E*Trade Will Recover

E*Trade (ETFC) is both bank and brokerage; as such, it has at times enjoyed successes from both market trading volume and banking sector gains. It’s sad, as both a customer and sometime shareholder, to see it currently under attack from many sides. I was a customer before their IPO and before they added banking. I’ve been a shareholder since their market price seemed to have room to run -- near their IPO, again since, and now. The first couple attempts nearly doubled my money, and I think this time around has that same potential, if not more.

Let me say that E*Trade has my checking, savings, margin, two IRA, and VISA accounts and they also wrote my home loan. Let me also say that having all my financial accounts under one roof initially seemed just a no-brain convenience, and is now something I never wish to give up.

For one, there is security; they offer an RSA hardware dongle to generate a pseudo-random number once per minute to enhance my password security. You need to request it, but it’s worth it, and it may be free depending how much money you have across your accounts. There was a story released Wednesday stating customer accounts at E*Trade, Ameritrade (AMTD) and elsewhere had been compromised for an options scam; I very much doubt the E*Trade customer(s?) that was compromised had this dongle. Let me digress and say that individuals frequently create passwords that are not secure; further, if they happen to mistype a password at a web site and get an error they often try a password that may belong to another institution before they get it correct -- at that point a password somewhere is compromised. With this dongle I have my base password plus 6 more digits of security. If the base password is compromised, they don’t have the physical dongle and if they’ve got the physical dongle they still shouldn’t have my base password. In either case, it is more difficult for someone else to get in. (I know there are some bright people out there; I acknowledge you – please don’t try to hack me.)

I see one bank wants you to choose a picture to add “security” to your account login – cute, but it’s the equivalent of adding one extra fixed letter to your password. Apparently they include the picture if they ever email you – tip: don’t ever respond to an email correspondence from your bank unless it’s by calling the number on your account statement (not one contained in the email). Since the bank has a limited number of pictures to choose from and everyone chooses the cute picture that touches them, then someone just sends that cute picture to a few thousand addresses and a few of them will see their picture – not what I call secure.

Everything under one roof at E*Trade means only one secure login to handle everything financial. I can receive a direct deposit in my checking account, perform an immediate transfer to my margin account and then invest it immediately. I can likewise perform a direct transfer from checking to pay my VISA bill, or use the free online bill pay to pay any other bill in moments. I can move non-invested cash from my margin account to my savings account and make over 5% APR interest. No other company or site ever has to have access to any of my financial accounts; I can link external accounts if I wish for direct transfer from or to them, but I’d initiate those transfers only from within E*Trade. I receive alerts to my phone when transactions are processed, so I know quickly if something odd is occurring. I also appreciate the unlimited reimbursement of ATM transaction fees; E*Trade did (and may still) have the 3rd largest ATM network in the U.S. which gives them bartering clout to do this and I doubt it incurs cost to them.

For a time, due to my workplace’s SIMPLE IRA plan, I had to deal with another brokerage that was both unresponsive (when my funds were credited to someone else’s account) and quite happy to keep collecting my trading fees with no attempt to update the efficiency of their site (poor layout and slow access times) or the services they provided. Fortunately I was able encourage the implementation of changes and employees were allowed to choose their brokerage under the plan. I then transferred that account over to E*Trade with my others. I’m sure what’s left of TDW is better where it is now.

What E*Trade did wrong

E*Trade followed the herd of banks trading in CDO paper. Had E*Trade limited their mortgage exposure to their existing customer base, to whom they do offer a small discount in rate by the way, and had they then maintained servicing for those loans while only seeking a reasonable percentage of outside mortgages, there would be no problem whatsoever. They did, however, follow many other banks. That being said, I believe they saw what was happening and were already exploring ways to divest themselves of the CDO line when, in early November, an analyst from a competing company said they faced the possibility of bankruptcy; further, he suggested a percentage possibility, which at 15% was near the 16.7% probability of throwing a number or a six-sided die. I believe they were already investigating ways to rid themselves of CDO paper because of the timing of the Citadel “vote of confidence” deal; it was too soon after the bankruptcy comment. Not too soon to complete the negotiations which were probably then expedited, but too soon not to have been researching their potential options to begin with.

