Jan. 9 (Bloomberg) -- E*Trade Financial Corp., the worst performer in the Standard & Poor's 500 Index last year, sold $3 billion of mortgage-backed securities and municipal bonds to raise capital after its biggest quarterly loss since 2002.

The company lost less than $5 million on the sale, the New York-based online brokerage said in a statement today. E*Trade also said it's ``aggressively'' reducing risks from real-estate loan holdings and shuttered the institutional equities trading division.

E*Trade rose 6.7 percent on the Nasdaq Stock Market after falling to an 11-year low yesterday on concern the company may post more mortgage losses when it reports fourth-quarter earnings later this month. Clients' cash balances were unchanged from a month earlier, easing concern about customer defections.

``We view the disclosure as incrementally positive since there has been worry over attrition in the brokerage unit,'' David Trone, an analyst at Fox Pitt Kelton Cochrane Caronia Waller, wrote in a report to clients today. He has an ``in line'' rating on the stock.

The shares climbed 15 cents to $2.40 in composite trading at 4 p.m. They closed yesterday at $2.25, the lowest since November 1996, giving E*Trade a market value of about $1.1 billion.

E*Trade's market capitalization peaked last year at $10.9 billion as the brokerage drew assets at a faster pace than larger rivals Charles Schwab Corp., Fidelity Investments and TD Ameritrade Holding Corp. The gains were derailed in November after the company reported its first net loss in five years, and Citigroup Inc. analyst Prashant Bhatia said mortgage losses raised the chance of an E*Trade bankruptcy to 15 percent.

Citadel's Investment

E*Trade sought to quell those concerns and stem customer defections with a $2.55 billion cash infusion Nov. 29 from hedge fund Citadel Investment Group LLC and BlackRock Inc., a New York- based asset manager. The funds allowed the company to double its loss provision for bad loans and shore up the banking unit.

The sale announced today, comprised primarily of mortgage- backed securities, allowed E*Trade to decrease its borrowings from the Federal Home Loan Bank by about $3.5 billion. As of the end of the year, so-called Tier 1 capital ratio, which is used to assess a bank's ability to withstand loan losses, was better or equal to the 5.9 percent reported Nov. 29, the company said.

The chief operating officer of E*Trade's banking unit, Robert Burton, will lead a new committee to cut the potential for further losses in the company's real-estate holdings. Burton joined E*Trade at the end of last year from Wachovia Corp., where he was head of mortgage banking and home-equity lending.

`Important Steps'

``We have taken important steps in the execution of our turnaround plan by reducing balance-sheet-related risk,'' Jarrett Lilien, who assumed the post of acting chief executive officer after the departure of Mitchell Caplan, said in the statement.

Citadel Investment, which is based in Chicago and manages about $17 billion, also paid E*Trade $800 million for asset- backed securities with a face value of $3 billion. The company plans to take a $2.2 billion charge for that sale, prompting analysts to project a second consecutive quarterly loss for the company in the fourth quarter.

Client assets fell to $190 billion at the end of the year from $192 billion a month earlier, the company said today. The $33 billion in client cash holdings was unchanged. The company opened 87,000 new accounts in December, above the average of as many as 60,000 during the prior 12 months, according to Fox Pitt's Trone.

Rating Downgrade

In November, Standard & Poor's lowered E*Trade's credit rating to B, five-notches under investment grade, and said it may lower the rating further.

``It's pretty much status quo; we continue to evaluate what progress is being made as E*Trade tries to steer the ship around,'' S&P analyst Helene De Luca said in an interview today. ``Overall, we are concerned about liquidity at E*Trade, the performance in the loan portfolio and changes in the securities portfolio.''

E*Trade also closed its institutional equity trading unit, a move that will affect fewer than 30 of the company's 3,800 employees. In October, E*Trade shut its institutional trading business in Asia.

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: January 9, 2008 16:29 EST