E*Trade: A Solid, Deep Value Stock

Before we begin, something to get you in the mood.

I’ve taken on a large speculative position on ETFC recently, one that has exponentially grown in size over the course of the week. I believe this to be one of the last remaining opportunities left from the Oct-Mar meltdown to make a wild profit on ‘risky paper’. (Hat tip to Jason Schwarz for providing the original impetus for this trade.)

Having read some excellent commentary on personal investment picks on SA (especially from Tom Armistead, Alan Brochstein, and Marc Gerstein), I’ve decided to also outline and organize my decision-making:

Quantitative:

ETFC is in a peculiar situation right now. In addition to a typical focus on fundamentals, its capital structure is also worth noting, due to its dilutive effects.

10/15/09	ETFC 6/30/2009	ETFC 12/31/2004	AMTD 6/30/2009
(sourced from WSJ and 10Ks)
Cash	5.2bn	0.9bn	1.1bn
Book	3.0bn	2.2bn	3.4bn
Tangible Book	0.7bn	1.6bn	(negative)
Loan Portfolio^	34.0bn	24.1bn	n/a
Brokerage Income	202mil		338mil
Total Revenue	797mil		616mil
Net Income	<123mil>		280mil
Loan Provision	404mil		n/a
Shares (WSJ as of today)	1.1bn	0.4bn	0.6bn
Market Cap	1.9bn	5.5bn	12.2bn
(w/ dilution*)	4.9bn

^ - includes MBSs, but not loan allowances

* - dilution is assuming 2.8 bn shares ($1.7bn in debentures convertible around $1)

Loan Portfolio as of 12/31/08:

• MBS – 10.1bn
• 1-4 family (1^st lien mortgages) – 13.0bn
• 2nds – 10.0bn
• Other – 2.3bn
• Fixed: 8.0bn
• ARMs (including 2nds): 17.3bn

From these numbers, we can see how much of an impact the banking division has on ETFC’s bottom line. Its brokerage arm is about 60% the size of AMTD, and overall, excluding the loan provision, they both have similar margins. Outside of large loss provisions, the banking division contributes a sizable amount to the bottom line, meaning that if it is ever given anything close to a clean bill of health, one could expect similar overall valuations to AMTD. That would result in a near tripling of ETFC, given today’s prices.

Personally, given its large cash balances, I’d say that ETFC has already been given the go-ahead. Although this will mark the first financial institution I’ve seriously looked at (my prior speculation on C completely discounted Citi Holdings as an externality), I would say that it looks quite healthy compared to the "too big to fail" institutions out there. I do not see derivative exposures that are several times the size of the US GDP, for example.

Qualitative:

There are several complications surrounding ETFC, all related in one way or another to its loan portfolio:

1. Loan operations
2. Citadel’s involvement
3. The Fed

1) Loan operations - ETFC is winding down its loan portfolio, at a rate of about $1bn per quarter. It has a standing allowance of $1.2bn, or over 5% of its portfolio. As of its 2008 annual report, it had nearly $1bn in non-performing loans (90 days overdue), or about 4% of its portfolio. These numbers are about in-line for the financial sector as a whole (not that such a fact should be encouraging). It is also inexplicably expanding on its MBS portfolio. Apparently this is all government guaranteed agency debt, so perhaps it is not that bad of a deal.

According to its website, it offers fixed mortgages, 5 - 7 year ARMs and interest-only loans. I could not find any information about 2^nd mortgage offerings, and will assume they account for the majority of its portfolio shrinkage.

From CEO Bob Layton, during the last quarterly conference call:

We’ve gone from that liability position where we had to pay high rates on deposits, to a position where we’re actually ultra-liquid at the bank and we are literally looking to have reduction in deposits to accommodate our shrinking asset side balance sheet as the loan portfolios and total runoff.

2) Citadel’s involvement - Instead of a government bailout, for all intents and purposes Citadel has fulfilled this role. Anyone familiar with ETFC is probably keenly aware of the $2.6bn transaction in Nov 2007. This transaction has two parts in my opinion, a) a bullish bet on distressed mortgage-related debt, and b) high frequency trading (HFT).

We’ll focus on the HFT. Matthew Goldstein has written a superb article highlighting what one can argue is the ‘real’ reason Citadel got involved. As you can see, it has proven to be spectacularly profitable for Citadel, even with only 40% of ETFC traffic routed to the hedge fund over the past two years. If we can pin a majority of the growth in HFT profits to the ETFC deal, we’re looking at a significant return on its $2.6bn investment. Not to mention that the convertible debentures already have an additional 58% return baked into it. According to the WSJ, Citadel still holds over $800mil of these debentures, along with its approximate 9.9% position in the stock. This would place its ownership percentage somewhere upward of 30-35%, assuming a fully diluted 2.8bn shares.

This New York Times article highlights the OTS stonewalling Citadel’s attempt to route nearly all of ETFC’s traffic to its desks. Apparently the concession granted was to allow Citadel to hold more than 25% of ETFC without the typical regulatory oversight over ‘holding companies’.

This points to a commitment on the part of Citadel. It’s certainly possible for hedge funds to take long positions in companies that may give favorable returns, such as John Paulson’s stake in ROH (now DOW), and Soros’s past commitment in QCOM. I see Citadel’s current stance as similar in nature.

One last thing to note is that Citadel has its own problems. I would imagine that Ken Griffin would rather not have to deal with an angry mob at his backside. Like all mobs, they're appeased with large wads of cash, the raising of which may be a cause for Citadel’s selling of ETFC. This is great for all other investors who have deep enough pocketbooks to speculate on ETFC at these depressed prices.

3) The Fed - Sometimes I wonder if we actually are subject to a centrally planned economy. I’ve been making speculative bets along with being outright bearish due to what I perceive as a dearth of actual investment opportunities in the marketplace. I’ve since altered my stance. What has erased my suspicions of a justified re-mauling of the market, IMHO, is the Fed. Marc Faber, among other things, is now famous for uttering the quote “Don’t underestimate the power of printing money,” and it seems that at least for asset prices, this has proven to be prescient. As long as the Fed keeps the punch bowl out, it looks like everyone is going to get drunk with greed.

Since countless analysts have posted more eloquent summaries of the situation, I will merely say that I believe it to be in the Fed’s best interest to keep QE on for as long as feasible, i.e. until inflation risks becoming an uncontrollable danger. This may end up buoying risky assets enough so that they’re no longer risky, mainly by inflating debt to a fraction of its current value. Both of these results will give ETFC a double-shot in the arm, as the former restores its balance sheet, and the latter assumes a general consumer recovery, one in which ETFC would naturally participate.

Conclusion:

1. ETFC is priced at pre-bankruptcy prices without a bankruptcy in sight.
2. Citadel has shown clear signs of holding onto its position.
3. The Fed has been explicit in supporting an ‘easy money’ policy, perfect for banks to recover their balance sheets.
4. Add 1-3 together, and I believe that ETFC, despite seeming like a risky stock, is actually a pretty solid deep-value play.

One more time...Whoa.

Disclosure: I’ve written cash-secured LEAP puts @ 5 exp Jan 2011, and used the 65% premium to purchase LEAP calls @ 2.50 exp Jan 2011 – these options currently trade at a 7-1 ratio. Partial exit strategy would be to wait until the options reach close to a 1-1 ratio (probably when ETFC hits around 3.5 - 4), and close the put position by selling calls. If ETFC hits 5, this strategy will yield at least 350% on secured cash.

Comments

[doodoo:]

Go ETFC.Hope our right,

Oct 20 06:15 AM

[lucky lenny:]

Ricard, here's my analysis on E-trade, which i believe could go to $5-10 over the next 12-24 months:

E-trad is at $1.75. Here’s what I like about the stock and why I’m holding:

• Loss provisions are moderating on a quarte-over-qtr basis. Per the 9/15/09 press release, E-trade is projecting a provision for loan loss of between $300-$375 mill; vs. $404.5 mill in 2Q09 - so the provision is moderating

• stock market is back on the upswing; w/ the DOW now over 10k

• despite advertising expense being cut in half, new a/c openings are strong; with a record 2.7 mill brokerage a/c’s as of 8/31/09

• Per the 2Q09 income statement, interest income, commissions, fees, and other revs are tremendous; running around $350 mill/qtr

• E-trade is getting its groove back on. Advertising costs coming down, in 2Q09, only $25.0 mill vs. the usual $44 mill or so. Tells me they’re over the whole meltdown debacle issue.