The bankruptcy comment must have forced management to take quick action, and possibly not get as favorable an outcome as may have been possible otherwise. Still I don’t feel they did that bad. While Citigroup (C) has announced layoffs of over 13,000 employees within a year's time, is cutting dividends, accepting foreign investments, offering excess tenders (hmm) and still holding CDOs, E*Trade has (so far) only cut one section which was underperforming and under review anyway affecting fewer than 100 employees, yet has fully divested itself of its primary CDO problem.

I’ve heard an analyst recently reiterate his downgrade of E*Trade saying it was paying more in customer enticements and advertising to gain back customers. I can say they paid near 5% savings interest for nearly all of last year, so that hasn’t increased. I do see a lot of advertising, but that must be to counter some early defections after the bankruptcy comment. Strangely enough, I think it’s the same analyst, hmm… and he works for the competition and about the biggest losing financial services juggernaut to announce this quarter, hmm…

I guess we’ll see what develops next week during E*Trade’s earnings announcement, but I believe they tried to do the right thing. They’d already announced expected write-downs and that should have been built into their price at mid $8s before the bankruptcy comment. Their price should have been considerably higher coming into earnings next week. The bankruptcy comment also had other results…

I would like to congratulate Joe and Ameritrade on their stellar quarter; if I only required a broker, their's would be a company I would investigate further. I can’t, however, willingly go back to separate bank and brokerage providers having now experienced something better. I’ll also say that should a company try to take a portion of E*Trade and not the whole entity, thus removing my conveniences, I would not be happy and I would then take all of my accounts elsewhere. Not that my holdings would be of too much consequence, but I would bet a large number of E*Trade customers feel the same way. You choose your bank or broker based on your particular tastes and requirements; it does not choose you.

It would be nice to say that buying a company’s stock shows support for that company, but since the shares you own can be borrowed and sold short, devaluing both your holdings and the company’s market capitalization, this is a fanciful illusion. Still, I love the company and have faith that it will find its way successfully through its troubles; it has often shown itself more nimble than its competition in the past, so when I realized where E*Trade was trading after the bankruptcy comment I bought in, mostly at mid fours. Before the projected annual earnings numbers were updated, the forward PE ratio was somewhere around 1.5; given that it is now trading closer to three (even if you do count a full 20% Citadel dilution)... well you figure it out. I’m pretty confident that I’ll get close to the returns I’ve made holding ETFC/ET/ETRD in the past, and probably at some point before the end of this year. I know people who are still opening accounts with them, and I know my trading volume was up last quarter and it will be increasing again this quarter. I have no affiliation with E*Trade other than being a loyal customer and holding a few shares, down and long.

With the poor opening to the year, I wish all a healthy recovery.

Disclosure: Author is a customer and shareholder of ETFC

Comments

[Tom B]

I'm sticking with Etrade as a customer for now.

[rbjohansen]

I believe you are correct in that etrade will go back up. I purchased some shairs at $2.80 and later at $3 something. I expect it to be up in the $10-$15 range when this is over, based on its past performance. This last drop +300 points in the DOW has pulled it down to near $3. It will go up today with the DOW but who knows after that. As long as etrade survives it will go back up. In the long run we will be fine. Good short term luck to all of us.

[Tom B]

Etrade could also be bought. In fact, I started with HarrisDirect, and that's how I got to Etrade as a customer.

[Zeus]

I'm an Etrade stock account customer and I love them. I moved some of my holdings over to Ameritrade last month out of fear. Ameritrade's platform sucks!

I LOVE Etrade's portfolio platform. If Etrade is bought out by a competitor, I will be very upset. Long live Etrade!

If Etrade is bought out by a competitor, what will happen to Etrade's stock price? Will it almost assuredly go up?

thx.

[No Thanks]

Not knowing their future, I did seek alternatives back in November.

