Click Here Print | Close this window Battered E*Trade banking on government funds Fri Nov 21, 2008 5:15pm EST By Jonathan Spicer NEW YORK (Reuters) - The troubles at E*Trade Financial Corp (ETFC.O: Quote, Profile, Research, Stock Buzz) have worsened and now hinge on whether it can secure U.S. government funds that would bring some relief to its book of bad mortgage loans. Shares of the discount brokerage tumbled below $1 to its lowest price ever this week, indicating that investors think chances are slim it will secure the $800 million it applied for under the Troubled Asset Relief Program (TARP) rescue program. Competitors, including Charles Schwab Corp (SCHW.O: Quote, Profile, Research, Stock Buzz) and TD Ameritrade Holding Corp (AMTD.O: Quote, Profile, Research, Stock Buzz), have said they are loath to bid for the smaller and now very cheap company, but have made no secret they covet E*Trade's brokerage business, which has kept it afloat despite the drag of its mortgage business. Roger Freeman, a Barclays Capital analyst attending a business update hosted by Schwab this week, said E*Trade's existence "depends on whether it gets the TARP." E*Trade's survival probably hinges more on whether its customers continue to drive growth, according to analysts. But after a string of quarterly losses, the TARP funding is vital for the near term. But there are serious doubts the company will qualify alongside larger banks whose collapse could further shake a weakened U.S. economy. "The way the stock is trading now, it appears as though a lot of investors don't expect them to get the TARP funding," said one analyst, who did not want to be named due to E*Trade's delicate situation. E*Trade Bank offers credit cards, savings and checking accounts, and mortgage and home equity loans and hash about $28 billion in deposits. About 5 percent, or $1.4 billion, of the customer deposits are not insured by the Federal Deposit Insurance Corp, according to the company. The purpose of the government's TARP program is to capitalize struggling financial institutions so they can resume lending. Some analysts said it is unlikely that E*Trade, in crisis mode, will be able to lend. "Inherently, it seems to go against the spirit of the TARP program," the analyst said of E*Trade's application. The company's argument for public funds focuses on the fact that TARP is partly intended to support those institutions that facilitate liquidity in the market. E*Trade has said it is confident it will secure the funding and expects to make an announcement later this month. The company has $665 million in cash available to increase the capital of its banking arm if necessary. Last month, E*Trade's daily trading and new client accounts both jumped from September, due largely to the volatile market selloff. "Customers have been consistently supportive of our business," said company spokeswoman Pam Erickson. WORST-CASE SCENARIO Overall, discount brokers are enjoying a spike in trading revenues, but they face the worst-case prospect of a lengthy bear market during which individual investors could exit in droves. "Despite the reasonably healthy trends in the core brokerage franchise, we believe continued credit headwinds, a lack of earnings visibility and a limited capital cushion for common shareholders gives us no reason to become more constructive on E*Trade shares at current levels," Credit Suisse analyst Howard Chen wrote to clients this week. The analyst added that because few details on the TARP application have been provided, he has not factored that into earnings estimates. Shares fell 7 cents to 87 cents on Nasdaq on Friday. The company spokeswoman declined to comment on the stock price. E*Trade has absorbed a series of price and ratings downgrades since the last quarterly update, when it boosted its provision for loan losses by 62 percent and warned that charges in its home equity portfolio would be higher than expected. The company had $26.4 billion in total loans -- including consumer, mortgages and home equity -- on its books at the end of September, with about 3 percent, or about $792 million, considered "nonperforming". TELEBANC ACQUISITION E*Trade, a high flyer in the 1990s technology boom, entered the mortgage business with its 2000 acquisition of Internet bank Telebanc. The deal helped E*Trade weather the tech-market crash that followed, but also hurt when the mortgage market started to crack last year. As recently as July, 2007, E*Trade shares were worth more than the stock of both Schwab and Ameritrade. But they plunged as the mortgage portfolio soured, and now the larger rivals are eyeing the healthy segments of E*Trade's business. If E*Trade fails, some 4.4 million retail accounts would be exposed, opening the door to a possible government-sponsored takeover intended to protect clients, analysts said. "We have an interest in the brokerage accounts of any of our competitors in the brokerage business," Schwab Chief Executive Walter Bettinger said this week. But he added: "We do not have any interest in taking on a complex balance sheet issue, a complex set of loans or securities that will require ... massive work-outs, writedowns and impairments." E*Trade had $119.4 billion in total assets at the end of October, of which $16.4 billion was brokerage-related cash. E*Trade has "a very good brokerage operation," Toronto-Dominion Bank (TD.TO: Quote, Profile, Research, Stock Buzz) CEO Ed Clark -- who also sits on Ameritrade's board -- said in an interview this week. "But they are associated with very bad assets, and so we're not interested to take asset risk in order to buy E*Trade." (Additional reporting by Lynne Olver in Toronto; editing by Jeffrey Benkoe) © Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
Thanks, good post. Everyone who trades has to wonder about the health of brokers. I glean from this article, that E-Trade is a weak sister which I was somewhat aware from their earlier problems. Yesterday on CNBC, it was stated the Scwab was among the top ten financial institutions in the S&P according to market cap. E-Trade may be the canary in the mine so to speak. If and when it fails then, one should start to worry about their own broker.