• Per 2Q09 Balance Sheet, E-trade looks to have enough capitial to weather a few more qtrs & even years of losses; with $6.7 bill in cash & investments; and net equity of $3.0 bill. Not that they’ll have these large losses; just that if they did, they’re still coming back w/out going Chapter 11.

• And finally, the #1 reason, is E-trades 2.7 mill brokerage a/c’s which could lead to a takeover. Even w/ the 662 mill shs o/s (diluted), I think E-trade’s trading platform, name recognition, tax loss carry-forwards, and customer bases would result in an offer of around $5-10/share. Especially if E-trade could become breakeven or profitiable before the buyout.

Oct 20 06:44 AM

[effeff63:]

Sticking to my Apr 2010 $2.00 covered call sales for a net gain of 40% if exercised. The call premium is about 20% with the shares @ $1.70.

Oct 20 09:43 AM

[China Expert:]

Deep value stocks trades as a low multiple of EBITDA relative to its total enterprise value. This company has NO EBITDA. This stock is neither a deep value stock nor a value stock .... it is merely a stock that trades measured on hope.

Oct 20 10:08 AM

[Luke Skywooker:]

If the stock goes to 5.10, you make 300% by onwing the common, why not just buy the common at $1.70, todays price

Oct 20 10:36 AM

[Tom Armistead:]

China Expert, what I see here is a speculative value stock, there is a chance of tripling or better if you accept the author's view, or that of lucky lenny, who suggests 5-10 from 1.70 now.

Set against that there is the chance of losing the whole amount invested if the banking operations take a turn for the worse. The author has stated that he regards it as a speculation.

Ricard, good article, thanks for the mention.

Tom

Oct 20 11:20 AM

[User 488509:]

Article is full of errors, misunderstandings and silly assumptions.
Just look at his conclusions:

"Conclusion:

1. ETFC is priced at pre-bankruptcy prices without a bankruptcy in sight.
2. Citadel has shown clear signs of holding onto its position.
3. The Fed has been explicit in supporting an ‘easy money’ policy, perfect for banks to recover their balance sheets.
4. Add 1-3 together, and I believe that ETFC, despite seeming like a risky stock, is actually a pretty solid deep-value play."

-----------

First , ETFC is actually priced for an "optimistic" earnings scenario. Using approx. 3 billion shares as the diluted share outstanding denominator , to earn just ten cents per share or a 17 p/e , ETFC will need to book a clean $300m profit in the next 12 months.
Unlikely!

Second,Citadel seems to be leaving as fast as they can. In the last 6 months , their overall $2.6 Billion dollar position in ETFC has been reduced to under a $1Billion including the complete sale of every ETFC interest paying bond they owned.

Third , ETFC is in the banking biz in name only. Third party loans are not going to yield much profit. Can't believe you wouldn't know this??

This artcle was very,very shoddy work.

Oct 20 11:59 AM

[Tack:]

When you have $60B in your loan portfolio, you're in the banking business, whether you want to be or not.


On Oct 20 11:59 AM User 488509 wrote:

> Article is full of errors, misunderstandings and silly assumptions.
>
> Just look at his conclusions:
>
> "Conclusion:
>
> 1. ETFC is priced at pre-bankruptcy prices without a bankruptcy in
> sight.
> 2. Citadel has shown clear signs of holding onto its position.<br/>3.
> The Fed has been explicit in supporting an ‘easy money’ policy, perfect
> for banks to recover their balance sheets.
> 4. Add 1-3 together, and I believe that ETFC, despite seeming like
> a risky stock, is actually a pretty solid deep-value play."
>
> -----------
>
> First , ETFC is actually priced for an "optimistic" earnings scenario.
> Using approx. 3 billion shares as the diluted share outstanding denominator
> , to earn just ten cents per share or a 17 p/e , ETFC will need to
> book a clean $300m profit in the next 12 months.
> Unlikely!
>
> Second,Citadel seems to be leaving as fast as they can. In the last
> 6 months , their overall $2.6 Billion dollar position in ETFC has
> been reduced to under a $1Billion including the complete sale of
> every ETFC interest paying bond they owned.
>
> Third , ETFC is in the banking biz in name only. Third party loans
> are not going to yield much profit. Can't believe you wouldn't know
> this??
>
> This artcle was very,very shoddy work.

Oct 20 01:03 PM

[Ricard:]

Great comment stream so far. I appreciate opposing opinions when they come with justifications for it, and in that sense I am very satisfied with the comments left behind by everyone.

@luckylenny

I agree the brokerage business looks very healthy, and left the 'why' out of the article.

@luke

Good question.

You have to fully work out the strategy. Yours is assuming owning 100% ownership of stock until it hits 5.

My scenario calls for selling enough out in order to 'break even' at 3.50 - meaning that my remaining 83% calls outstanding would be 'free' of risk - I would have exited the put portion of this trade along with 1/7 of my call position. Given that only 65% of secured cash is invested, and given that there was a partial sell midway, the fact that this strategy still returns 350% is noteworthy, IMHO.

I've incorporated this into my long call bets in order to map out a logical and clear exit strategy into my decision-making. It is easy to see options double, and have greed take over, and miss what would have been a great exit point. This way, if I happen to be right AND wrong, I have an exit point where I still get a chance to participate further if I turn out to have been too conservative, and suffer none of the downside.

Unlike what I did for C, the puts do not have a time premium, which made me think twice about writing them. However, given the option between buying straight out-of-money calls or at least incorporating a less risky strategy, I chose to merge the two into this hybrid.

Oct 20 01:16 PM

[Ricard:]

I would point out that the reason this stock has no EBITDA is because of the loan provision. Take it out, and you have an incredibly robust bottom line, with margins that exceed AMTD.

Of course, that may be a bit too rosy given that non-performing is right up there with the provisions, but I hope you see my point.

You're right in that this trade is predicated upon a nominal housing recovery (and corresponding nominal financial sector recovery), IMHO planned out and executed by the Fed. Given that the Fed has explicitly stated that it will keep rates low and QE out for the foreseeable future, I think that what would be 'risky bets' in stocks like this become much more attractive and under-valued.

On Oct 20 10:08 AM China Expert wrote:

> Deep value stocks trades as a low multiple of EBITDA relative to
> its total enterprise value. This company has NO EBITDA. This stock
> is neither a deep value stock nor a value stock .... it is merely
> a stock that trades measured on hope.

Oct 20 01:20 PM

[Ricard:]

I saw your debate with Redbeard in Jason's column...excellent if I may say so.

Here are some of my justifications for my logic:

1) Let's start with the share sales. The NYT article is key here, because I would imagine a diversified hedge fund like Citadel is desperate to avoid any prying eyes, especially of the regulatory flavor, from looking too closely at its operations.

Bank Holding Company Act of 1956, Title 12, Ch 17 of the US Code:

A Bank Holding Company:
“bank holding company” means any company which has control over any bank or over any company that is or becomes a bank holding company by virtue of this chapter.

"Any company has control over a bank or over any company if—
(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company..."

This has, according to the NYT article, been waived for Citadel's excess ownership of E*TRADE (to what degree I'm not sure, for now I am working under the assumption it must be well below 50%), a concession to deter it from routing its brokerage traffic to its desk, it seems.

Then, look at this link, and I'd imagine that Citadel is desperate to cut ownership enough so that it will not have to comply with this section of the law:

www.law.cornell.edu/us...

Thus, the fact that they have gained concessions to exceed 25% ownership, and that they still own in excess of this amount, is IMHO a positive sign of Citadel's intention to ride this stock upward.

Finally, I must remind you that all of Citadel's selling has been profitable. They are not exiting out of a losing position here. They are not 'desperate'.

2) Your earnings analysis justifies the stock today at today's
prices...but stocks rarely reflect only the views of the moment. If the loan portfolio improves, it is possible that by this time next year, it will be able to meet and exceed that number. AMTD and ETFC's brokerage arms are still profitable in this abysmal environment...think about a recovery scenario, even if it's only nominal.

If the loan provisions were reduced to, say $100 mil a quarter, ETFC will be earning well north of $0.5bn annually, all else being the same. AMTD is already poised to earn twice that amount this year. There is room for optimism, IMHO. We will see how ample next week.

