Monday, November 12, 2007

The Mortgage Crisis Comes to E-Trade

The excerpts below from an article in Yahoo discuss the plight of E-Trade after investing in various mortgage related securities. The question that should be asked of many of the firms that did this same sort of thing is, “is this part of your core competency”? If it is not, then why is it being done? Text in bold is my emphasis.

E*Trade Financial Corp (ETFC.O) told customers on Monday it can absorb a writedown of as much as $1 billion and it is well capitalized, after a Citigroup analyst said credit woes put the online brokerage is at risk of bankruptcy.

Shares fell to their lowest level since April 2003 a day after Citigroup analyst Prashant Bhatia said in a research note that there is a 15 percent chance of bankruptcy and downgraded the brokerage to a "sell" from "hold."

But E*Trade President and Chief Operating Officer Jarrett Lilien said in a message to customers posted on the company's Web site, "We could absorb an immediate writedown in excess of $1 billion and still remain well capitalized."

Lilien also acknowledged that because "news in the market" will get worse before it gets better, E*Trade is taking "prudent measures" to manage its balance sheet.

E*Trade said last week it expects more write-downs in its $3 billion asset-backed securities portfolio and would no longer meet previously issued earnings forecasts.

"The continued negative news flow about charges resulting from its mortgage and CDO (collateralized debt obligation) exposure, an SEC inquiry, and continued deterioration in its financial condition, all increase the likelihood of significant client attrition," Bhatia wrote.

The $15 billion of deposits in 57,000 accounts represent roughly 25 percent of the New York-based company's funding and deposit attrition could lead to forced selling of the assets that are supported by these deposits, he said.

"There may be layers of protection for customers, but in our view, customers may withdraw assets first, and ask questions later," he wrote.

E*Trade on Monday said its total retail client assets in October rose 4 percent sequentially to $226.7 billion.

Shares of E*Trade were down $4.32, or nearly 50 percent, to $4.26 in morning trading on Nasdaq.

Bhatia also said E*Trade could realize losses of over $5 billion if it tries to liquidate its loan and asset-backed securities portfolio as a result of losing its funding sources.

He cut his price target to $7.50 from $13, while Bank of America analyst Michael Hecht reduced his target by $1.50 to $10.50, citing diminished earnings visibility. Hecht maintained his "neutral" rating on the stock.

E*Trade said last week the U.S. Securities and Exchange Commission was investigating whether its Capital Markets division executed orders ahead of customer orders during the period 1999 to 2005.

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