For whatever reason I never liked e*trade. I like TD ameritrade. I only wish they would offer futures and/or forex. I like their attitude on things(stocks/options).
eTrade deserves to go under, because there's absolutely NOTHING good you can say about them compared to their competitors: * Outrageously expensive $12.99 trades. Let's be honest... anyone with the cash and activity level to ever see their lower rates will be GONE and trading with someone else by that time. * Sneaky 3-4 week funding delay. Go to their site, read the fine print, and sign up for your new account convinced that you'll be trading within a matter of hours. Make your ACH trasfer 10 minutes later, then wait... and wait... and wait... then find out, when you call them a few days later, that buried in some clause incorporated by reference is a policy of holding first-time ACH deposits for 10 BUSINESS days, THEN subjecting them to another day or two of hold time from that point, and THEN, when the new customer is finally able to trade... restricting them from buying any stock trading for less than $10/share for ANOTHER 5 business days. * Limited trading functions. If you want to trade before/after hours, you have to submit the order at or after 8am. You can make an order "GTC", but it's going to expire in EXACTLY 60 days, and won't trade during extended times. * Extortionately expensive quarterly inactivity fee after the first year, so any shares you've bought with eTrade have to be either liquidated or transferred (at equally extortionate cost) unless you want to see their value wiped out by eTrade's fees. Ameritrade isn't cheap ($9.99/trade), but at least they provide what I consider to be the Lexus and "white glove handling" of consumer-oriented online trading: * Opening a new account today? Cool... they'll credit the first $750 of your ACH deposit within an hour or so. Sign up at noon, and be making your first trades by 2:30 or 3pm. Like everyone else, your first few trades will be disasters... but in this case, you'll only have $750 to make those first few trades with (your subsequent ACH deposit will take 2-3 days), so you'll have an advantage over eTrade's new customers... the scope of your initial damage is limited, but the timeframe is immediate, giving you a valuable opportunity to make your mistakes without getting destroyed completely. * 30 days with 500 free trades. I can't think of a single factor that saved my butt during my first "real" month than the ability to ease into positions a few shares at a time, and back out of my mistakes the same way. If there was a stock I was just *burning* to have, even though it was trading well above one of its October-crash lows, I could let myself have 5 for instant gratification... and to stare me in the face every day as red lines in my "positions" page to remind me why I needed to wait before buying any more shares. Then, as soon as a crash occurred and I could buy my first batch of "cheap" shares, I only had 5 expensive ones to get rid of during the next rally. * Powerful trading options. My favorite, of course, was "GTC+ext limit orders". However, Ameritrade even lets you place "triggered" orders that don't eat into your "available funds for trading" until they actually get triggered. So if you want to buy 30 of one company at a given price, or 25 of some other company at similar price, and just want to buy whichever hits the price first, you can do it ("one-cancels-another" won't work for that purpose if you have a cash account, because it won't allow you to place the order unless you have the funds available to handle BOTH; With triggered trades you can do it, because the order doesn't even get PLACED until the trigger fires, so if the second trigger fires after the first order gets placed, the second will fail as expected due to unavailable funds). * Command Center 2.0 rocks. It's not perfect, but comes pretty close. * Nasdaq level 2 for $9.95/month. I don't know of anybody remotely close to that price-wise. * Compatible with thirdparty streaming apps, like QuoteTracker. In fact, QuoteTracker itself is free if you use Ameritrade as your streamer source. * Great research tools, reasonably well organized and laid out. * etc, etc, etc. I know I sound like an Ameritrade fanboy, but IMHO for someone starting out with their first account, it would really be hard to recommend anyone else... at least, until they use up their month of free trades and the training wheels come off ;-) ScottTrade is cheaper than Ameritrade, but from checking out my friend's account, it looks like they don't really offer anything that TradeKing doesn't... so you might as well just go with TradeKing & enjoy the lower trade prices. SogoTrade is kind of like the "Southwest Airlines" of online trading. No-frills, but cheap ($3/trade) and does what 80% of newbies need it to do. If they allowed users to freely upgrade and downgrade to SogoElite pricing (or maybe $1.50-2 trades in exchange for $10/month), so they could pay the $10/month when needed, then drop it if they quit actively trading, I probably would have gone with them. I ended up with SogoElite, though I kind of regard THAT as my "trading account for shares I don't really intend to keep for a long time" Zecco is the site people love to hate. For people like my dad, it's nearly ideal. For anyone deluded enough to think they'll actually be able to get onto the site to do trades on days when the market is melting down, it's a disaster waiting to happen. Personally, I ended up picking Just2trade for my new long-term trades. In the grand scheme of things, they aren't THAT much more expensive than SogoElite when you factor the $10 monthly fee, they have an API, they don't require you to literally place your day's orders between 8am and 9:30am (SogoElite orders ALL expire at the end of the trading day), and in another week or so they'll have free level 2 streaming quotes. At the moment they're temporarily running in limited functionality mode because they had to switch clearinghouses with minimal notice and rewrite their software to handle it, but they got the important functionality working right away, and they're working fast & furiously to get everything back to 100% within another week or two. Since I still have positions at Ameritrade that won't be going away anytime soon, and Ameritrade doesn't charge maintenance fees, I've just used Ameritrade for my streaming and research, and used Just2Trade for the trades themselves ;-)
I sure as hell would get any of my money out of E*Trade as fast as possible - I could give a shit about their alleged insured accounts or anything else. Under $1 a share? They were investing money in mortgage-backed paper? Are you f**king serious????
NASDAQ level 2 is free for Ameritrade Apex customers. And Apex is really easy to get. Really cool thing is that Apex customers get free outgoing wires. Average five or more trades per month in your TD AMERITRADE account over a three-month period. Or, maintain a total account value of $100,000. I got it alsmost immediately after I got my account there. The best part about ameritrade for me is advanced analyzer.