3) You're right, the banking business will likely eventually become a supplement to its profitable brokerage arm. I saw comments from management in the past earnings call implying a general exit out of loans (which was why I was surprised by the increase MBS position), and using the sweep from cash deposits for brokerage accounts. I will not profess to knowing the economics of this aspect of the business.

I'm guessing the increased MBS position is due to its inability to reduce customer deposits by an acceptable amount (see CEO's statement). Thus, as deposits decrease further to their liking, these MBS positions may also decrease accordingly...but that is close to pure conjecture on my part.

Ball's in your court.

On Oct 20 11:59 AM User 488509 wrote:

> -----------
>
> First , ETFC is actually priced for an "optimistic" earnings scenario.
> Using approx. 3 billion shares as the diluted share outstanding denominator
> , to earn just ten cents per share or a 17 p/e , ETFC will need to
> book a clean $300m profit in the next 12 months.
> Unlikely!
>
> Second,Citadel seems to be leaving as fast as they can. In the last
> 6 months , their overall $2.6 Billion dollar position in ETFC has
> been reduced to under a $1Billion including the complete sale of
> every ETFC interest paying bond they owned.
>
> Third , ETFC is in the banking biz in name only. Third party loans
> are not going to yield much profit. Can't believe you wouldn't know
> this??
>
> This artcle was very,very shoddy work.

Oct 20 01:55 PM

[Pj568:]

A quick review - back in 06 (near peak) ETFC earned 1.50 with 400 mil shares outstanding sold for 25 , a pe of 17.

Today with the diluted 2.8B shares (greater by 7x) and keeping the same 17 pe earnings would be around 30cents if selling at 5 or 60cents if selling at 10. Therefore we're talking net income of 840M or 1.68B.

The most money TD Ameritrade (AMTD) ever made was 803M. So realistically how can ETFC get to even 5.

Oct 20 02:07 PM

[dogtrack2:]

Enough with BS. Whether it's "Buy Out Imminent" or "Citadel is done selling" nobody knows jack. The tape is the only thing that matters and it sucks!

Oct 20 02:11 PM

[Jason Schwarz:]

Ricard,

Excellent analysis. Patient speculation can produce quite a reward. I'm perfectly content to hold throughout 2010 and let the stock rise come to me.

Oct 20 02:25 PM

[redbeard20000:]

Thanks Ricard for putting into a column the same basic thoughts I've had since I've been following Etrade. And for articulating it better than I could hope to do. Great that you posted a ton of links, I know how much they mean to some people.

Once they raised the extra 600 million in capital and pulled off the debt for equity swap, I've been almost 100% sure that bankruptcy was off the table. I bought the majority of my position within a week of those announcements. With the bankruptcy question out of the way, it all comes down to how much the company is worth in a "normalized" environment. Then you just buy some shares and arbitrage away the bankruptcy discount thats currently there. Whether that takes 1 month or 2 years, who knows, but its coming eventually.

As for what the company is actually worth, I'm afraid some people are a little too bullish, with 2.8 billion shares on a fully diluted basis, I really don't believe they have the earnings power to be a 5+$ stock, unless they see some very good growth on their brokerage side in the coming quarters. My price target is 3.50 per share, but will be looking to either get out, or sell covered calls at around 3.

I've already been able to get some great returns selling jan10 2.50 calls back when they spiked above .40 a month ago. The option premium on the calls and puts are still too high at this point considering where the shares are trading, so I think you're better off with a covered call position or selling out of the money puts, which I am doing as well.

Oct 20 03:00 PM

[Egg:]

Most of the ETFC holders predicting $5 and (gasp) $10 shares prices are truely ignorant. Factoring in eventual dilution, the all-time high for ETFC is $3-$3.50.

Yes, that would be an all-time high market cap. I say again, all-time high. As high as when the stock was $25/share. Before ETFC blew up their company with bad risks.

So if ETFC goes to $3.50, it WILL be at an all-time high. And why would anyone think ETFC would trade at an all-time high after the mortgage debacle they are still unwinding?

Dilution kills.

Oct 20 03:01 PM

[Ricard:]

My apologies, I made one error in tabulating the chart:

The net income number for AMTD is supposed to be 171mil. I inputted the net income before taxes number by mistake.

Oct 20 06:52 PM

[Ricard:]

My apologies - there are some errors with the 'net income' columns in the table. It amazes me that the table took longer for me to put together than the rest of the article - I'll have to remember to re-double-check my figures before submitting in the future.

Net Income - I copied the wrong income columns from the WSJ - for ETFC 6/30/09, the 'net income after taxes' figure is <$143mil>, and for AMTD, it is $171mil.

Cash - upon re-reading the 10K for ETFC, I decided to add the 'cash/investments' column into general 'cash'. Thus, for 6/30/09, ETFC had $6.7bn, and for 12/31/04, $1.7bn. For AMTD, the description is less clear, but if you include it, the amount would be $6.4bn.

Generally, the overall picture does not change, except that it may be a little easier for ETFC to match AMTD in quarterly income in the near future. I apologize for the silly mistakes.

Oct 20 07:51 PM

[Ricard:]

BTW, I agree with comments stating that ETFC will probably not go much higher than $3, given today's prices. Any profit afterward will be incumbent on relative performance (say, if AMTD rises another 20-30%), as well as more asset inflation (the Fed).

Oct 20 10:35 PM

[colony:]

Well, I think it is very important to remember that as the loan portfolio heals and provisions begin coming down, the cash that is being held againt the portfolio will become free every quarter as the loans wind down.

Layton particularly emphasized this fact and gave a hint that the next CEO can possibly decide to use that cash to buy back shares. This I believe is a key reason to hold the stock. $6.7 billion is a LOT of cash, and with the loan portfolio of $22.9B running down at the rate of ~ 1 billion per quarter......

The cash coming free and the debt to equity exchange is big in my eyes. We will see how Q3 goes, but Q4 should be positive EPS finally.

Disclosure: Currently out of ETFC, looking to re enter here in the 1.60s before CC next week!

Oct 21 03:27 AM

[aaavoid:]

If it is indeed a deep value stock, I would expect Buffet to be lining up a bid for ETFC sooner rather than later. Didn't Buffet invest in GS? And didn't GS upgraded ETFC to 2.30? Coincidence? For all we know, we might have beaten Buffet in hunting value stocks...

Oct 21 08:59 AM

[Ricard:]

Two helpful links:

www.reuters.com/financ...

www.nasdaq.com/aspxcon...

The short covering is telling.

Oct 21 10:04 AM

[Pj568:]

Any discussion of cash is absurd since they're a bank. Citi has 535B of cash at June 30th but what does that mean.

Oct 21 10:46 AM

[Ricard:]

Hence the comparative number with Dec 2004. ETFC was a bank then as well, and yet it now has triple the cash.

On Oct 21 10:46 AM Pj568 wrote:

> Any discussion of cash is absurd since they're a bank. Citi has
> 535B of cash at June 30th but what does that mean.

Oct 21 10:50 AM

[Pj568:]

Customer deposits at 12/31/04 totaled 12B they're now 26B. Banks also borrow from the Fed so cash without debt and equity is meaningless.

Parent Co only cash at 12/31/08 was 183M.

Oct 21 11:00 AM

[Ricard:]

Admittedly I have always been uncomfortable analyzing financial institutions due to such considerations, so thanks for pointing this out.

However, I must point out that in 2006, customer deposits doubled to $24bn, while cash still remained around the $1bn mark. From 2006 to today, cash more than quadrupled.

I believe parent cash has crossed the $0.5 bn mark. CEO states ample liquidity.


On Oct 21 11:00 AM Pj568 wrote:

> Customer deposits at 12/31/04 totaled 12B they're now 26B. Banks
> also borrow from the Fed so cash without debt and equity is meaningless.
>
>
> Parent Co only cash at 12/31/08 was 183M.

Oct 21 12:00 PM

[Pj568:]

The cash number has no meaning for any year so any change between years is also meaningless.

One possible approach - The FDIC report for June 30 shows E*Trade Bank with cash of 5.8B. They don't have unlimited access to this as E-Trade transactions with its Bank are restricted so how does their cash have any meaning except for banking operations.

