In bailing out flailing E*Trade with a $2.5-billion infusion yesterday, Citadel Investment is among the hedge funds and private investors starting to bet big on a recovery in mortgage-related securities, the Wall Street Journal reports. "The market is pricing assets like things are going to get really bad," Citadel founder and CEO Ken Griffin said. "But the more likely outcome is for the economy to slow for two or three quarters, and then strengthen."
E*Trade is primarily an online broker, but it also runs a federal savings and loan that had invested in mortgage securities and been devastated by the subprime crisis. Chicago-based Citadel will buy out $3 billion in mortgage securities for only $800 million, and pump another $1.75 billion into E*Trade. CEO Mitch Caplan, criticized for taking on too much risk, will lose his job. (Read more E Trade stories.)