Seeking Alpha

Read This Before Buying E*Trade 90 comments

by: Richard Shinnick February 18, 2008 | about: ETFC    
About this author:

I have seen several articles written about E*Trade (ETFC) recently and both the articles and comments focus almost entirely on E*Trade’s brokerage franchise. It is obvious that E*Trade has a cadre of fiercely loyal traders and investors who bristle at any suggestion that E*Trade might fail. After reading the comments following one recent article, I had the following thought:

People love this company. Every single comment glows about the company and scoffs at the idea that E*Trade might fail. What a lovefest - it almost seems contrived. I should look in to this story. This might make for a great upside trade.

Naturally, I immediately opened a small position and then I decided to do a little research. I know, that is a little backwards but I was really caught up in the fervency of E*Trade’s supporters. After doing a little digging on their investor relations website, I came to a conclusion that surprised me. E*Trade is not a broker that got in to trouble by delving in to the mortgage business. E*Trade is now a mortgage business that happens to own a brokerage. In fact, the E*Trade brokerage franchise may exist for years merely to try to earn enough money fast enough to keep up with the losses generated by the mortgage and consumer loan book.

I now believe that any discussion or analysis of E*Trade that does not look at its mortgage portfolio is simply pointless. If you do a search of E*Trade articles, however, you will notice that virtually none of the recent articles or comments discuss the mortgage portfolio at all, and instead simply focus on things such as E*Trade’s terrific trading platform. In fact, a couple of recent articles did not mention the word “mortgage” even once, yet pretended to offer solid advice on E*Trade’s future. So, since nobody else seems to be talking about “the problem” I thought I would shed some light. All of the information below comes directly from the E*Trade investor relations website.

“The Problem” Portfolio
$9.7 billion in agency CMOs
$1.2 billion in “private label” CMO
$2.6 billion in consumer loans (Primarily RV and boat)
$15.5 billion in home loans
$11.9 billion in home equity loans
-----------------------------------------
$40.9 billion total

E*Trade also holds about $7 billion in margin loans and about $1 billion in corporate and municipal securities. Because I lack any loss estimates for those types of loans and figure they are fairly secure, I am going to leave them out of the discussion. As for the rest of the loan portfolio, I will take on each piece one at a time.

$11.1 billion CMO portfolio
This mortgage portfolio has two pieces, “agency” paper and “private label” paper. It is all rated AAA and AA. The “private label” securities give me concern because I simply do not know what “private label” means and I don’t trust ratings on any mortgage paper these days. Nevertheless, lacking any “who, what or where” on these securities, it is hard to say much else other than that they increase E*trade’s mortgage exposure.

$2.6 billion Consumer Loan Portfolio
Does it surprise you to know that E*Trade holds $2 billion in RV loans and $500 million in boat loans? They have a little over 1% of this total portfolio reserved for loan losses as of the end of 2007. Here is my question. How will a portfolio of RV and boat loans do in a recession? Could this portfolio be a little bigger problem in the future than just a 1% write-off? I will not pass judgment, but be sure to factor in Winnebago loans to any decision on whether to invest in E*Trade.

$15.5 billion Home Loan Portfolio Houston we have a problem. The average LTV (loan to value) on these loans is listed as 69%, which is not to bad. The problem, however, is that I believe the “V” in LTV was calculated at the time the loan was written. If anybody wants to correct me on this, please do. So, it is important to look at the quality of this portfolio. First, about 85% of these loans were written at the peak of the housing bubble with the following vintages:

20% 2005 vintage
38% 2006 vintage
26% 2007 vintage

Second, a large percentage was written for property squarely located in “bubble” areas:

12% Los Angeles
11% San Francisco
9% New York
6% Washington D.C.
5% San Jose
2% Riverside
2% Phoenix
2% Miami

Finally, about half of the loans were written based on stated income. As you know, stated income loans are also known as “liar loans.”

Despite the quality issues, E*Trade has just $19 million reserved against this $15.5 billion portfolio. Moreover, the 90-day delinquency rate on these loans more than doubled in the past 6 months and now stands at over 1% of the portfolio ($160 million in loans). The low loss reserve no doubt relates to the first lien position and an assumption that the LTV is high enough to allow for a substantial recovery on bad loans. This assumption, however, goes out the window in a 30% down market, which is predicted by many pundits.

$11.9 billion Home Loan Portfolio (1-4 units) Ick, yuk, ugh! This is the UGLY stuff. These loans are mostly second liens, and the portfolio is going bad fast. The vintages are as follows:

20% 2005 vintage
49% 2006 vintage
10% 2007 vintage

The geography of the loans is similar to the first lien portfolio. A substantial amount of the loans are located in the bubble areas of California, Arizona, Florida and New York. More than 40% of these loans were stated income and over half were made with a CLTV (Combined Loan to Value) of over 80%. Remember, this valuation was done at the height of the bubble. So, with falling real estate values you can guesstimate that a substantial amount of this portfolio is collateralized by “thin air” and a handshake.

The portfolio seems to be performing accordingly. Close to 4% of loans are over 30 days delinquent and over 2% are 90 days past due. The company has already written off $91 million in losses, and it has reserved about $460 million for future losses. By its own estimate, losses will ultimately fall in the $1 to $1.5 billion range, which is 10%-15% of the entire portfolio. Again, you can decide if the losses will be higher, but keep the quality of the portfolio in mind when you make your calculation. Also, remember that E*Trade is a bank and must keep adequate reserves in order to forestall bankruptcy. If these loans go sour at a faster pace than E*Trade can replenish its reserves, it will mean big trouble. With this portfolio, E*Trade is by its own admission in a race against time.

Conclusion
In its best year (2006) E*Trade made about $650 million in net profits but the company has lost a substantial number of clients and deposits recently and it has greatly increased its debt burden. Also, in 2006 its mortgage business actually contributed to earnings. For the sake of argument, lets assume that the company can make an average $400 million in operating profits in 2008, 2009, and 2010. Virtually all of the profit will go just to cover losses in its home equity portfolio alone. A substantial amount will also be needed to address that puny reserve for the first lien mortgages, which Morningstar conservatively estimates will generate $145 million in eventual write-offs.

