Where others see looming disaster, Citadel Investment Group, the giant Chicago-based hedge fund, sees opportunity. Citadel swooped in to acquire the assets of Amaranth Advisors and Sowood Capital Management after bad bets on natural gas and bonds blew up those hedge funds.

Now Citadel is pumping $2.55 billion into ETrade, the online brokerage firm that has run into trouble because of its portfolio of mortgages and investments tied to them.

ETrade had been expected to seek a merger, possibly with rival TD Ameritrade, or to find a big investor after its shares lost more than half of their value earlier this month. A Citigroup analyst said that ETrade might be forced to seek bankruptcy protection because of mounting mortgage losses and diminishing deposits.

The online brokerage firm joins Countrywide Financial and Citigroup as the latest prominent financial institution to receive a large capital infusion amid a prolonged credit crunch. Like the Citigroup deal, the lifeline was seen as a stabilizing force in a tumultuous market. Shares of ETrade were up 4 percent in morning trading.

The deal is composed of two parts: Initially, Citadel will purchase ETrade's portfolio of asset-backed securities for $800 million in cash. Then it will invest, in two stages, $1.75 billion worth of 10-year notes that pay an annual interest of 12.5 percent as well as common stock. BlackRock, the investment management firm in which Merrill Lynch has a 49 percent stake, is also an investor.

"We finally have a market-determined price for all those mortgage-backed securities, and it is 27 cents on the dollar," said Robert Ellis, a senior analyst with Boston-based financial research and consulting firm Celent. "That is the most interesting feature of the cash infusion from Citadel and BlackRock. It also puts a pricing floor for all the other holders of these types of securities, so analysts can better determine the losses across the financial services industry."

In return for its investment, Citadel will get a nearly 20 percent stake in ETrade and a seat on its board. The infusion will also give Citadel, founded in 1990 by Ken Griffin when he was 21 years old, a more public profile than the somewhat secretive fund has had in the past.

"With its strong brand, solid business model, and fortified balance sheet, we believe ETrade is well positioned to execute on its growth strategy for its core retail business," Griffin said in a statement.   

Unlike many other funds that have been hurt by 2007's market turmoil, Citadel is expected to end the year with a 27 percent return.

"Citadel should make money on all three legs of the deal,” Felix Salmon writes. "The cash infusion is big enough that ETrade's solvency is no longer in doubt, which in turn means that bonds paying 12.5 percent are going to be very valuable over their lifetime."

An ETrade spokesperson also said that Mitchell Caplan would step down as chief executive and that R. Jarrett Lilien would serve as acting C.E.O.