One guess as to cash available would be to take total cash of 6.7B (10-Q) minus Bank cash 5.8 to arrive at 900M (although the parent would probably have some cash at the bank nor do we know what restricted cash is held at other banks). This answer may not even be close but I would think it more accurate than 6.7B

E-Trade could disclose if they wanted to be transparent as to the issue.

Oct 21 01:00 PM

[TRYKtrading:]

it's a dog with fleas.

Oct 21 05:52 PM

[TRYKtrading:]

it's a dog with fleas.

the only reason to own this stock is on a takeover.
don't hold your breath on that until after the Next Great Crash is over.

Oct 21 05:52 PM

[TRYKtrading:]

it means citibank is using free government money to make a killing on trading just like goldman and jpmorgan have.

etrade will do no different, except to dump it's cash into hedge funds offshore for not having it's own prop desk to make the profits it can't from retail customer trading.


On Oct 21 10:46 AM Pj568 wrote:

> Any discussion of cash is absurd since they're a bank. Citi has
> 535B of cash at June 30th but what does that mean.

Oct 21 05:56 PM

[colony:]

The difference between Citi and Etrade cash figures is huge. Citibank HAS to keep originating loans....Etrade is running down it's total portfolio and deposits(though this is said to be "sticky"). The cash holding up those loans and deposits will come free.

Oct 21 07:04 PM

[Mobywhite:]

Why pick a stock this risky when there are many metal, mining, and oil stocks that have a finite supply, rising demand, little debt and a much better long term story? Some of these companies are still selling for 30%-50% of their previous highs and they have not diluted shares.

You can double your money just betting on oil. With all the new cars in the BRIC countries and most oilfield output dropping do you really think oil is going to stay at $70-$80? When China alone is going to create 100 million more middle class consumers in the next 10 years? Who is going to supply all the metal needed for the stoves, fridges, cars, etc. What about supplying the power for those devices and the cars?

Look at Alcoa. AA is a dow component trading at less than 1/3 of their previous highs. I bought a chunk at $7, more at $11 and just bought more today at $13.75. Think about it's long term prospects for the automobile industry alone. Probably the single easiest way the car manufacturers can reduce mileage is to reduce weight. There will be more aluminum in every car sold. Do you think the total number of cars is going up or down? It's diviersified across the glob which will help it take advantage of the tremendous growth in the BRIC countries.

There are many Alcoa's out there still, I don't understand why you would look at ETFC over AA?

Oct 21 09:21 PM

[Ricard:]

I don't understand why you would hold AA over ACH...which is my largest position in my portfolio.

Thanks anyway for the advice - I also agree that commodity plays will most likely fare well in the foreseeable future.

On Oct 21 09:21 PM Mobywhite wrote:

Oct 21 10:02 PM

[User 488509:]

Ricard,
Regarding your thesis that Griffin is standing by ETFC,this is how I see it.

As recently as May, KG owned about $2.2 to $2.4 Billion of 2017's paying 12.5%.
In early summer we saw a small item in a filing that KG had sold $200m in 2017's to parties unknown. He also sold 13m common.
As part of the recapitalization plan,KG exchanged approx. $1.3 Billion in 2017's for debentures.
Then on 9-17-09, a filing reveals KG sold for cash all his remaining 2017's ($750m worth) and another $100m of other interest bearing notes from ETFC.

The latest 13D filed by KG (10-13-09) shows he owns 821m debentures and 166m shares of common, nothing else.

Adding it all up,I figure since the OTS put the screws to Layton and KG after Q1 ,
KG has unloaded approx. 60% of his various shares and paper with ETFC's name on it.

Is Citadel totally abandoning ETFC ?
Dunno.

KG is converting and selling at a "determined " pace.
There's also a general perception that KG is converting at $1.03 and selling above $1.70 to lock in hefty profits. I think that's a bit of an urban legend as nowhere is the cost of the underlying note that was exchanged for the debenture factored in. KG could actually be taking loss on large part of the debentures.
Arguments that he's selling to stay under regulatory limits are bogus , as shares are converted and added to the existing outstanding pool, KG's ownership % is actually going down from a fixed point in time where the OTS declared Citadel in compliance.
Checkler's Dow Jones article hinted at a serious rift between KG and ETFC mgt. but he never gave me any color on it when I asked.
To the best of my knowledge,the sale of the non-convertible notes was totally unforced.

My SUSPICION is he's salvaging what he can and ridding himself of ETFC , these are not the actions of an investor confident the biz is turning around.
The caveat is we know from other articles he'll need to meet redemptions at his hedge funds in January but I doubt ETFC is the "only " asset he can monetize for this ,seems more of a choice.

If KG abandons ETFC, they lose their "protector".
It was his arrival that "saved" the franchise (just ignore the lousy deal terms ).
He was the star who led other institutions to buy the secondary and it was his concessions on the converts that allowed ETFC to reduce their crushing debt burden and satisfy the OTS.

And I SUSPECT they may soon need another protector.
Their most recent ATM capital raise came within hours of them announcing over $400m in receipts from conversions and the final tally of the $600m in the big secondary. David Trone commented that the OTS demanding more reserves at that time didn't appear to be good news-I concur.
I seriously doubt it a coincidence that the share authorization voted on in August included an "extra" 1.1 billion shares.

Another concern is the new holders of the 2017's. Should the OTS demand further debt relief , the current owners of that debt might have less incentive than KG to cooperate.
****************
As to your characterization of my generous valuation model
"> 2) Your earnings analysis justifies the stock today at today's <br/>prices..."-... true!!
My valuation justifies the current price only if a miracle occurs and they earn clean $300m in the next 12 months.

Your attempts to buttress a shoddy original article were weak.

On Oct 20 01:55 PM Ricard wrote:

> I saw your debate with Redbeard in Jason's column...excellent if
> I may say so.
>
> Here are some of my justifications for my logic:
>
> 1) Let's start with the share sales. The NYT article is key here,
> because I would imagine a diversified hedge fund like Citadel is
> desperate to avoid any prying eyes, especially of the regulatory
> flavor, from looking too closely at its operations.
>
> Bank Holding Company Act of 1956, Title 12, Ch 17 of the US Code:
>
>
> A Bank Holding Company:
> “bank holding company” means any company which has control over any
> bank or over any company that is or becomes a bank holding company
> by virtue of this chapter.
>
> "Any company has control over a bank or over any company if—
> (seekingalpha.com/symbol/a) the company directly or indirectly
> or acting through one or more other persons owns, controls, or has
> power to vote 25 per centum or more of any class of voting securities
> of the bank or company..."
>
> This has, according to the NYT article, been waived for Citadel's
> excess ownership of E*TRADE (to what degree I'm not sure, for now
> I am working under the assumption it must be well below 50%), a concession
> to deter it from routing its brokerage traffic to its desk, it seems.
>
>
> Then, look at this link, and I'd imagine that Citadel is desperate
> to cut ownership enough so that it will not have to comply with this
> section of the law:
>
> www.law.cornell.edu/us...
>
>
> Thus, the fact that they have gained concessions to exceed 25% ownership,
> and that they still own in excess of this amount, is IMHO a positive
> sign of Citadel's intention to ride this stock upward.
>
> Finally, I must remind you that all of Citadel's selling has been
> profitable. They are not exiting out of a losing position here.
> They are not 'desperate'.
>
> 2) Your earnings analysis justifies the stock today at today's <br/>prices...but
> stocks rarely reflect only the views of the moment. If the loan
> portfolio improves, it is possible that by this time next year, it
> will be able to meet and exceed that number. AMTD and ETFC's brokerage
> arms are still profitable in this abysmal environment...think about
> a recovery scenario, even if it's only nominal.
>
> If the loan provisions were reduced to, say $100 mil a quarter, ETFC
> will be earning well north of $0.5bn annually, all else being the
> same. AMTD is already poised to earn twice that amount this year.
> There is room for optimism, IMHO. We will see how ample next week.
>
>
> 3) You're right, the banking business will likely eventually become
> a supplement to its profitable brokerage arm. I saw comments from
> management in the past earnings call implying a general exit out
> of loans (which was why I was surprised by the increase MBS position),
> and using the sweep from cash deposits for brokerage accounts. I
> will not profess to knowing the economics of this aspect of the business.
>
>
> I'm guessing the increased MBS position is due to its inability to
> reduce customer deposits by an acceptable amount (see CEO's statement).
> Thus, as deposits decrease further to their liking, these MBS positions
> may also decrease accordingly...but that is close to pure conjecture
> on my part.
>
> Ball's in your court.
>
> On Oct 20 11:59 AM User 488509 wrote:

Oct 21 10:40 PM

[redbeard20000:]

User 488509, first off you are very rude when you address people. Second, you speak as if you are knowledgeable on finance subjects yet you don't even know how convertible bonds work. Not only are you suggesting that Citadel might be losing money in the conversion/sale process, but you call others stupid for believing otherwise! Next time learn what you're talking about before speaking out of your ass.