The problem is not just the absolute amount of any losses. Given time (20 years or so), the brokerage could probably pay for the entire portfolio to go bad, but time is not on E*Trade’s side. The company recently took some drastic but positive steps through asset sales and an onerous and dilutive re-capitalization deal in order to alleviate immediate concerns over its regulatory capital requirements. Nevertheless, the company has just $500 million in excess capital on the books, which puts it precariously close to being pushed into bankruptcy should its loan portfolio deteriorate faster or further than anticipated. Needless to say, E*Trade has not been great at anticipating things lately.

So, when considering an investment in E*Trade, keep in mind that what will eventually determine the fate of the company has relatively little to do with the quality of the brokerage service or trading platform, and everything to do with the housing market, the performance of liar loans in bubble areas, and the fate of RV and boat loans in a slowing economy. I know that a lot of readers won’t like me pointing out these facts, but this is unfortunately what this company has become and you should invest accordingly.

Disclosure: long ETFC

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This article has 90 comments:

  •  
    Excellent, thank you. Like you I bought a starter position, impressed by the insider "statement" buys. As Soros says, "Invest, then investigate!" Tomorrow I'm outtahere.
    2008 Feb 18 05:17 PM | Link | Reply
  •  
    Let me preface these comments by stating that I agree that the mortgage portfolio, for the time, does dwarf the brokerage and you rightly point that out. However, now you need to be taken to task.

    Perhaps you should do a bit more research before blathering on as you do. First, know that in the first lien mortgage portfolio, Etrade has insurance on any loan where LTV is 80%. Second, they have already addressed a direct question on how the consumer loans (boat and RV) were performing and they were doing fine -- nothing like the HELOCs which were a problem from the start -- are you suggesting they are lying. Third, the HELOC portfolio is functioning under radically conservative assumptions, I suggest you do some actual DD before you spout off. Finally, your suggestion that Etrade has just "$500 million in excess capital on the books" and thus is precariously close to bk is a joke. Are you a real author? They are $500M (and soon to be $1B) over WELL-CAPITALIZED levels, which is a far, far cry from bk. Hell, Citigroup has a better chance of bk. So, thanks for your non-analysis stealth bash. Carry on. In the future, if you truly have some "concerns" do some DD and you may find it surprising that there are actually some answers to the "questions" you posit.

    I'm sure your 3 long shares qualify you to be a secret basher. Congrats.
    2008 Feb 18 05:44 PM | Link | Reply
  •  
    They did not belong in the business to start with as described in the Alpha article. It is the typical misuse of the fiduciary responsibility
    of using the cash balances and cash flow to make extra income
    based on the greed factor of "yield". THe used the triple aaa ratings
    as an excuse to throw the money around. tthe officers and board
    would not have done it if the had to sign personally. Other peoples money like in the movies with Danny Divito.
    2008 Feb 18 06:20 PM | Link | Reply
  •  
    i htink they gained new Customers for trading instead of losing per their headlines.
    2008 Feb 18 06:27 PM | Link | Reply
  •  
    A good article well written and presumably factual.
    Would be nice to see similar analysis of other investment houses that carry subprime mortages in such a short and concise manner allowing the reader a basis for futher research
    2008 Feb 18 06:44 PM | Link | Reply
  •  
    In response to Prescient11:

    Perhaps you should do a bit more research before blathering on as you do. First, know that in the first lien mortgage portfolio, Etrade has insurance on any loan where LTV is 80%.

    Response 1: Ok, who is the counterparty? Ambac? Also, I assume that you know that a substantial amount of the portfolio is written below the 80% threshold and that those valuations are dropping as I suggested. So, there is still significant risk and I assume any insurance is not 100% relative to any loss.

    Second, they have already addressed a direct question on how the consumer loans (boat and RV) were performing and they were doing fine -- nothing like the HELOCs which were a problem from the start -- are you suggesting they are lying.

    Response 2: No, actually I suggested that they were telling the truth. I also suggested, however, that this portfolio was a surprise to me and might not perform so well in a recession? Are you suggesting that it will perform well regardless of the economic environment and poses no risk at all?

    Third, the HELOC portfolio is functioning under radically conservative assumptions, I suggest you do some actual DD before you spout off.

    Response 3: What is “radically conservative.” It is going bad fast, period. E*Trade is reserving for it and expects to continue increasing reserves by hundreds of millions of dollars. Are you suggesting that they are lying?

    Finally, your suggestion that Etrade has just "$500 million in excess capital on the books" and thus is precariously close to bk is a joke. Are you a real author? They are $500M (and soon to be $1B) over WELL-CAPITALIZED levels, which is a far, far cry from bk. Hell, Citigroup has a better chance of bk.

    Response 4
    I am quoting Morningstar:
    E*Trade's first priority is to avoid bankruptcy. The bank needs to maintain "well-capitalized" status in order to avoid violating covenants and regulatory problems. As of Dec. 31, E*Trade had excess capital of $418 million and expects excess capital to equal roughly $1 billion by the end of 2008. However, we believe higher loan losses could eat through the capital cushion over the next two years. If loan losses mount and the cushion starts to erode, E*Trade's well-publicized problems could panic customers and create a second massive withdrawal of deposits and brokerage assets, which could rapidly push the company to the brink of bankruptcy.

    So, there is a plausible bankruptcy scenario authored by a plausible analyst.

    Response 5
    As for whether I am a “real” author, you can take that up with my editor.

    So, thanks for your non-analysis stealth bash.

    Response 6
    Well, if pointing out information about E*Trade that often gets over-looked makes me a basher, then so be it. If you look over articles on this site, you will see that you already have plenty of other glowing perspectives. I just thought this information was getting over-looked.

    Carry on. In the future, if you truly have some "concerns" do some DD and you may find it surprising that there are actually some answers to the "questions" you posit.

    Response 7
    See, if I answer my own questions, then I would be having a conversation with myself and there would be no point in putting up an article to generate discussion. That would be no fun at all.

    I'm sure your 3 long shares qualify you to be a secret basher. Congrats.

