Here’s Why the Floor Collapsed on E*Trade

E*TRADE Financials (NASDAQ:ETFC) was off as much as 7 percent in afternoon trading on Thursday. The stock faced heavy selling pressure after its largest and long-time shareholder, the hedge-fund Citadel, revealed its intention to sell its entire 9.6 percent stake.

The news is a black eye for the stock for several reasons. First, E*Trade announced that Citadel would pursue the sale of its 27.4 million shares on Wednesday night — pretty much immediately after the stock hit a 52-week high of $11.82. The price point is significant, representing the culmination of a tremendous and unlikely rally that had the stock up more than 42 percent over the trailing three-month period. Before that, shares were bouncing along near post-recession lows, apparently trapped under the weight of the company’s enormous — though shrinking — loan portfolio, and negative earnings.

Second, not only was Citadel the company’s largest shareholder, but it had bought into the company in 2007, and came to the rescue of the brokerage twice in the wake of the financial crisis. E*Trade was one of the unlucky many that found themselves with a large portfolio of bad financial instruments as the housing market turned around. Citadel injected $2.6 billion into the company in 2007 and bought a portfolio of bad mortgage loans in order to save the ship.

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Two years later, Citadel was the primary sponsor of a $1.7 billion debt exchange that ended up putting Ken Griffin, founder and CEO of the hedge fund, on E*Trade’s board…

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