As far as the rest of your comments on the future of etrade goes, its hard to give them any merit considering something as simple as a convertible bond transaction is above your understanding.


On Oct 21 10:40 PM User 488509 wrote:

> Ricard,
> Regarding your thesis that Griffin is standing by ETFC,this is how
> I see it.
>
> As recently as May, KG owned about $2.2 to $2.4 Billion of 2017's
> paying 12.5%.
> In early summer we saw a small item in a filing that KG had sold
> $200m in 2017's to parties unknown. He also sold 13m common.
> As part of the recapitalization plan,KG exchanged approx. $1.3 Billion
> in 2017's for debentures.
> Then on 9-17-09, a filing reveals KG sold for cash all his remaining
> 2017's ($750m worth) and another $100m of other interest bearing
> notes from ETFC.
>
> The latest 13D filed by KG (10-13-09) shows he owns 821m debentures
> and 166m shares of common, nothing else.
>
> Adding it all up,I figure since the OTS put the screws to Layton
> and KG after Q1 ,
> KG has unloaded approx. 60% of his various shares and paper with
> ETFC's name on it.
>
> Is Citadel totally abandoning ETFC ?
> Dunno.
>
> KG is converting and selling at a "determined " pace.
> There's also a general perception that KG is converting at $1.03
> and selling above $1.70 to lock in hefty profits. I think that's
> a bit of an urban legend as nowhere is the cost of the underlying
> note that was exchanged for the debenture factored in. KG could actually
> be taking loss on large part of the debentures.
> Arguments that he's selling to stay under regulatory limits are bogus
> , as shares are converted and added to the existing outstanding pool,
> KG's ownership % is actually going down from a fixed point in time
> where the OTS declared Citadel in compliance.
> Checkler's Dow Jones article hinted at a serious rift between KG
> and ETFC mgt. but he never gave me any color on it when I asked.
>
> To the best of my knowledge,the sale of the non-convertible notes
> was totally unforced.
>
> My SUSPICION is he's salvaging what he can and ridding himself of
> ETFC , these are not the actions of an investor confident the biz
> is turning around.
> The caveat is we know from other articles he'll need to meet redemptions
> at his hedge funds in January but I doubt ETFC is the "only " asset
> he can monetize for this ,seems more of a choice.
>
> If KG abandons ETFC, they lose their "protector".
> It was his arrival that "saved" the franchise (just ignore the lousy
> deal terms ).
> He was the star who led other institutions to buy the secondary and
> it was his concessions on the converts that allowed ETFC to reduce
> their crushing debt burden and satisfy the OTS.
>
> And I SUSPECT they may soon need another protector.
> Their most recent ATM capital raise came within hours of them announcing
> over $400m in receipts from conversions and the final tally of the
> $600m in the big secondary. David Trone commented that the OTS demanding
> more reserves at that time didn't appear to be good news-I concur.
>
> I seriously doubt it a coincidence that the share authorization voted
> on in August included an "extra" 1.1 billion shares.
>
> Another concern is the new holders of the 2017's. Should the OTS
> demand further debt relief , the current owners of that debt might
> have less incentive than KG to cooperate.
> ****************
> As to your characterization of my generous valuation model
> "> 2) Your earnings analysis justifies the stock today at today's
>
> prices..."-... true!!
> My valuation justifies the current price only if a miracle occurs
> and they earn clean $300m in the next 12 months.
>
> Your attempts to buttress a shoddy original article were weak.<br/>
>
> On Oct 20 01:55 PM Ricard wrote:

Oct 22 12:01 AM

[User 488509:]

redbeard,why don't you correct my thinking?

The biggest block of debentures came from the 2017's.
To get a dollars worth of 2017's , Griffin loaned ETFC a dollar.
He collected 12.5% for almost two years on that dollar so that brings his cost basis down to approx. $.78.
KG then exchanges that 2017 for one debenture.
KG then gives the debenture and $1.034 to ETFC for a share of stock whch he then sells for $1.80 on average , for example.

So when I add KG's two costs , the .78 and the $1.03 , I get a tiny loss on the conversion.

Maybe you see it different?
Lots of variables like interest returns , actual cost of some of the non-2017's which KG may have bought on the open market at a discount,any hedges KG may have put on and probably a few others .But just looking at KG converting at $1.034 and selling the share at $1.80 and then claiming he made a $.76 profit seems quite incorrect to me?


On Oct 22 12:01 AM redbeard20000 wrote:

> User 488509, first off you are very rude when you address people.
> Second, you speak as if you are knowledgeable on finance subjects
> yet you don't even know how convertible bonds work. Not only are
> you suggesting that Citadel might be losing money in the conversion/sale
> process, but you call others stupid for believing otherwise! Next
> time learn what you're talking about before speaking out of your
> ass.
>
> As far as the rest of your comments on the future of etrade goes,
> its hard to give them any merit considering something as simple as
> a convertible bond transaction is above your understanding.

Oct 22 10:52 AM

[redbeard20000:]

Citadel isn't giving Etrade $1.034 when the convert debt. They give 1.034 in face ammount of the convertible notes in exchange for 1 share. No cash trades hands, its strickly the debt they hold for shares. Going by your logic, that means not only did Etrade get rid of $1.7 Billion in debt, it also took in almost $1.7 Billion in cash as well, which would be an amazingly good deal for them. No free lunch here for Etrade. But huge gains for Citadel, to the tune of almost 1 Billion$ in profit if they end up converting all the debt and selling shares at the current share price. Its hard to sit on those types of gains.


On Oct 22 10:52 AM User 488509 wrote:

> redbeard,why don't you correct my thinking?
>
> The biggest block of debentures came from the 2017's.
> To get a dollars worth of 2017's , Griffin loaned ETFC a dollar.
>
> He collected 12.5% for almost two years on that dollar so that brings
> his cost basis down to approx. $.78.
> KG then exchanges that 2017 for one debenture.
> KG then gives the debenture and $1.034 to ETFC for a share of stock
> whch he then sells for $1.80 on average , for example.
>
> So when I add KG's two costs , the .78 and the $1.03 , I get a tiny
> loss on the conversion.
>
> Maybe you see it different?
> Lots of variables like interest returns , actual cost of some of
> the non-2017's which KG may have bought on the open market at a discount,any
> hedges KG may have put on and probably a few others .But just looking
> at KG converting at $1.034 and selling the share at $1.80 and then
> claiming he made a $.76 profit seems quite incorrect to me?

Oct 22 12:05 PM

[redbeard20000:]

There are other examples where you're interpretation of facts are flawed. For example you site an analyst who predicts losses will ultimately come to 6.4 Billion on their loan portfolio. What you failed to realize, however, was that this was CUMULATIVE losses for the whole period, not losses going forward. Etrade has already realized 2 Billion in losses, and they have another 1.2 Billion in loan loss reserves. So 3.2 Billion in losses is already accounted for, meaning under the WORST CASE SENARIO, they are already half way through the loan mess.

I could go on, but you get my point. Maybe you should reconsider your position or at least look at the facts again to make sure you're interpreting them correctly.

Oct 22 12:42 PM

[Ricard:]

First off, I'll call you out in that you are calling analysis 'shoddy' based on your SUSPICIONS and guesses you SUSPECT may come about. You've yet to challenge any of the facts I've laid out in this article.

Furthermore, regarding earnings, upon looking at the rest of your comment stream, I happened upon these gems:

Will E*TRADE Surprise or Disappoint Wall Street?
seekingalpha.com/artic...
"I don't think the nominal earnings number will be the issue for this upcoming report , bigger concerns loom."

"Bottom line , I think focusing on the earning number is misguided. "

Lastly, you missed my original rebuttal re your earnings statement. Let's say, this time next year, all else being the same, loan provisions are half of what they are now. Yes, they may have endured another full year of red ink, but by this time next year, they'll be poised to report profits rivaling AMTD, and if provisions halve again, then going forward another year, they will handily best AMTD's rosiest earnings projections.