    Response 8
    Aw shucks. A personal attack! Now I am supposed to insult you, right? I pass and sincerely would like to thank you for reading my article and taking the time to comment.
    2008 Feb 18 07:07 PM | Link | Reply
  •  
    atlantis2

    To be fair, the mortgage paper carried by E*Trade is generally not subprime.
    2008 Feb 18 07:21 PM | Link | Reply
  •  
    I find it interesting that you state the purpose of your column is to highlight overlooked information, but yet you gathered all your DD from previously written articles. That's contradictory.

    How many people from ETFC did you speak to before writing this article? Did you listen to (or read the transcript) the ETFC conference call? You don't seem to post ETFC managements outlook on the loan data, yet they made all their projections clearly in the cc. I would expect you spoke to Burton at ETFC, isn't he the expert that they brought in to evaluate the loan portfolio? Does he agree with your assumptions?

    What's the date of that Morningstar report that you quote? It seems a little out of date.

    Lastly, when you report assumptions as facts, you lose all credibility.
    2008 Feb 18 08:01 PM | Link | Reply
  •  
    Rich,you can yap this or that,but capital wont even be an issue for Etrade,didnt you hear the CC a couple weeks ago?,they have plans to raise massive capital later this year,and we know Citadel is planning to launch an IPO later this year,see any connection to possible capital raised from IPO and the statement made from Etrade about the capital they planned to acquire later this year,i sense some kind of major deal with Citadel injection major new capital into Etrade,and even if it came to worse case scenario do you think they would just throw the Etrade name in the trash and declare bankruptcy or like the CEO said a deal would be made long before that would even be considered an option,Etrade knows where they stand with all the loans/HELOC'S and their capital position current and future if they didnt would they talk about "return to profitability" in late 2008! not 2009 not 2010 but later this year,it was totally irresponsible to make to erroneous opinionated comments like you had some kind of inside information(and crystal ball on our economic future) your almost on par with that Citi analyst Bhatia ,if your so pessimistic about Etrade and the Fed's ability to rectify the current situation were in then sell your long stake and go short..

    and buy some of that gold you recommend load up at $900-$1000
    pffffft,like rich says you gotta trade on emotion ignore the fundamentals..
    rich if you want to short,cover on Etrade and then short gold at $998.00
    2008 Feb 18 08:29 PM | Link | Reply
  •  
    In reply to Mr. Shinnick:

    Let me again preface these comments by stating that the fact that I have to provide links or research is somewhat incredible, given that it’s not my “article” and that I am not the one authoring a piece that has the potential, however unlikely, to alter someone’s investment decision. Just so your readers have the complete picture, I endeavor to provide a complete reply to your responses.

    Reply 1:

    Here is the link re 80% LTV insurance – page 4 of this pdf. files.shareholder.com/...

    The fact that you would suggest it’s Ambac shows your complete lack of diligence here. Etrade has ABSOLUTELY NO EXPOSURE to monoline insurers – you can find that out for yourself (people who actually research the stock have already reviewed this possibility given the current monoline issues). Your own article states that avg. LTV is 69%, take out loans that are at 80% and above LTV, then watch how low that avg. drops. As an aside, I did not know that Washington, D.C. and New York were part of the
    ”bubble” locations, I thought they were holding up very well actually and appreciating in some areas. And finally, you ignore the fact, that from an accounting standpoint, these first lien loans that are under 80% LTV, and likely well under, Etrade will be first in line on any foreclosure. That is the biggest danger with a HELOC portfolio, since they could be wiped out with dropping valuations as a second lien. Finally, are you proposing that real estate valuations across the board will drop 20-60%, thus rendering all of these first lien mortgages worthless. I guess a nuclear war could happen as well. Only 1% of these loans are 90 days past due and the portfolio is very profitable – Fact.

    Reply 2:

    Aren’t we in a recession, or at least a slowdown? And you ask the question here, but 4Q ’07 was pretty bad and they stated that this portfolio is holding up fine. So what’s your point? This “problem” portfolio actually is not a problem and is performing just fine. If you’re going to label a portfolio as a problem, then yes, you should have a reason for it other than vague hypotheticals, or explain to your readers that it is performing currently, and management does not expect any problems, but x, y, z, etc. Yes, in a hypothetical depression some boats might get repo’d. Who cares. Next.

    Reply 3:

    Here is radically conservative. WFC, Buffet’s baby, has $1.4B reserved for a HELOC of $84B!!!! (And these are some of the worst of the worst). In contrast, Etrade has anticipated putting aside $1.5B for a HELOC portfolio of under $12B, and $1.5B of these loans are FIRST LIEN LOANS. There are many problems in this portfolio, but Etrade has been more than 700% more conservative than WFC – a conservative bank in its own right. The HELOCs are taken care of, end of story. Etrade has prepared for the absolute worst situation in that portfolio so they are not taken by surprise again and made to look bad. Never say never, but this portfolio poses almost no threat to anything.

    Reply 4:

    What kind of a response is that, you are quoting from Morningstar. I made a clear, simple point and you respond by copying somebody else’s point. First, I don’t care who you copy, I asked a simple question. You should know how to analyze a balance sheet and capitalization requirements before you make an inflammatory and completely unfounded statement like you did re bk. Do you even know what they’ve done over the past months? Did you know they took $3.5B in available cash to pay down FHLB borrowing. Doesn’t sound like a company in desperate need of cash now does it? Moreover, you don’t point out that this extra cash is above WELL CAPITALIZED levels, which means the best of the best. You will be hard pressed to find a better capitalized bank other than Etrade these days. Look at the majors.

    Second, you are relying on an outdated Morningstar piece, I can’t believe you would respond with that. They have since revised that “analysis” and basically thrown their hands in the air stating that they don’t know what to think. If you have been following Morningstar’s “analysis” of Etrade, which you obviously have not, it is about the most atrocious coverage I have ever seen. At one point, it consisted of two women talking on a video who felt that they may have a 25% of bk, with no facts whatsoever and random conjecture about customers leaving Etrade – which is no longer happening since November – CASH LEVELS ARE COMPLETELY STABLE and Etrade is adding new accounts daily. Calling Morningstar a plausible analyst on this stock is a joke, in fact, the person in charge of this DD at Morningstar should be fired.

