On Friday, investors became aware of yet another victim of subprime fallout when E*TRADE Financial said in a SEC filing that deterioration in the residential mortgage market will likely result in writedowns that exceed previous expectations included in the company’s Oct. 17 earnings report. Shares tumbled on news of the after hours announcement, which also disclosed a SEC probe, dropping as much as 14.44% to $7.35 in extended trading to reach a four-year low. E*Trade told investors it would write off approximately $450 million of its $3 billion asset-backed securities portfolio, consisting mainly of CDOs (collateralized debt obligations) and second-lien securities, but also including $50 million in AAA-rated debt. CEO Mitchell Caplan's strategy of tripling loans outstanding backfired when borrowers fell behind on payments and U.S. home prices declined. Though the company believes it will remain well-capitalized based on regulatory standards, investors were concerned after management said in the press release the company "believes it is no longer beneficial to provide earnings expectations for the remainder of the year." One analyst went as far as to question the company's long-term viability: "The extent of poor risk management in our view, has put the viability of the franchise at risk," Citigroup analyst Prashant Bhatia told clients in a note Sunday. E*Trade said it is cooperating with the SEC's informal investigation of its loan and securities portfolios initiated Oct. 17.
Commentary: Sorry Folks, the Housing ATM is Closed • Contemplating Life Without Guarantors
Stocks to watch: ETFC. Competitors: SCHW, AMTD, TRAD. ETFs: FDN, HHH