien, who joined E-Trade in 1999 and previously was its chief brokerage officer, said the deal gives E-Trade a cushion to manage future risk and allows it to focus on building its banking and brokerage businesses.
“I think it will hopefully go all the way” toward restoring confidence, he said. “The things that created the headlines are gone.”
Analysts were cautiously optimistic Thursday. They noted E-Trade will take a $2.2 billion charge on the sale of the securities portfolio and record an expanded provision of $400 million for loan losses this quarter. But they said the business model is sound.
Matt Snowling, an analyst at Friedman, Billings, Ramsey & Co. Inc., called the Citadel transaction “a necessary evil.”
“It shores up E-Trade’s capital and allows the company to earn itself out of any remaining balance sheet issues over time,” he wrote in a research note issued Thursday. The move does not erase concerns about loan losses and customer attrition, he wrote, but “for those investors willing to assume the risk or take a longer-term outlook, the stock is attractive.” Friedman Billings Ramsey kept a “market perform” rating on E-Trade.
E-Trade’s shares closed down 8.7%.
Citadel, of Chicago, has a reputation for investing in down-and-out companies.
By taking over E-Trade’s securities portfolio, it is buying what its founder and CEO, Ken Griffin, views as a reasonably priced securities package whose value will rise as market conditions improve.
Mr. Griffin said in a press release that he is confident E-Trade can “grow the business from a position of strength.”