    Reply 5:

    I am hoping your editor will take it up with you for this complete lack of diligence.

    Reply 6:

    Your failure to do research and unjustified inflammatory comments justify the basher title. As you can see, I prefaced my original comments by agreeing with your observation that the mortgage portfolio was very big indeed. But your label of a “problem” and really ridiculous other points is what made me think you were bashing.

    Reply 7:

    Well, why don’t you tell me the name of your small business, and I will send an article to all of your vendors, customers and creditors, where I will posit several “concerns” and “questions” and put a percentage on the likelihood of you going bankrupt. Would you like that? Asking a question without providing an answer and positing false hypothetics is almost worse than flat-out lying. As you can see by this reply, it takes a hell of a lot longer to unwind the half-truths than just refuting a lie.

    Reply 8:

    It’s not a personal attack, rather an observation and my attempt to take the high road. I would like to presume that you are a stealth basher, as the alternative means that you were quite lazy, negligent and careless before authoring your piece. In the future, perhaps you should actually attempt some DD before throwing out “concerns” and “questions” that result in inflammatory “observations” regarding Etrade’s capitalization levels.

    In closing, I’ll put my money with Mr. Layton’s (Chairman of the Board and MIT grad. in case you were unaware) million dollars at $4.07. And if anybody wants to know how this game is played, know this, Citigroup’s wonderful analyst continues to maintain a sell rating on Etrade stock, yet Citigroup increased their position recently in Etrade stock over 600%. In other words, retails get screwed again. Real DD is needed to help the little guy, and until your article, Seeking Alpha was a fairly reliable source of at least an unbiased opinion, let alone research that was worth a damn. I hate to see you sully their reputation.
    2008 Feb 18 09:14 PM | Link | Reply
  •  
    great article, and great comments. I don't care who is right. This site is definitely a good source because of its readers and writers.

    I think the author of the article brought to light a portion of Etrades business that nobody looks at, but the keen and knowledgeable investors, and it does look like we have one here.

    The fact remains though, that as always. Tested and true. In hindsight everything will be obvious.

    Thank you for a great article, and thank you seekingalpha guys for giving us such a platform, and thank you commenters
    2008 Feb 18 09:39 PM | Link | Reply
  •  
    Liac, you're welcome and as I originally stated it is good to know what Etrade is really holding, as Mr. Shinnick discusses. It is the other "points" or comments I took issue with.

    If you, or anyone reading this for that matter, takes anything away from this exchange know this, other than the HELOC portfolio the rest of these assets are either performing -- i.e., income producing -- or are at least break even. Time to move on and get back to basics, and that's exactly what Etrade is doing.
    2008 Feb 18 09:47 PM | Link | Reply
  •  
    Compost and More Compost

    I did not use information from other articles, I got the information from the E*Trade investor relations website. The point is that I could not find this information in other articles. Instead, where I saw mortgages mentioned, it was with respect to the paper that E*Trade sold at pennies on the dollar, it did not address the remaining mortgage exposure.

    As far as the Morningstar report, it was very recent: 2-11-2008.
    2008 Feb 18 10:32 PM | Link | Reply
  •  
    "Compost and More Compost"???

    Game, set, and match.
    2008 Feb 18 10:58 PM | Link | Reply
  •  
    Prescient11

    Thanks for the link, but I think it actually does not support yourr point that 80% or higher LTV loans are insured and that if you take them out the LTV drops significantly. According to the chart on your link, the total of such loans is only 2.5% of the portfolio. It is almost insignificant. That means that 97.5% of the home loan portfolio is NOT insured. Am I reading that wrong?

    In any case, thanks for all your counterpoints and thoughtfulness. My intention was to point out risks and your intention is to show that those risks are "dealt with." It makes for a great discussion.
    2008 Feb 18 11:10 PM | Link | Reply
  •  
    I've been following the debate, based on what has been written, it's clear the author (Rich Shinnick) didn't do a good job and deserved the resulting feedback.

    I will also advise Mr. Shinnick to stop coming across as a sore loser. People took time and energy to give constructive criticism such that Mr. Shinnick would be a better analyst as a consequence. I don't know what Mr. Shinnick seeks to gain (perhaps to comfort his damaged ego) by attacking the critic(s) who made good faith evaluations of the article.

    Mr. Shinnick ought to know that there is a unwritten rule about people who write essays: Attacking the essay is fair game. If Mr. Shinnick doesn't want feedback, then common sense would suggest that Mr. Shinnick refrain from submitting articles in the public domain.

    Cheers.
    2008 Feb 18 11:14 PM | Link | Reply
  •  
    Prescient11

    By the way, the Ambac thing was a joke meant to point out that with all such insurance these days there is counterparty risk. Bad joke, irresponsible, sorry.
    2008 Feb 18 11:16 PM | Link | Reply
  •  
    Chungst,

    What you call "feedback" I call a discussion and I very much enjoy it. There are no winners or losers in a discussion. In fact, Prescient11 has great points and has really balanced out the discussion. I think, however, that if you write something and people critique it, that you have every right to respond. It is called taking ownership. Personally, I thoroughly enjoy reading articles where the author comes back to respond to comments. A lot of people who write comments want a response and in many cases never get one. And, yes, I will be a better author in the future based on this discussion-it is a tremendous learning experience.
    2008 Feb 18 11:29 PM | Link | Reply
  •  
    Mr. Shinnick, I will leave the discussion with this. Etrade longs have long-suffered through the lies and negligent reporting from the major media, that does nothing but quote analysts who are either lying or entirely negligent. Seeking Alpha has been one refuge for the truth, where retail investors could look for great analysis, the same with the Motley Fool for the most part. That is why I took such offense to your article. We assume that Seeking Alpha will provide the complete picture, if one is to make such sweeping statements.