Banking? I see no difference, it really did not matter. Brokerage however is quite important, and, I am an extremely active trader.

I opened Schwab and Ameritrade accounts to test their sites and their platforms/trading software, and was very, very dissapointed and started to realize the true value and convenience of ETrade.....

I believe current matters are truly the competition trying to take advantage of everything they can.

Other brokerages sites and features are INFERIOR to ETrade....exactly by how much is beyond explanation.

I'm in,and, I am staying in, and, I think current values are absolutely ridiculous, and unwarranted.

A change?......ETrade currently is superior to all others I opened accounts with (and never funded, and later closed those accounts), so, I too will be removing all funds and closing all accounts should ETrade's site and/or platforms be changed. They are superior to all others.

[Zeus]

Couldn't agree more. Etrade's platform is FAR superior to others. Etrade allows me to trade on margin big time with NO cash in my account. Ameritrade will not.

Etrade has global trading. The others don't. Etrade's platform is awesome. Ameritrade's, OptionsXpress, and Schwab's platforms SUCK.

I pray Etrade survives.

[helplessobserver]

Clearly the best on-line trading platform. I am also a TDAmeri and BAC customer and find ETFC superior in all ways. Their A-Z list speaks volumes about the condition of the market. My only complaint is they don't include option prices on their MarketCaster basic quote service.

[kurt walter]

Brokerage account are insured. Just like bank accounts. So what is the problem?

[Tom B]

Glad you guys did the research on other brokers. I was going to look at Etrade's quarterly and consider a change if it looked really, really, really horrible. As opposed to just "horrible".

[Zeus]

I can speak from experience:
Ameritrade's platform sucks. And they will not let me buy much on margin. Etrade will allow me to buy over $100,000 on margin right now, and I have $0 in cash in my Etrade account. I have about $50,000 worth of stocks. Etrade's generous margin ROCKS.

Besides Ameritrade and Etrade, I also have an optionsXpress account. I have that for trading overseas. And, I have to tell you that optionsXpress' platform is worse than even Ameritrade's.

I have 1 wish for 2008. That Etrade stays in the game. If Ameritrade buys them out, I'm going to be sick.

[Doug Smith]

I couldn't help but throw in my support. I have used etrade for the past 10 years. It is one of the few products in life that I just can't live without. I transferred all of my banking over to Etrade about a year ago and have been exceptionally happy. I did not even realize I could get a credit card linked in to the rest of my accounts. I'll be calling later today to get one.

Thanks to those that made the comments about trying out the other platforms. I thought about doing that but your comments convinced me that would be a waste of time.

[Brandybuck]

I've been an Etrade customer since 1996 - I love the convenience of having my FDIC bank account accesible with one click! It will be a crime if the big boys manage to drive them out of business...

[Gary McCamey]

I really appreciated your article. It said what I've been thinking for a long time. I've owned stock in Etrade on different occasions for many years. I started doing the stock market paying $200. to $500. a trade, each way, and now, $5. is so good. I'd pay more just because they are far better then any other brokerage, and I have looked. I'm glad to hear the positive thoughts of others as I was beginning to think I was the only one who appreciated ETrade. I've day traded for about 6 or 7 years and done good for a man with no knowledge of the market. But I've decided to hold on the the shares of ET that I now have, long term. Gee, I, like one of the other writers, bought ET at $2.20, and some at $2.40. I feel like a thief. I already could have made a $10,000. to $15,000. profit in what, a couple of weeks. But for the first time in years I"m going to hold ET until years end. I will do well.
Advice for Ameritrade, or any other brokerage who might be thinking of buying out ETrade. If you do, don't change Etrade to your standards, but change your standards to the Etrade platform. If you do that, you will keep many satisfied Etrade customers. Say if Ameritrade were to buy out ETrade, if you changed your Ameritrade platform to the Etrade platform, then you'd have Ameritrade stock traders who will be very happy. I looked into Ameritrade a long time ago, and I just didn't like it. I forget now what bothered me most, but after using Etrade for all these years, I'd be hard put to go to a system that was, (for the sake of a better word), cheap. For me, I'd rather see ETrade buy out Ameritrade, even though the stock value would drop, in the short run, but the Ameritrade customers would be so happy they'd never leave or search for another brokerage. I honestly can say, customers of Ameritrade could, (example), get out of their Ford Edsel, and enjoy the ride of a BMW.
Thank you folks for letting me see the other side of Etrade customers opinions. I'm really glad to see there are others who feel as I feel. I wondered if all the negative comments were coming from people who had been hurt on that bad month, and for ya'll, I'm really sorry. But you took a bad loss and it's happened to many people in the market now. It's happened before and people jumped out of windows. Instead of scratching the wound, buy some Etrade now at $2.85 or $2.90, and give it a year. If you were/are an Etrade customer then you know they are the only brokerage you want to trade with. I'm sorry you were hurt, but don't let that cause you to lose an opportunity by making another mistake. In two months you'll not see Etrade at $2. or $3. prices ever again. Thank you for this opportunity to express my thoughts about Etrade. A very satisfied past, present and future customer of Etrade.