You are the first investor I've met that invests solely based upon the following 12 months of earnings. I hope for your sake you are not in the habit of doing so.

You are obviously short, or in some sort of position where having ETFC decline is in your interests. I'd wish you luck, but you're obviously wishing the opposite for me, and are willing to repeatedly sink to petty insults to advance your point of view.


On Oct 21 10:40 PM User 488509 wrote:

> Is Citadel totally abandoning ETFC ?
> Dunno.
> My SUSPICION is he's salvaging what he can and ridding himself of
> ETFC , these are not the actions of an investor confident the biz
> is turning around.
> And I SUSPECT they may soon need another protector.

> Your attempts to buttress a shoddy original article were weak.<br/>
>
> On Oct 20 01:55 PM Ricard wrote:

Oct 22 01:44 PM

[Ricard:]

Redbeard:

I was about to post something similar, thanks for pointing this out.

I do not understand why our ill-tempered friend is double-counting the cost of the convertibles.

The correct math, assuming his logic, is that Citadel took a 22 basis point loss in the debt conversion (78 cents for $1), and then booked anywhere from a 75-100 bp gain in the equity conversion ($1.75-2.00 for $1), for net 53-78 bp gain. This is still a very healthy profit. Furthermore, I do not recall the original debt being zero-coupon - one reason ETFC swapped the debt for convertibles was to avoid the interest payments.
www.fool.com/personal-...

User 488509, I ask that if in the future you decide to continue your posts, please provide links to substantiate your logic. I am beginning to suspect your line of thinking.


On Oct 22 12:05 PM redbeard20000 wrote:

> Citadel isn't giving Etrade $1.034 when the convert debt. They give
> 1.034 in face ammount of the convertible notes in exchange for 1
> share. No cash trades hands, its strickly the debt they hold for
> shares. Going by your logic, that means not only did Etrade get rid
> of $1.7 Billion in debt, it also took in almost $1.7 Billion in cash
> as well, which would be an amazingly good deal for them. No free
> lunch here for Etrade. But huge gains for Citadel, to the tune of
> almost 1 Billion$ in profit if they end up converting all the debt
> and selling shares at the current share price. Its hard to sit on
> those types of gains.

Oct 22 01:53 PM

[User 488509:]

I don't believe I'm double counting anything , you and redbeard need to explain the June 22, 2009 PR that stated the terms of the exchange:

"E*TRADE FINANCIAL Announces Debt Exchange Offer and Consent Solicitation

NEW YORK, Jun 22, 2009 (BUSINESS WIRE) -- E*TRADE FINANCIAL Corporation (NASDAQ: ETFC) today announced the launch of its debt exchange offer for certain of its outstanding high-yield notes (the "Exchange Offer"), on the terms and subject to the conditions set forth in the Offering Memorandum and Consent Solicitation dated June 22, 2009 (the "Offering Memorandum") and the related letter of transmittal (the "Letter of Transmittal"). The consummation of the Exchange Offer will be subject to certain conditions, including the closing of the Company's previously announced registered public offering which priced on June 18, 2009, shareholder approval and regulatory approval. Affiliates of Citadel Investment Group L.L.C. ("Citadel"), the Company's largest stock and bond holder, have agreed to participate in the Exchange Offer.

The Company is offering to exchange more than $1 billion of newly-issued zero coupon Convertible Debentures due 2019 (the "Debentures") for all of its 8% Senior Notes due 2011 (the "2011 Notes") and a portion of its 12.5% Springing Lien Notes due 2017 (the "2017 Notes", and together with the 2011 Notes, the "Notes"). The Company is offering to exchange $1,000 principal amount of Debentures for every $1,000 principal amount of the Notes tendered in the Exchange Offer. The Exchange Offer is designed to significantly reduce the Company's debt service burden by eliminating interest costs relating to those debt securities that are exchanged and lengthening the weighted-average maturity of its debt securities. The Debentures will have a maturity of 10 years and will be convertible into shares of common stock at an initial conversion price of $1.0340 per share for Class A Debentures and $1.5510 per share for Class B Debentures, which is 150% of the initial conversion price of the Class A Debentures. The terms of the Class A Debentures and the Class B Debentures will be identical except for the initial conversion price. "


To me it's quite clear , $1000 in notes will be Exchanged for $1000 in debentures -that's even up.
The debentures then give you the right at any time to buy shares at $1.034-very clear and simple.
I'm not sure you two have ever understood this?

There's a filing floating around somewhere in which ETFC announces it collected approx. $420m in proceeds from the conversion ,believe ETFC was aware of that incoming cash the Friday just before they announced the ATM offering. We'll see the item in Q4 report I believe but redbeard is correct that if all the debentures are converted ETFC will net approx. $1.7 Bill. at considerable dilution,of course.


On Oct 22 01:53 PM Ricard wrote:

> Redbeard:
>
> I was about to post something similar, thanks for pointing this out.
>
>
> I do not understand why our ill-tempered friend is double-counting
> the cost of the convertibles.
>
> The correct math, assuming his logic, is that Citadel took a 22 basis
> point loss in the debt conversion (78 cents for $1), and then booked
> anywhere from a 75-100 bp gain in the equity conversion ($1.75-2.00
> for $1), for net 53-78 bp gain. This is still a very healthy profit.
> Furthermore, I do not recall the original debt being zero-coupon
> - one reason ETFC swapped the debt for convertibles was to avoid
> the interest payments.
> www.fool.com/personal-...
>
>
> User 488509, I ask that if in the future you decide to continue your
> posts, please provide links to substantiate your logic. I am beginning
> to suspect your line of thinking.

Oct 22 02:56 PM

[redbeard20000:]

I know you love links so heres one:

www.investopedia.com/t...

Read up on what a convertible bond actually is, cause its clear you have no clue. Citadel exchanges their bonds for stock, not their bonds and cash for stock. Just the bond for the stock.

Heres another link:

www.stchas.edu/coursed...

Check out BUS220, its a class that teaches you about such things, and it shouldn't be too hard to get accepted, even for you! I hope I'm not assuming too much by thinking you've graduated high school!

In the mean time, please feel free to stop posting stuff you know next to nothing about.


On Oct 22 02:56 PM User 488509 wrote:

> I don't believe I'm double counting anything , you and redbeard need
> to explain the June 22, 2009 PR that stated the terms of the exchange:
>
>
> "E*TRADE FINANCIAL Announces Debt Exchange Offer and Consent Solicitation
>
>
> NEW YORK, Jun 22, 2009 (BUSINESS WIRE) -- E*TRADE FINANCIAL Corporation
> (NASDAQ: seekingalpha.com/symbo...) today announced the
> launch of its debt exchange offer for certain of its outstanding
> high-yield notes (the "Exchange Offer"), on the terms and subject
> to the conditions set forth in the Offering Memorandum and Consent
> Solicitation dated June 22, 2009 (the "Offering Memorandum") and
> the related letter of transmittal (the "Letter of Transmittal").
> The consummation of the Exchange Offer will be subject to certain
> conditions, including the closing of the Company's previously announced
> registered public offering which priced on June 18, 2009, shareholder
> approval and regulatory approval. Affiliates of Citadel Investment
> Group L.L.C. ("Citadel"), the Company's largest stock and bond holder,
> have agreed to participate in the Exchange Offer.
>
> The Company is offering to exchange more than $1 billion of newly-issued
> zero coupon Convertible Debentures due 2019 (the "Debentures") for
> all of its 8% Senior Notes due 2011 (the "2011 Notes") and a portion
> of its 12.5% Springing Lien Notes due 2017 (the "2017 Notes", and
> together with the 2011 Notes, the "Notes"). The Company is offering
> to exchange $1,000 principal amount of Debentures for every $1,000
> principal amount of the Notes tendered in the Exchange Offer. The
> Exchange Offer is designed to significantly reduce the Company's
> debt service burden by eliminating interest costs relating to those
> debt securities that are exchanged and lengthening the weighted-average
> maturity of its debt securities. The Debentures will have a maturity
> of 10 years and will be convertible into shares of common stock at
> an initial conversion price of $1.0340 per share for Class A Debentures
> and $1.5510 per share for Class B Debentures, which is 150% of the
> initial conversion price of the Class A Debentures. The terms of
> the Class A Debentures and the Class B Debentures will be identical
> except for the initial conversion price. "
>
>
> To me it's quite clear , $1000 in notes will be Exchanged for $1000
> in debentures -that's even up.
> The debentures then give you the right at any time to buy shares
> at $1.034-very clear and simple.
> I'm not sure you two have ever understood this?
>
> There's a filing floating around somewhere in which ETFC announces
> it collected approx. $420m in proceeds from the conversion ,believe
> ETFC was aware of that incoming cash the Friday just before they
> announced the ATM offering. We'll see the item in Q4 report I believe
> but redbeard is correct that if all the debentures are converted
> ETFC will net approx. $1.7 Bill. at considerable dilution,of course.
>