    I honestly do believe some clarification is in order to your conclusion. Etrade has set aside $500M, and plan to have that number over or at $1B by the end of 2008, above well-capitalized levels. This is an amazingly good capital ratio. Yes, it's true that they could still go bk presumably, but it's likely that Citigroup would get there first if the economy truly melts down to that point. Given that Etrade has already been hurt by someone yelling Fire in a crowded theater, I think it is irresponsible to say they are "precariously" close when that is obviously not the case. I would respectfully submit that that portion of your article, at least, should be revised or amended to reflect exactly what a strong capital position is in, stronger than many huge household financial names these days.
    2008 Feb 18 11:43 PM | Link | Reply
  •  
    Prescient11

    Tell you what, I know of no way to "amend" an article, but I will say that my "precariously close" comment was not meant to infer any immediate threat but rather to point out that the mortgage portfolio could eventually push E*Trade in this direction-that is why it is a $5.00 stock and not a $25.00 stock. You have done a great job of making the point that they are well-capitalized and I hope everyone gets as far as your comments. I read Seeking Alpha for the articles and the comments and find the later to be just as informative.

    At the present time E*Trade indicates that it is well capitalized and it has plans to improve the situation. It is making progress, no doubt. Does E*Trade truly have a handle on their mortgage losses? I don't know and neither do you because it is hard to predict how far things will deteriorate or improve. New Century Financial was a vibrant multi-billion dollar business just 1 year ago. I know the comparison is unfair, but we now know a little more about risk than we did back then. I did not make a single prediction in my article with respect to buy, sell or hold. Many articles I have read make glowing ones and unabashadly say "buy" with no discussion of risks.

    So, you certainly did your DD and any long position that you have may be heavily rewarded. In fact, I sincerely hope that it is. Best of luck.
    2008 Feb 19 12:05 AM | Link | Reply
  •  
    Sigh, not to be one to always try to get the last word, but this is it, and I'll finally sign off. You stated: "I did not make a single prediction in my article with respect to buy, sell or hold. Many articles I have read make glowing ones and unabashadly say "buy" with no discussion of risks." I find that to be disingenuous at best. Respectfully, the title of your article is "Read This Before Buying Etrade." Clearly, you want potential investors to consider your article before acting. If you actually do the complete DD here, a title of a good follow up article (since you can't amend your current article) should and would be:

    "Buy Etrade". You also would likely do well to increase your current position at these levels, in my opinion. For those of your readers seeking a complete review of Etrade's portfolio and business, please refer them to the Yahoo Finance board for Etrade under the ETFC symbol. We welcome them over there for a great investment at current price levels and a discussion of the overall positions. Best of luck to all.
    2008 Feb 19 12:21 AM | Link | Reply
  •  
    Prescient11
    End of discussion. But, one bit off trivia for Seeking Alpha readers is in order. The Seeking Alpha editors wrote the title, I did not. They usually rewrite my original title and their title choices always seem to be much better and to the point than the ones I originally submit. The have not, however, ever edited one word of content.
    2008 Feb 19 12:35 AM | Link | Reply
  •  
    I don't know why I checked this, but I did. Fair enough, then what was the original title? And see, you get the last word as well. Good night.
    2008 Feb 19 12:39 AM | Link | Reply
  •  
    holy bejesus ,Prescient11 just blew me away with his responses..i think Prescient11 reply number .7 put a chill up Rich's spine,why don't we find out the name of your small business and draw up an analysis on your "likelyhood" like you just did Etrades and see how you feel about it..

    only thing i can say is Etrade needs to hire Prescient11 like right now at any cost to work in public relations/media department,im freaken dead serious i dont know what that guy does for a living but holy bejesus does he have talent!!!
    2008 Feb 19 12:41 AM | Link | Reply
  •  
    I want to say this in regards to both sides of this debate. America is on the brink of recovery. All that is needed that will cause economic recovery is for investors to sway to the upside with their support in all levels of good due diligence on the part of companies performing in the positive manner that they have been in readjusting and re-evaluating their positions with regard to the sub-prime. E*Trade has done this and investors have taken sides with them and are causing them to grow. America as a whole needs to reexamine their positions... Do we want to pass or fail as a nation? The power is in our own hands " and pockets" as - we should not jump to the best performing equity over the other, but we should examine what our decisions will reflect on our peers as they see us react to the plausible scenarios at hand. The stock market as a whole can be fragile. All concerned parties are aware that the financial markets are at risk here, - They always are and always have been - That
    s not the real question.... The real question is what are you doing to perpetuate a better America? Keep your posts of our economy in a positive light and you will see the light... However, throw on dire scenarios and focus on the ultimate risk, and you will keep the spirit of recovery in the gutter. It is far past the time Investors abroad see the "light to recovery" and realize that we have finally seen the bottom provided analysts and "bashers" give it a rest. It's far past the time to stop reporting on the negative facets of "What Ultimately Could Happen If Everyone Stops Paying Their Bills" and move forward and give due diligence to responsible reporting by stimulating the economy by alerting folks to the upside. Start concentrating on the upside and you will indeed see an upside. Seek the negative and you will certainly find it. I do hold a position in E*Trade and as an investor, I did my due diligence, and I find it foolish and irresponsible to report as you did in this article as if all of the worldly investors, hedge fund corporations, and corporate financial managers have not given weight to the preceding aforementioned points you so clearly pointed out. You simply must print a retraction statement and clearly state how ruthless and over critical you were to print a statement with such regard to the unknown. As an investor and business owner, I am shocked that you of all men would write such an article so far past the recovery of such a company as E*trade. I say to you all, Where are all the proponents of our economic society? Responsible investing requires our attention to both the good times and the bad times, the ups and the downs. E*Trade Has Adapted and Will Overcome! Long E*Trade... aajones7472000@yahoo.c...
    2008 Feb 19 01:01 AM | Link | Reply
  •  
    aajones

    Hallelujah brother! Hallelujah!

