E*Trade’s (ETFC) making another change. The online brokerage named chairman, Donald Layton, as CEO, The Wall Street Journal reports. Layton became chairman in November, when Citadel took a 20% stake in E*Trade and made a $2.5 billion capital infusion into the company, which was swooning under the weight of bad bets on mortgage-related securities. At that time, Citadel also replaced longtime chief Mitch Caplan, author of the company’s push into the mortgage business, with interim chief Jarrett Lilien. Since then, Lilien achieved some success in stemming the flight of customers, but the company continues to struggle to attract new accounts.

“Having worked directly with the Board of Directors and the management team over the past few months, I am fully convinced that the E*Trade franchise has immense strength, perhaps best exemplified by the quick return of its customer volumes,” Layton said in a prepared statement released Monday morning. “I also believe that its current financial issues can be effectively managed despite the tough environment.”

As for Layton’s paycheck, E*Trade said that 90% of his total compensation will consist of restricted stock and stock options, with no cash bonus.

The question now is whether Layton, a former JPMorgan Chase (JPM) exec, will try to sell the company - and if so, who will want to buy it. As the The Wall Street Journal points out Monday, rivals Charles Schwab (SCHW) and TD Ameritrade (AMTD) could be interested in the company’s brokerage operations, but that would leave Citadel with E*Trade’s bank unit, which holds $12 billion in home equity loans - a week after JPMorgan execs said home equity losses had exceeded their worst-case scenario. Another option is to try to sell the home equity portfolio, but Layton tells the Journal that  “while the markets are disturbed there is no serious alternative for that portfolio that works for buyer and seller.” In the meantime, expect E*Trade shares to get a bounce Monday as investors bet Layton and Citadel will cook up something.

E*Trade (ETFC) finally rid itself of its former chief, but his departure didn’t come cheap. Mitchell Caplan, who stepped down as CEO in November as the struggling online broker lined up a huge capital infusion from Citadel, resigned Wednesday from E*Trade’s board. E*Trade and Citadel booted Caplan after investors fled the stock amid worries about E*Trade’s liquidity - fears brought on largely by Caplan’s ill-considered foray into risky mortgage securities. E*Trade is still looking for a full-time replacement for Caplan and says it hopes to make a decision in the next month or two.

In the meantime, Caplan will be busy counting his money. He will get $10.9 million in cash, plus medical, life and disability insurance coverage, and reimbursement of certain legal fees. All this for a guy who steered the stock to an 84 percent decline last year - the third-biggest decline among Fortune 1000 companies that retain their stock exchange listings. “Mr. Caplan’s resignation from the board,” E*Trade’s press release says, “effectively severs all ties with the company.” Not a moment too soon, obviously.

The steady drop in E*Trade (ETFC) shares since the company lined up its bailout package last Thursday makes more sense in light of E*Trade’s long-awaited 8-K filing Tuesday afternoon. In the filing, E*Trade offers additional information on Citadel’s $1.75 billion purchase of senior unsecured notes — information that could make the Citadel transaction look substantially less bullish for E*Trade shareholders.

E*Trade’s press release last week announcing the deal described the debt Citadel is buying from E*Trade generically as “senior unsecured notes.” But in the 8-K filing, as Minyanville pointed out, E*Trade describes the same notes as “springing lien notes” — meaning they could become more senior to other obligations in the event of a bankruptcy filing or other adverse event. One reason the Citadel deal initially appeared so bullish for E*Trade was that Citadel was taking big, apparently unhedged, debt and equity stakes in the struggling online financial company — seemingly betting that it could oversee a recovery in the company’s fortunes.

About the springing lien notes: An E*Trade spokeswoman says that for now, the notes being issued to Citadel sit side by side with other senior unsecured debt, with the same rights. She adds that the notes will “spring” above the other senior unsecured notes only after E*Trade has paid off an outstanding issue of 8% notes coming due in 2011. There was $500 million worth of those notes outstanding as of Dec. 31, 2006, E*Trade’s 10-K filing says.

Once that happens, she says, the Citadel notes will sit above E*Trade’s existing notes due 2013 and 2015 — there are $600 million of the 2013 notes and $300 million worth of 2015 notes, the 10-K says – but below the company’s revolving credit facility in terms of creditor standing. The spokeswoman puts E*Trade’s total debt at $1.88 billion and its senior debt currently outstanding at $1.44 billion. 

She adds that under the agreement, all the Citadel notes won’t necessarily spring higher in E*Trade’s capital structure. She says an amount of notes equivalent to E*Trade’s trailing 12 months earnings before interest, taxes, depreciation and amortization at the time of the 2011 notes’ retirement will get the more senior status.

Asked why E*Trade described the notes only as senior and unsecured in its press release, she says the company believes it made the disclosure in “the appropriate way” and that readers look to press releases for the general details on a transaction, on the understanding that “more technical aspects” will be explained in the 8-K.

“This was absolutely the right deal for the company,” she added, referring to E*Trade’s need to raise capital and grow its business. But the 29% drop in E*Trade’s shares since the bailout’s announcement may suggest otherwise.