Oct 22 03:47 PM

[redbeard20000:]

Also note that Citadel sold their remaining 12.5% notes at 106, or 6% above par, at least to the company I work for. How do I know this? Because I saw the trade ticket come through! (Obviously you'll "believe" I'm lying, but that doesn't matter really, cause I "know" you are full of shit.) You expect me to believe that they were able to sell their 12.5% notes above par, yet are losing money on the convertible debt, debt that has increased in value by over 30% since it was issued? You're basically saying that when they did the debt for equity transaction, the 12.5% notes Citadel held were currently worth only about 50% of face value. Even though it was senior secured debt, and in bankruptcy court the brokerage unit would of gotten at least 5 Billion and after the mortgages were liquidated, even at a big loss, Citadel would still have most likely got all their money back. Last time I checked KG didn't become insanely rich by making stupid deals that undervalue his holdings by 50%.

Oct 22 04:07 PM

[Ricard:]

User 488509 wrote:
"To me it's quite clear , $1000 in notes will be Exchanged for $1000 in debentures -that's even up.
The debentures then give you the right at any time to buy shares at $1.034-very clear and simple.
I'm not sure you two have ever understood this?"

We are not questioning whether or not a debt conversion took place, but rather your mathematics in computing total cost.

User 488509:
"The biggest block of debentures came from the 2017's.
To get a dollars worth of 2017's , Griffin loaned ETFC a dollar.
He collected 12.5% for almost two years on that dollar so that brings his cost basis down to approx. $.78.
KG then exchanges that 2017 for one debenture.
KG then gives the debenture and $1.034 to ETFC for a share of stock whch he then sells for $1.80 on average , for example.

So when I add KG's two costs , the .78 and the $1.03 , I get a tiny loss on the conversion."

Look closely at your last sentence. That is called 'double counting'. If you do that, you must balance by 'double counting' what they got in exchange.

Before I begin to do the math for you, I must first point out that there is no reason to even suspect that the prior bonds were zero-coupon. So, instead of '0.78', I will assume even swap, $1 for $1 in
convertible.

From your PR Statement:

"The Company is offering to exchange $1,000 principal amount of Debentures for every $1,000 principal amount of the Notes tendered in the Exchange Offer. The Exchange Offer is designed to significantly reduce the Company's debt service burden by eliminating interest costs relating to those debt securities that are exchanged and lengthening the weighted-average maturity of its debt securities. "

Your link substantiates my point of view. The prior bonds were NOT zero coupon, and were exchanged on a 1:1 basis.

So, let's say they exchanged $1.2bn for convertibles, convertible around $1. They have yet to book any real costs, outside of whatever they had to pay investment bankers for transaction fees.

They then are able to convert every bond (face value $1000) into around 1000 shares of ETFC common. This is profitable for them to do as long as ETFC trades above $1. ETFC trades at $1.67 right now. That is called a good profit.

The double cost: $1 bond lost, $1 convertible bond lost
The double revenue: $1 convertible gained, 1 share ETFC gained

You need to get your math straight.

On Oct 22 02:56 PM User 488509 wrote:

Oct 22 05:13 PM

[User 488509:]

You two can tap dance and double talk all you want, you're still wrong.The language of the PR is quite clear unlike Ricard's gibberish.
Let's just wait and see if the conversion cash shows up in the 10k.

And please stop mis-characterizing what I'm saying and my intent , I'm just trying to get the story right before buying or shorting or just giving up on it. This story is so distorted by amateurs and pros alike it's amazing.Some of the beat writers missed the note sale on 9-15 entirely.
No denying ETFC was DEAD without the exchange and share sales.
But it wasn't a bonanza for KG nor the shareholders who got diluted beyond recognition.
If the dilution is over and the loans are really improving you could possibly make a buy case but neither concept is close to certain as I see it.

Oct 22 05:48 PM

[Ricard:]

"The double cost: $1 bond lost, $1 convertible bond lost
The double revenue: $1 convertible gained, 1 share ETFC gained"

Let me outline the entire transaction from $ to $:

Citadel buys a 12.5% bond, costing $1000
Citadel earns interest on this bond, $125 x 2 years = $250
Citadel swaps 12.5% bond for convertibles at 1:1 basis, no cost
Citadel swaps one convertible bond for around 1000 ETFC common
Citadel sells 1000 shares ETFC common in the market, books around $1700.

$ costs: $1000
$ gains: $1700 ($700 capital gains), $250 in interest.

Ladies and gentlemen, let me present to you a healthy profit.

Oct 22 05:51 PM

[Ricard:]

1) It's gibberish to you because you don't know what you're talking about. Yiddish sounds like gibberish to me because I don't speak it. You need to realize when your knowledge base is inadequate.

2) Good on you for taking time to make an educated decision. Good luck, and I hope you make one that you are eventually comfortable with.

3) You have an opinion, I have an opinion. The point is not who can insult who more, but who can substantiate their opinion with proper analysis of the facts. You have made me more comfortable with my position, although slightly more irate in general.

4) KG has publicly stated that his ETFC transaction has been overall profitable - that considering his fund bombed in 2008.
www.reuters.com/articl...

Again, get your facts straight. Post links. Stop with the excessive guesswork and rabid insults.

5) You have been mis-characterizing MY intent since posting on this forum. And now you demand respect? Think before you speak. For your sake, I'm going to politely ask that you discontinue posting on this forum. You're making a fool of yourself.


On Oct 22 05:48 PM User 488509 wrote:

> You two can tap dance and double talk all you want, you're still
> wrong.The language of the PR is quite clear unlike Ricard's gibberish.
>
> Let's just wait and see if the conversion cash shows up in the 10k.
>
>
> And please stop mis-characterizing what I'm saying and my intent
> , I'm just trying to get the story right before buying or shorting
> or just giving up on it. This story is so distorted by amateurs and
> pros alike it's amazing.Some of the beat writers missed the note
> sale on 9-15 entirely.
> No denying ETFC was DEAD without the exchange and share sales.<br/>But
> it wasn't a bonanza for KG nor the shareholders who got diluted beyond
> recognition.
> If the dilution is over and the loans are really improving you could
> possibly make a buy case but neither concept is close to certain
> as I see it.

Oct 22 06:07 PM

[redbeard20000:]

The language of the PR is quite clear. You're just too stupid to understand and refuse admit that you're wrong. You have no understanding of convertible bonds and likely little understanding of anything financial. Thanks for wasting the time me and Ricard spent replying to your uninformed nonsense. If you actually know someone who works in finance you should ask them to explain the situation to you, I for one am done trying.

Oct 22 07:05 PM

[User 488509:]

Quite simply you just ignored the $1.034 cost to convert the debenture to a share.
Read the damn PR , it's clear as a bell.

> "The Company is offering to exchange more than $1 billion of newly-issued
> zero coupon Convertible Debentures due 2019 (the "Debentures") for
> all of its 8% Senior Notes due 2011 (the "2011 Notes") and a portion
> of its 12.5% Springing Lien Notes due 2017 (the "2017 Notes", and
> together with the 2011 Notes, the "Notes"). The Company is offering
> to exchange $1,000 principal amount of Debentures for every $1,000
> principal amount of the Notes tendered in the Exchange Offer. The
> Exchange Offer is designed to significantly reduce the Company's
> debt service burden by eliminating interest costs relating to those
> debt securities that are exchanged and lengthening the weighted-average
> maturity of its debt securities. The Debentures will have a maturity
> of 10 years and will be convertible into shares of common stock at
> an initial conversion price of $1.0340 per share for Class A Debentures
> and $1.5510 per share for Class B Debentures, which is 150% of the
> initial conversion price of the Class A Debentures."

