E*Trade's Mortgage Snafu: Will It Prompt a Sale?

E*Trade Financial Corp.'s (NASDAQ:ETFC) $1.8 billion purchase of Internet bank Telebanc Financial Corp. in 2000 raised some eyebrows for the price it paid for the little known target that it would later use to begin its foray into the mortgage business.

Nine years and billions of dollars in losses later, E*Trade is likely regretting its move into mortgages, especially since it reported more bloodletting with a loss of 41 cents per share, or $232.7 million, in the first quarter. The loss was the seventh consecutive money-losing quarter for E*Trade.

Now, the Office of Thrift Supervision has told the company to "quickly" raise new capital for its bank and cut the debt of its holding company, Reuters reported. Will the company consider putting itself up for sale as an option to survive?

This wouldn't be the first time E*Trade would be flirting with going on the auction block. But this time around, its circumstances seem more dire. The economy has reduced the number of potential buyers, and more importantly E*Trade's financial picture hasn't improved. Corporate Dealmaker reported in March 2008 that then-newly elected CEO Donald Layton told The Wall Street Journal that he would certainly entertain a sale if it made sense for the shareholders. Citadel Investment Group LLC eventually rescued E*Trade with a $2.5 billion cash infusion, crushing rumors that TDAmeritrade Holding Corp. (NASDAQ:AMTD), Citigroup Inc. (NYSE:C), Wells Fargo & Co. (NYSE:WFC) or Bank of America Corp. (NYSE:BAC) would swoop in on the online brokerage firm.

What does E*Trade have to offer? The company's core brokerage business seems healthy, but its Achilles heel is its mortgage business, where delinquent loans totaled $2.24 billion, up 13% from the previous quarter.

Overall, the future for E*Trade looks bleak. E*Trade Bank's Tier 1 capital ratio, a measure of capital strength, was 5.63% at quarter's end, down from 6.29% in the previous period. A well capitalized firm needs at least 6%. Meanwhile, it's stock has languished, dropping as low as 59 cents a share in the last year (shares have since rebounded).

Besides selling itself, the company could still raise capital if Uncle Sam gives a green-light on its application for $800 million in relief under the Troubled Asset Relief Program. However, the application was made back in November. But if that doesn't happen, E*Trade may try to dive into the onerous task of either tapping into the debt markets or even issuing more stock to stay afloat. E*Trade's escape scenarios seem precarious at best, but that's what happens when a billion-dollar deal based on a speculative bubble blows up. -

Gerald Magpily

Comments

[Joe E:]

Sorry, ETRADE is toast.

Apr 29 09:20 PM

[expat in China:]

what happens to my stock trading account is my money safe?
and will "powertrade" stop working?

Apr 29 10:41 PM

[Hirendu Vai...:]

There is a bit of fear-mongering in this article which is ignorant at the least and fradulent at the worst.

Let us break down the $2.243B in delinquent loans:
HELOC delinquencies $724M -- Current Provisions $818.6M
1-4Family delinquencies $1469M -- Current Provisions $308.8M

HELOC delinquecies are down this quarter. Yet they are provisioned more than total delinquencies even assuming 100% loss on all delinquencies.

1-4 Familly loans; which are mostly 1st liens, usually have a much reduced loss rate depending on the LTV and recovery rates. Yet E*Trade is provisioned assuming at 21% loss on that. Delinquency rates on 1-4 Family is likely to come down in future, though charge-off will be at current level for one more quarter.

So in my opinion, using $2.243B deliquencies without mentioning over-provisions and improving future delinquencies is dishonest.

If anything, E*Trade seems to have finally put all loan problems behind and it seems it is suffering now from too much provisions intended to push the stock price lower so that private placement of equity offerings can be done at sweetheart of stock prices.

In other words, a great company that will be taken over by unscrupulous means, aided and abetted by people like this author.

Apr 30 12:26 AM

[CoverIsBetter:]

"Because it's wreckable!!" -- Gordon Gecko

Apr 30 11:40 AM

[mikebrah:]

lol, touche.


On Apr 30 11:40 AM CoverIsBetter wrote:

> "Because it's wreckable!!" -- Gordon Gecko

Apr 30 03:49 PM

[Shaggieman:]

Strong brokerage service, WFC should pick them up. It would vastly improve WFC's brokerage operations.

Apr 30 04:11 PM

[Long US stockS:]

Amen!!


On Apr 30 12:26 AM Hirendu Vaishnav wrote:

> There is a bit of fear-mongering in this article which is ignorant
> at the least and fradulent at the worst.
>
> Let us break down the $2.243B in delinquent loans:
> HELOC delinquencies $724M -- Current Provisions $818.6M
> 1-4Family delinquencies $1469M -- Current Provisions $308.8M
>
> HELOC delinquecies are down this quarter. Yet they are provisioned
> more than total delinquencies even assuming 100% loss on all delinquencies.
>
>
> 1-4 Familly loans; which are mostly 1st liens, usually have a much
> reduced loss rate depending on the LTV and recovery rates. Yet E*Trade
> is provisioned assuming at 21% loss on that. Delinquency rates on
> 1-4 Family is likely to come down in future, though charge-off will
> be at current level for one more quarter.
>
> So in my opinion, using $2.243B deliquencies without mentioning over-provisions
> and improving future delinquencies is dishonest.
>
> If anything, E*Trade seems to have finally put all loan problems
> behind and it seems it is suffering now from too much provisions
> intended to push the stock price lower so that private placement
> of equity offerings can be done at sweetheart of stock prices. <br/>
>
> In other words, a great company that will be taken over by unscrupulous
> means, aided and abetted by people like this author.

May 01 12:01 AM

[Lightway:]

Sad to see this kind of manipulation. "Shareholder dilution" sounds like a big red warning sign to get out while you can. Those who are staying in for a quick trade, I hope I am wrong. Maybe Schwab will buy at favorable terms for shareholders. But after witnessing what happened in many of the financial takeovers in 2008, shareholders in those cases got wiped out pretty badly. Good luck to all.

May 02 08:45 PM