E*Trade sinks 59% on losses and fear of bankruptcy


By Anupreeta Das
via Yahoo News
Monday, November 12, 2007


NEW YORK -- Shares in E*Trade Financial Corp sank 59 percent to a five-year low on Monday after an analyst said mounting credit losses may prompt customers to yank deposits and could put the online brokerage at risk of bankruptcy.

The company told customers it could absorb a $1 billion write-down and remain well-capitalized. Investors were unconvinced, pushing E*Trade shares down $5.04 to $3.55 on the Nasdaq, their lowest level since August 2002.

The slide came after E*Trade late Friday withdrew its 2007 earnings forecast, projected further write-downs on a $3 billion asset-backed securities portfolio, and said the U.S. Securities and Exchange Commission had begun an informal inquiry into its loan and securities portfolios.

It also said Dennis Webb, who led its capital markets unit, had left the company.

Citigroup analyst Prashant Bhatia downgraded E*Trade to "sell" from "hold," a forecast that incorporated a 15 percent chance of bankruptcy.

"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.

Other analysts did not raise the specter of bankruptcy but also downgraded their ratings or reduced their price targets.

Jarrett Lilien, E*Trade's chief operating officer, in a message on the company's Web site said: "We could absorb an immediate write-down in excess of $1 billion and still remain well capitalized."

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

Much of E*Trade's recent revenue growth has come from its mortgage-backed assets, but the slowing housing market has reduced demand for a variety of mortgage securities.

Bhatia said E*Trade has altered its earnings forecasts five times in eight months, "reflecting poor risk management."

...Rivals may gain

E*Trade's problems appeared to have sent investors to rivals such as Charles Schwab Corp and TD Ameritrade Holding Corp. Their shares rose a respective 2.6 percent and 5.4 percent on Monday.

"Ameritrade, which has no exposure to the subprime difficulties, stands to gain," said Chris Manns, an analyst at optionmonster.com.

Bhatia said about $15 billion of deposits, representing one-half of E*Trade's deposit base and one-fourth of its funding base, lack federal deposit insurance and thus have a "higher risk" of leaving. He said this could result in forced selling of assets supported by these deposits.

"Customers may withdraw assets first, and ask questions later," he wrote. He said E*Trade could suffer more than $5 billion of losses if it liquidated its loan and asset-backed securities portfolio because it lost its funding sources.

Bhatia cut his price target to $7.50 from $13, and Banc of America analyst Michael Hecht reduced his target by $1.50 to $10.50, while keeping a "neutral" rating on the stock.

Sandler O'Neill analyst Rich Repetto downgraded E*Trade shares to "hold," saying he expects E*Trade to "aggressively" pursue strategic alternatives such as a deal or a sale of some assets.

Earlier, Fox-Pitt, Kelton analyst David Trone said a sale was not "a luxury, but a necessity" for E*Trade.

But Deutsche Bank analysts Matthew Fischer and Mike Mayo said the brokerage's retail business remains strong.

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

E*Trade said last week the SEC was investigating whether its capital markets division executed orders ahead of customer orders during the period 1999 to 2005.

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