On Oct 22 05:51 PM Ricard wrote:

> "The double cost: $1 bond lost, $1 convertible bond lost
> The double revenue: $1 convertible gained, 1 share ETFC gained"<br/>
>
> Let me outline the entire transaction from $ to $:
>
> Citadel buys a 12.5% bond, costing $1000
> Citadel earns interest on this bond, $125 x 2 years = $250
> Citadel swaps 12.5% bond for convertibles at 1:1 basis, no cost<br/>Citadel
> swaps one convertible bond for around 1000 ETFC common
> Citadel sells 1000 shares ETFC common in the market, books around
> $1700.
>
> $ costs: $1000
> $ gains: $1700 ($700 capital gains), $250 in interest.
>
> Ladies and gentlemen, let me present to you a healthy profit.

Oct 22 07:46 PM

[redbeard20000:]

Email Etrade investor relations and ask them to explain it to you. Or better yet, look at the SEC filings by Citadel. Notice when they convert the debentures, they only receive 1/1.034 shares per debenture redeemed. Please explain that to me.

Table II - Derivative Securities Beneficially Owned ( e.g. , puts, calls, warrants, options, convertible securities)
1. Title of Derivate Security
(Instr. 3) 2. Conversion or Exercise Price of Derivative Security 3. Trans. Date 3A. Deemed Execution Date, if any 4. Trans. Code
(Instr. 8) 5. Number of Derivative Securities Acquired (A) or Disposed of (D)
(Instr. 3, 4 and 5) 6. Date Exercisable and Expiration Date 7. Title and Amount of Securities Underlying Derivative Security
(Instr. 3 and 4) 8. Price of Derivative Security
(Instr. 5) 9. Number of derivative Securities Beneficially Owned Following Reported Transaction(s) (Instr. 4) 10. Ownership Form of Derivative Security: Direct (D) or Indirect (I) (Instr. 4) 11. Nature of Indirect Beneficial Ownership (Instr. 4)
Code V (A) (D) Date Exercisable Expiration Date Title Amount or Number of Shares
Class A Convertible Debentures due 2019 $1.034 10/1/2009 M 25849000 8/25/2009 8/25/2019 Common Stock 24999032 (5) 887398000 D (4)
Class A Convertible Debentures due 2019 $1.034 10/2/2009 M 454000 8/25/2009 8/25/2019 Common Stock 439071 (5) 886944000 D (4)

Oct 22 08:03 PM

[Ricard:]

Jesus...really, read this book:
www.amazon.com/How-Buy...

And look at this example:
www.calamos.com/Conver...

There IS not cost. The bond is 'converted' to stock; as long as the price of the stock is above $1.0340, it can be profitably sold on the market upon conversion.

I do not read PR announcements expecting them to redefine the definition of a convertible bond.

I highly recommend that you postpone your decision to buy or short this stock indefinitely, until you get more education on how to invest.


On Oct 22 07:46 PM User 488509 wrote:

> Quite simply you just ignored the $1.034 cost to convert the debenture
> to a share.
> Read the damn PR , it's clear as a bell.

Oct 22 08:12 PM

[redbeard20000:]

Can't wait til he comes back and posts that we're STILL wrong. I've passed being annoyed and am now humored by this.

Oct 22 08:14 PM

[Ricard:]

+1

I'm still annoyed, though. I was hoping this discussion could stay at a more analytical level. My aim in posting articles like this was to flesh out the trade.

I just hope (s)he takes my advice seriously. For his/her sake, at least.


On Oct 22 08:14 PM redbeard20000 wrote:

> Can't wait til he comes back and posts that we're STILL wrong. I've
> passed being annoyed and am now humored by this.

Oct 22 08:49 PM

[redbeard20000:]

Heres my take on the current earnings report:

Etrade basically already released most of the relevant info for this
quarter so I'm pretty confident in my expectations of -60 mil in
operating earnings. They could surprise to the upside with sales of
securities, those holdings have had a huge increase this quarter, and if they sold off a bunch this would come out in the earnings report and might push them positive for this quarter. However, thats more of a one-time gain thing and while very nice, doesn't really reflect how well the company is doing.

I'm kinda disapointed with the special mention deliquency rates, they only declined 4% q/q as of the end of August, which is basically the same rate at which their total portfolio declined. Which means people are failing to make payments at the same rate as last quarter. I would hope for more of an improvement in that area, but at least its not getting worse. Overall shrinkage of the loan portfolio is great though, at over 5% per quarter.

They currently have around 6 Billion in cash and equivalents at the
Bank, and management stated they hoped to get that down to around 2 Billion. They have just about 4 Billion in Repos and FHLB advances due by the end of the year so hopfully they dont roll those over and just use the cash to pay them off. This will make their capital ratios look ALOT better, at least the Tier 1 ratio which is what most people make a fuss about. If they do that they'll have equity somewhere a little north of 4 Billion (assuming all the debentures get converted) and slightly more than 40something Billion in assets. Having 6 Billion in cash at the bank doing nothing when they no longer have liquidity problems, is kinda a waste.

Oct 22 08:59 PM

[Ricard:]

You've obviously been following this stock a lot longer than I have. It will probably take me a full quarter to be fully comfortable with the finer details. The broad strokes were enough to tell me that there was something odd about the current valuation of this company, enough for a nice speculative plunge.

Next quarter, I'm basically looking at this:
investor.etrade.com/re...

If it hits these numbers, I'll be very satisfied with forward progress. Looking/hoping for a pleasant surprise in charge-offs.

Cheers, thanks for your POV.

On Oct 22 08:59 PM redbeard20000 wrote:

Oct 22 10:03 PM

[Anthony Alfidi:]

Calling ETFC a speculative play is absolutely correct. Have you noticed their long term debt load? Net income (which has been negative for two years) would have to suddenly turn positive, rise by several multiples, and stay there for a decade to pay off that debt. Shareholder equity has declined for three years straight. ETFC is a penny stock for very good reasons.

Oct 23 08:28 AM

[redbeard20000:]

What numbers are you using for long term debt? Post debt for equtiy swap I have these numbers:

414 mil in 2013 7 3/8 notes
243 mil in 2015 7 7/8 notes
~800 mil in 2017 12.5 notes

So 1.45 Billion in total. Their pre-provision earnings are 200-250 mil per quarter, so you're looking at 7 quarters to pay off the debt. This excludes the additional loan loss provisions they have to make. My estimate for those future provisions is 1.5 Billion, or ~7.5% of current loans receiveable. Adding the two together you get about 3 Billion, which they should be able to cover in 3 1/2 to 4 years, if you really want to look at it that way. Considering the earliest maturity isnt until 2013, I'd say they have plenty of time.


On Oct 23 08:28 AM Anthony Alfidi wrote:

> Calling ETFC a speculative play is absolutely correct. Have you noticed
> their long term debt load? Net income (which has been negative for
> two years) would have to suddenly turn positive, rise by several
> multiples, and stay there for a decade to pay off that debt. Shareholder
> equity has declined for three years straight. ETFC is a penny stock
> for very good reasons.

Oct 23 10:10 AM

[Ricard:]

Your arguments are unfounded. Most of the LTD is in the form of convertibles, meaning that either you see a dilution problem or a leverage concern, not both. Current interest expenses (after debt conversion) are about $40m per quarter - reduce the loan provisions to around $100m per quarter, and you get about 4-5x interest expense in operating income. Not stellar, but not at all bad either. If business picks up, it may turn out to be quite good. Its franchise is golden, so there's every reason to think it may pick up.

We all know why equity has declined - the point is to ask whether or not it will decline significantly further before a recovery takes hold.


On Oct 23 08:28 AM Anthony Alfidi wrote:

> Calling ETFC a speculative play is absolutely correct. Have you
> noticed their long term debt load? Net income (which has been negative
> for two years) would have to suddenly turn positive, rise by several
> multiples, and stay there for a decade to pay off that debt. Shareholder
> equity has declined for three years straight. ETFC is a penny stock
> for very good reasons.

Oct 23 10:27 AM

[Ricard:]

3Q update:

online.wsj.com/article...

online.wsj.com/article...

No real surprises - 'beat expectations' of course. Slightly disappointed that revenues decreased ever so slightly. Would like to know exactly the nature of the 900m charge they took and how it related to the debt exchange.

Oct 27 10:52 PM