[David Tsao]

I had an account with TD Waterhouse in the day, and currently have brokerage accounts with Bank of America, Fidelity, and E*Trade. E*Trade by far has the best tools and platform for buying/selling stocks. It's too bad they got caught up in the CDO mess. The brokerages could learn a thing or two from E*Trade's online platform.

[P. Vemireddy]

In regards to people borrowing shares from your account for short sales: this is only true for margin accounts. Shares from non-margin accounts can't be borrowed. Some brokers will allow you set up both a margin and non-margin account. Simply move a stock to the non-margin account to prevent short sales.

[Zeus]

Captain Gary has a good point.

If by chance Ameritrade or Schwab buys out Etrade's brokerage biz, they would be wise to keep Etrade's stock trading platform.

Trust me - if Ameritrade or a Schwab buys out Etrade, once Etrade customers see Ameritrade or Schwab's platform, they will be jumping to another brokerage service within 3 months.

After being spoiled with Etrade's superior platform, they will not put up with Ameritrade's or Schwab's crappy platform.

Ameritrade will be in for a rude awakening. They'll think they'll acquire 100s of thousands of Etrade customers, but if those Etrade customers are then forced to use an inferior platform because of some acquistion, they will bail to another brokerage.

Ameritrade and others - keep your hands off Etrade.

[Jeffyboy]

I am a relative nubie to E*Trade, I used an expensive big name broker. I never got information I requested, it had no web based system. (They said they did but it was not good for anything.)

I tried E*Trade and I have been in love with the system. For a small fry, I feel like I have the power of a major wall street player. I move money from saving to trading, bling it is done. I order a stocks, click, click, bling it is done.

I feel lucky to buy the stock at this level and I feel everyone who shorts the stock or puts the company down are STUPID.

[CraigMazeska]

I've been with etrade for about 10 years. I've been with Fidelity, Schwab, and Ameritrade, but Etrade is by far the superior service in every regard. Buying 150k shares of Etrade in early 2000 crushed me like a grape, but it shows how much I believe in this well run organization. I think they will survive and I suggest buying some shares as a speculative position. It's hard to say how their misguiding mortgage mess will play out, but their platform is top notch and it would be a travisty to see Etrade go bk or get bought out by an inferior competitor. Good luck!

[S Datta]

I completely agree with all the positive comments about E*Trade -- their trading platform is FAR superior than TD Ameritrade's (I opened an account with TD out of my fear of E*Trade's potential bankruptcy. I also appreciate the convenience of brokerage and banking etc. I am pleasantly surprised that so many of E*Trade's customers feel the same way. We all want it to survive with all its conveniences and features in tact. I was originally a Brown & Co customer, which was subsequently bought out by E*Trade and I then became a E*trade customer and had an excellent experience. I still continue to be an E*Trade customer but have moved some of my holdings and money to TD Ameritrade just to diversify the risk. This would not have been necessary if some MORONIC CEO didn't try to goose E*Trade's earning by getting into the mortgage business. It is indeed a travesty and I hope and pray that E*Trade's financial situation will stabilize and improve. By the way, I am a Finance professor and I would like to write a case study on how a STUPID CEO can ruin an excellent franchise!!