    Very enjoyable!
    2008 Feb 19 01:17 AM | Link | Reply
  •  
    Prescient11

    Truthfully, I do not remember and it is irrelevant since I knew it would get rewritten anyway. I no longer put any thought in to titles. I trust the editors to read the article and give it an appropriate title, and they always have. Good night.
    2008 Feb 19 01:44 AM | Link | Reply
  •  
    So basically you're exiting your ETFC position because you think public
    information from E*Trade's IR website is not already accurately priced
    into the stock?

    heh.. I guess it's good to have people on both sides of the market.
    Can I buy your shares? I trade technically and ETFC flashes "buy me", up
    80.6% in 20 sessions w/ 5.5% stddev. I'll sell if/when it drops through the
    trailing stop loss. The trend is your friend, except at the end when it bends...
    2008 Feb 19 02:20 AM | Link | Reply
  •  
    Rich needs to give concrete answers to the following challenges posed by Prescient11:

    If applying Rich’s analysis approach (assumptions) to the major firms like Citi or WFC or Washington Mutual, these firms probably would go under before etfc would. Rich apparently doesn’t want to show us the true intelligence of his analysis… So, I think Rich is playing the leftover fire as that Citi analyst did: they know people, under certain circumstance, would not seek reasoning based on facts but succumb to the “fear or perception” hinted by the catching word like “BK”.

    Specifically, as far as ELOCS is concerned, both ETFC and WFC have the same loan amount , please see the below article for your own clue: 209.85.173.104/search?...

    Rich’s analysis is really coarse if not “bashing”…

    By the way, I don’t believe the big houses would care that much about articles like Rich’s. But to small investors who seek some true light that can penetrate the abyss generated by Wall Street "big guys", this kind of under-par analysis is annoying at best, to me it is insulting to the intelligence of the “small guys”…

    Note:I own a small long position of ETFC...
    2008 Feb 19 02:36 AM | Link | Reply
  •  
    Richard Shinnick, you are missing the point. If you write a piece and submit into the public domain, you are inviting feedback -- be it positive or negative feedback. However, when you receive negative feedback, it's how you response that is the key. Since you unilaterally wrote and submit this article (i.e. no one put a gun to your head) you are held accountable for the quality of the information. When someone points out a defect in your argument, in my humble opinion, you are now obligated to verify that information yourself as opposed to attacking the critic with your comment of: "Response 1: Ok, who is the counterparty? Ambac?"

    I am very serious about this because how difficult was it for you, i.e. the analyst on ETFC, to simply call up ETFC's investor relation's department and get the answer from the horse's mouth. Therefore, this behavoir is not called "taking ownership" as you liked me to believe -- to me, this behavior is akin to being a sore loser.

    A good analyst has to independently verify the information because a good analyst has to be objective. When I was studying for my CFA exams, AIMR (now the CFA Institute) stated that one must have a reasonable basis for the recommendation. People can debate what is meant by "reasonable basis," but to me, it meant looking under sufficient rocks to make sure I did as best of a job as I could. And yes, I did discover some fraud in my career as a Buy-Side Analyst.

    Cheers.
    2008 Feb 19 06:58 AM | Link | Reply
  •  
    The following admissions from Rich in follow comments relating to this irresponsible article.

    Some Shinnick snippets:

    "At the present time E*Trade indicates that it is well capitalized and it has plans to improve the situation. It is making progress, no doubt. Does E*Trade truly have a handle on their mortgage losses? I don't know and neither do you because it is hard to predict how far things will deteriorate or improve."

    "And, yes, I will be a better author in the future based on this discussion-it is a tremendous learning experience."

    "In fact, Prescient11 has great points and has really balanced out the discussion."

    "Prescient11

    By the way, the Ambac thing was a joke meant to point out that with all such insurance these days there is counterparty risk. Bad joke, irresponsible, sorry."

    "In any case, thanks for all your counterpoints and thoughtfulness. My intention was to point out risks and your intention is to show that those risks are "dealt with." It makes for a great discussion."
    2008 Feb 19 07:11 AM | Link | Reply
  •  
    aajones.

    Very eloquent.

    I will wait for the retraction. Or maybe not.

    Egos run amock. That is what got is into this mess in the first place. Looks like those same egos are, in plays of futility, trying to keep us there.

    aajones, carrying on means to follow your advice.

    Why would I sell my Etrade again?
    2008 Feb 19 09:06 AM | Link | Reply
  •  
    I am confused about all the bantering, however, what did Citadel purchase? I thought they bought it all, RV and boats, included, for 27 cents on the dollar? Is this what is left that they didn't buy? Regardless, E*Trade's senior management, dating back to the IPO days, has been less than transparent, historically, and if everything was all right, why would dozens of suitors be rebuffed who wanted to buy the brokerage side? Certainly, a bidding process would have garnered more than a reasonable valuation? It is a shame! Especially for small investors, and potentially, brokerage customers. Another black box investment that probably has more cockroaches in the woodpile.
    2008 Feb 19 09:59 AM | Link | Reply
  •  
    Chungst,
    You wrote:
    When someone points out a defect in your argument, in my humble opinion, you are now obligated to verify that information yourself as opposed to attacking the critic with your comment of: "Response 1: Ok, who is the counterparty? Ambac?"

    I respond:
    The "defect" in my arguement pointed out by Prescient11 was that the 80% or higher LTV loans were insured-he provided a link. I checked the link and it indicates that 2.5% of the loans are insured, and 97.5% are not insured. His link was to information that I already had looked over and I did not include a note on the insurance because it is such a small part of the portfolio that it is almost irrelevant. In his comment he made it sound like it was most of the portfolio, not 2.5%. Take a look yourself and let me know what you think.

    Furthermore, nobody has pointed at anything in the article that is "innacurate" information. I think Prescient's point was that the information is accurate but E*Trade has adequately dealt with it. Any way you slice or dice it, E*Trade is highly leveraged to bubble area, stated income loans written at the height of the housing bubble. That is a fact. Whether they can deal with that fact is what this discussion is all about. Moreover, a lot of investors do not even realize that they still carry this paper and assume, like Vegasjoe, that they sold it all.
    2008 Feb 19 12:51 PM | Link | Reply
  •  
    Prescient:
    Found the original title
    E*Trade: What Investors Need To Know!
    2008 Feb 19 01:40 PM | Link | Reply
  •  
    Honestly, in my humble opinion, the name of the game was "Kill
    E*Trade" (probably by some competitors of E*Trade or some hedge
    funds with naked shorts in conjunction with media and analysts).
    It would be interesting to see WHO built their short
    positions while people like Cramer were screaming BUY at $15.
    Next comes the attacks by Citi, BOA and ML (specially CITI
    with screaming "fire" in crowded theater) -- in fact forcing the company to
    the brink of bankruptcy by creating fear in
    customer base. That was the plan -- to force bankruptcy and
    then pick up pieces purely through analyst/media manipulations.
    In the process they also forced a lot of retail investors to lose
    tremendous amount of money. Note also that Citi itself BOUGHT
    ETrade share (ownership up by 600% while their analyst
    screamed bankruptcy).

