When I wrote the column last August headlined, “How E-Trade mortgages its past, future” CEO Mitch Caplan sounded as if everything was under control. His bottom line was that, even with the mortgage mess at the time, E-trade hadn’t changed the midpoint of its earnings estimates for the year.
My, what a difference a few months makes. Today, in the wake of a disclosures of an SEC investigation into its mortgage trading and a further slide in the value of its mortgage portfolio, the company stopped offering guidance for the rest of the year.
The latest news caused longtime critic Egan-Jones Ratings Co., an independent ratings agency, to downgrade E-Trade’s debt; the action comes a month after a ratings affirmation with a positive bent by Moody’s. In its downgrade, Egan-Jones wrote that the most recent disclosures is confirms its original concerns regarding the valuation of $47 billion in mortgages and loan receivables. According to Egan-Jones:
A 10% haircut on the $47B portfolio (many market values have dropped by
more than 10%) would wipe out all of ETFC’s $4.1B equity. The slippage in shares is an indication that the market believes that there are additional loses in the pipeline. ETFC was marking its assets to model rather than market claiming there are no good prices for its assets. BAC zero commissions for accounts with more than $25,000 in assets is an additional negative. The portfolio losses are probably an impediment for most acquirors and therefore a sale is problematic.
Even more problematic, and perhaps getting more to the heart of the problem, is that E-Trade has steadfastly believed the quality of its mortgage portfolio is better than most. And mark this date: November 15: According to accounting rules, says Sean Egan, of Egan Jones, that’s when E-Trade must mark its mortgage portfolio to market not a computer model.
The beat here definitely goes on…