Best wishes to all.

[Darrell]

Hi Guys:

Has anyone tried Wells Fargo's platform? I heard that they are very good at customer service, and you can go to a local branch to make deposits to your account. E*Trade does not have branch offices and most communications are done electronically.

I have most of my accounts with Wells Fargo but my trading account is with TD Ameritrade and I agree that their service is something to be desired.

[oldie383]

six months ago I had accumulated only 23 out of the 25 trades minimum for powertrading platform there, so I have not traded much in my etrade account. I guess I am just lucky. But etrade is dumb in losing my business. You can't rightly crucify an outfit for being stupid, but that's what Citibank did to them. I don't think the thousand words you have expended in this article has done any good towards reversing the damage that Citi did. Is it proper to attack stupid people?

[Toto-13]

I doubt the firm will recover. While managing the biggest traders event- Traders Expo, personally I saw thousands of people transfer accounts to Ameritrade and Fidelity, because of sub-prime fears...
Rob
WallastonInvestments.c...

[NakoQuant]

Active traders: have you tried InteractiveBrokers? I opened an account there a few months back, on a lark, and have been very pleased so far. Major improvements over the ETFC and OXPS platforms:

1) Real-time quotes only. No stale data. I still maintain an ETFC account, but when I trade there I use real-time quotes from IB to set my price.

2) Commissions are nearly free. Seriously, go check their schedule. Trades that cost me $13-$20 at ETFC and OXPS are more like $1-$2 at IB. That's not a typo. Both equities and options are much cheaper.

3) More trade types. If you have ever wanted to enter a trailing stop against an option position (not possible AFAIK at ETFC), you need to look at IB.

4) No ridiculous minimums. I dislike the idea of Power E*Trade because it dictates the terms of my trading. Maybe I hit the minimum, maybe not. I need the market to dictate my trading, not my broker. IB lets you do all the trades you want without worrying about the # of trades you've done this quarter.

Not sure why more folks aren't using IB.

[AnotherI-Banker]

Finally someone takes all of the pieces of this perfect storm attack against etrade that has transpired over the last several months, and puts them together to tell the story to those who haven't been abreast of the day-to-day developments. There's no question that Etrade has a strong future and will rebound just as the author has predicted. As soon as the positive releases begin to bubble to the surface, there will be an enormous short squeeze which will serve as the impetus of the rebound. Hopefully the naked shorting has subsided now that ETFC has been added to the RegSho list.

Let's not forget friends that any and every retail trader out there today knows that Etrade has by far the most technical, comprehensive and versatile trading platform out there - which is precisely why the attrition hasn't been nearly as bad as it could have been following the comments by the self-fullfilling Citi-analyst prophet.

The power of Etrade!

[M Greene]

I've only used ScottTrade and E*Trade, but in the comparison between them E*Trade wins hands down. The b*- fears might have affected some major depositors, but the vast majority of E*Trade's users probably don't have to worry about being above the half-million limit.

[Hanoi Rocks]

I've used Etrade since '99. They are by far the best online financial institution. I do everything online. As far as trading stock goes, it doesn't get any better. And their banking is also top notch. They reimburse me for ATM fees, interest rates is always the highest on savings and money market accounts. The only hassle is depositing through mail. But i've never had a problem with checks lost through mail. I will remain a customer with them, always.

[No Thanks]

Hanoi,I have a secondary account for local deposits and banking and just transfer....I've never sent a check in almost 10yrs...

[ROOSEVELT M.]

DARRELL JAN.20 1:20PM
MY FRIEND YOU NEED TO GO TO THE CORNER OF PARK AVE. AND 49TH STREET (NWC) BEFORE YOU PRINT YOUR WRONG THINKINGS.