    That attempt at killing E*Trade failed. Total disaster on the
    side on Citi/BOA. So then the name of the game became how
    to cover the short positions (and whose short positions are these??)
    without causing a run-up? So Citi comes with another "sell"
    announcement early January and BOA follows with sell with $2 target.
    Both these announcements were very ill-intentioned and timing of
    those again smack of "manipulation" (and were obviously wrong as
    proven now).

    In summary, in my OPINION -- I suspect this was a master plan
    to "screw" retail investors for the benefit of "professionals". And
    by your article, in the best case, you either prove that you are
    not as bright as you think you are -- or in the worst case,
    you are part of the "manipulator" crowd.

    At this point, the theory of manipulation is speculation; but I hope
    someday SEC investigates links between various parties AND also
    follows up on Naked shorts, FTD (Failure to Deliver) and enforce
    reg sho list.

    Manipulators should know that they are up against who are now
    known as "E*Trade Marines". We have seen all the manipulation
    (including media and analysts) and we are going to back this
    company to ZERO or $25. I will wait for 3 more years and see
    E*Trade buy Ameriturd for 1/10 the price it is today.

    Many of us have lost too much money already to be afraid
    of losing $5 more. Thanks for your attempt to whisper "fire"
    in crowded theater! It did not work. Go look at the fundamentals,
    listen to conference calls, go through the numbers with fine
    tooth comb (as I have done and Precient has so eloquently
    put above), listen to the facts, have some faith in our country.

    This company would be dealing with it's mortgage issues in an
    orderly fashion if not for Prashant Bhatia's irresponsible (and
    maybe intentional) "run on the bank" comment.
    2008 Feb 19 04:11 PM | Link | Reply
  •  
    "Furthermore, nobody has pointed at anything in the article that is "innacurate" information." -- RS

    As a buy-side analyst for a number of years, I will tell you that OMISSION of key information equates to "inaccurate" information and I am not dealing with semantics. I don't have time to go over your numerous faulty comments, but I will address one in that you originally wrote (more like pontificating out loud):

    "$2.6 billion Consumer Loan Portfolio
    Does it surprise you to know that E*Trade holds $2 billion in RV loans and $500 million in boat loans? They have a little over 1% of this total portfolio reserved for loan losses as of the end of 2007. Here is my question. How will a portfolio of RV and boat loans do in a recession? Could this portfolio be a little bigger problem in the future than just a 1% write-off?"

    You never checked with ETFC's investor relations about these concerns. So, I ask you again, HOW DIFFICULT IS IT TO DO YOUR JOB??? Please advise, how difficult is it to call the company and get answers to these basic questions --- questions with negative implications based on your writing, etc.

    Lastly, Mr. Shinnick, you have demonstrated you don't like, much less appreciate, constructive criticism. Therefore, I will exit this "dialogue" and allow you the last word (which history shows that you enjoy).

    Good luck.
    2008 Feb 19 04:12 PM | Link | Reply
  •  
    Chungst,

    Thanks, but you have provided no analysis of your own. I have no questions to ask E*Trade's investor relations regarding their consumer loan portfolio. They listed it and they have reserved 1% for it. The question on whether their reserve is adequate is for readers to answer, not for E*Trade to answer. E*Trade thinks the portfolio is fine and the reserve is adequate, I could call the investor relations department but that is what they would tell me.

    As far as criticism, constructive or otherwise, I do enjoy it and I enjoy responding to it, otherwise I would be doing something else. What "key" information did I omit? You are a professional analyst, I would ejoy hearing and learning from what you have to say. Please post the "key" information.
    2008 Feb 19 04:49 PM | Link | Reply
  •  
    Rich Shinnick: You are being so difficult.

    First, you wrote the piece (I stated earlier no one put a gun to your head to write it). We, as the readers, provided feedback at our option. Given your background that you've advertised (akin to shingle theory) that you are highly educated (with a JD no less) with years of investment experience (your bio stated 10 years of "studying"), you should have figured out (by yourself) why some critics told you how to improve your analysis (trust me, I've tried nicely earlier). Instead, you want to come across as a neophyte in investing -- sorry, you can't play both sides of the fence or "Homey don't play that" where I'm from. If you really are a neophyte or incompetent, then I will not hestitate to treat you like one.

    Second, I commented to you earlier about objectivity and having a reasonable basis. I am astounded that someone with a JD and 10 years of investing experience would respond with: "I could call the investor relations department but that is what they would tell me." How difficult would have been to say to ETFC's investor relations that I have concerns over the company's $2.6 billion consumer portfolio and can you walk me through the migitants or does the company have safeguards in place? To make assumptions on what the company will say is NOT OBJECTIVITY and trust me I've tried to teach that concept to you but you don't listen. Clearly someone like Prescient11 was able to use a little more effort and supplied more information about these loans based on the link provided. Therefore, this information is AVAILABLE and you chose to OMIT key information like FICO scores, etc because you chose to avoid calling the company to get the information in the first place.

    Rich Shinnick, if you advertise yourself as someone with a JD and 10 years of "studying", then you ought to be intelligent to discern when someone (like myself) is trying to coach you to do a better job. Instead, you make excuses and make up answers rather than take the advice.

    You owe it to yourself to learn how to speak to the investor relations department. Since you have a JD, then you ought to understand the impact of "Fair Disclosure" (aka Reg FD that levels the playing field such that the investor relations or senior management must treat each investor fairly). If you don't speak to the company, you will miss out on key information. Let me conclude with this comment, even Warren Buffett calls the IR department himself.

    Cheers.

