Monday, November 12, 2007

Less Than $4 A Share

You know, I looked at E*Trade's online bank awhile ago. They were offering the highest interest of any online banks at that time and I was thinking about opening an account. But then I read how they were having some subprime mortgages issues and decided to look elsewhere.

I'm glad I did:

Shares of E*Trade lost more than half of their value after the company said it expected additional asset write-downs and an analyst suggested that it might be forced into bankruptcy protection. While the bank assured customers that it remained “well capitalized by regulatory standards,” the analyst, Prashant Bhatia of Citigroup, theorized that a rush of withdrawals might leave the bank without enough funding to operate.

E*Trade has already warned that this year’s profits would be hurt by the subprime crisis. But the picture grew even more grim late Friday, when E*Trade said it expected to take additional write-downs on its $3 billion portfolio of asset-backed securities, which includes second-lien loans and C.D.O.’s.

What was potentially most unnerving to Wall Street was that E*Trade did not put a number on the size of the latest write-downs. E*Trade also withdrew its previous earnings forecasts, which had already been lowered several times this year.

“Management believes it is no longer beneficial to provide earnings expectations for the remainder of the year,” E*Trade said in a statement.

Mr. Bhatia, the Citi analyst, responded by cutting his rating on E*Trade to “sell” from “hold,” citing a “higher probability of a run on the bank.” About half of E*Trade’s deposits, or $15 billion, are in accounts that contain more than $100,000, he said in a report dated Sunday. These account holders are the most likely to bolt, because bank deposits above that amount aren’t insured by the Federal Deposit Insurance Corporation.

If customers rush to withdraw their money, E*Trade could be forced to hold a fire-sale of other assets to generate capital. The resulting losses could wipe out its tangible equity, Mr. Bhatia wrote.

E*Trade's stock fell 60% today. It's now worth less than $4 a share.

Here's how the stock has done in the past year:

POSTSCRIPT: The advertiser on the website where I got the chart of E*Trade's stock performance over the last year was E*Trade.

Wonder how much longer they'll be in business?

reality, eTrade is rebounding. But even if fatal problems surface, no harm will come to account-holders unless their accounts exceed the insured limits of the SIPC, which protects cash up to $100,000 and securities up to $500,000. More insurance is probably available.

Anyway, if eTrade were to fail, that simply means an acquiror would take over immediately. Schwab is a likely name. Or TD, Toronto Dominion. Or several others.
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