    Cheers.
    2008 Feb 19 05:53 PM | Link | Reply
  •  
    Chungst,

    Thank you for your comments, I was hoping for analysis regarding E*Trade, but your focus remains personal to me, which is fine and fair. I appreciate your advice. I must say that the investor relations website for E*Trade is very comprehensive and the information that they disclose is very detailed and well-presented compared to other companies. Cheers to you as well.
    2008 Feb 19 06:28 PM | Link | Reply
  •  
    I haven't read these comments and reports in a week or so. Actually, I bought another stock for the first time in about 10 years. I've made profits buying ET for the past 10 years and now I'm losing a bit on one of the ones I just bought on a spur. BUT, I appreciate all you folks who answered his article. Especially the one who asked if he was with Citigroup. I've vowed never, no never to do anything that in any way involved Citigroup. They are no longer in my vocabulary. That guy Bhailia, or however it's spelled, when I read his articles I thought, "What a jerk". Then I marked Citigroup. I stated then that I will always do exactly the opposite of what Bhailia says to do. I did right after that and made a bunch, for me a bunch. Now, what I'd like to know, is the guy who wrote this article connected in any way to Citigroup???? If so, I"m sorry for wasting my time on his trash. Anything connected to Citigroup is trash, whether it's the writer or the writers opinion. Now, is he connected in any way to Citigroup. I don't know all those terms used, 'DD', and others, for I'm not educated in business. However, I am one of those loyal customers of ETrade. I only know what I've experienced in the stock market. I've found that when they run around squeeling, 'The Sky is Falling', it's mostly an over statement. If these analyst say it's going to last 3 years, it's only going to last a few months. I've made thousands of dollars by not listening to analyst, or doing the opposite of what they say. What really irritates me is that these analyst, (due to being partial, paid liars or just ignorant), write these articles that are lies or ignorant statements, and some poor dumb guy like me who hasn't been in the market long enough to understand that there are some real phonies, or jerks who write articles like this because they want to help their failing company like Citigroup, or because they just like to argue and show an opinion so different he/she's bound to get an argument by intelligent people who know better. But, all it does is cause some poor guy or gal who is trying to invest and make a few dollars, just a few, and those people in a sincere effort to do what seems best, read and believe the article and sell their shares even though it causes them to lose their money. I appreciate you folks who know what you're talking about, listen, I appreciate you for commenting on this man's article and showing by your statements he didn't do his job professionally. A man who was a Democrat once told me, "Gary, I'd vote for a jack ass if it ran on the Democrat ticket". I'm neither Democrat nor Republican, but I stand by this, "A man who'd vote for a party, and not for America is a fool". I prefer the word, 'Traitor'. Well, in the same sense, a man who'd mislead good folks by writing words or opinions that mislead or LIE, he/she is a traitor to the human race. That really P-----S me off. Captain Gary
    2008 Feb 19 08:57 PM | Link | Reply
  •  
    "opinions that mislead or LIE, he/she is a traitor to the human race. That really P-----S me off. Captain Gary"

    Opinions by definition don't "lie or mislead" as long as the opinion holder sincerely holds the opinion. But, you definately have an opinion and are welcome to it. In full disclosure, I have a checking account at Citibank.

    Thank you for the comment.
    2008 Feb 19 09:34 PM | Link | Reply
  •  
    Excellent article Mr. Shinnick and your core conclusion:

    ..."So, when considering an investment in E*Trade, keep in mind that what will eventually determine the fate of the company has relatively little to do with the quality of the brokerage service or trading platform, and everything to do with the housing market, the performance of liar loans in bubble areas, and the fate of RV and boat loans in a slowing economy. "...

    clearly states the real issues any buyer of ETFC must know and consider. This is not a stock for widows and orphans,it's a high risk ,possibly high reward GAMBLE. Those who tout it as a dead cinch,wildly undervalued,misunderst... financial are not doing anyone any favors.

    I'd like to know your opinion on why ETFC mgt. took such a lousy deal from Citadel if they weren't in a level of distress far greater than they portrayed to their investors? How deeply involved was the OTS and do you believe Citadel to be a passive,friendly partner?

    Citi analyst Bhatia,early and correct in his criticism of the ETFC loan portfolio called the chance of bankruptcy at approx. 5 to 1 against and S&P who at one point put the chance of insolvency at 50% and quickly retracted that have both been slandered unmercifully for their views but do you believe they were honestly and candidly assessing what was in everyone's mind and was it within their proper purview to address the topic?

    Thanks.
    2008 Feb 19 09:51 PM | Link | Reply
  •  
    jbmaria, I have been following Etrade quite closely since their stock plummeted. I personally believe that although Etrade has it's problems, and they were at the forefront of the "plummeting financial" market, they are also the most forthright of all the big financial companies. I am a new investor and I know very little about the stock market. I am a business owner and I do pride myself on knowing a good business when I see it. I personally think that Etrade has a good business. I therefore, after some research, bought in at about $4. I have a rule that I follow: never invest in a company that you refuse to do business with.

    Now that the preliminary information is out of the way, I want to touch on what you asked about "honestly and candidly assessing what was on everyone's minds". I think many people here have touched quite clearly on the lack of optimism and have certainly argued that the nervous nellies would like to drive this country into the ground with their fear mongering (and I am sure that the fear mongers would love to start with Etrade). I am not going to beat that into the ground, but I would like to contend that they did indeed deserve be to be slandered unmercifully for airing such views. The US is not comprised solely of nervous investors. The are just as many people who can sit comfortably and watch their stocks go down 20, 30, 40 percent and trust in the fact that a good business will rebound. My father has been trading stocks for over 30 years. He has never lost a cent in the stock market. I don't intend to either. How is that possible? So, I ask you to critique your own statement. How do you assess "everyone's minds"? Would you lump those who believe that in 6-8 months, everything will be returning to solid growth and the economic forecast will be positive again into the same category as the doomsayers who would have the markets just go belly up? You see, not everyone thinks like all these people who say the world is going to come to an end. I hate to say it, but I would be pretty primed in a bet to say that they(the nellies) are the same people who were promoting the growth through deregulation and wanton currency creation. Of course they would be the ones crying in their milk when the ends come to justify their means. Here is the really crappy part of this equation. The Etrade stockholders who bought in at 15, 20, 25$ (and likewise with CFC, et cetera). The homeowners that are soon to not be homeowners due to their adjusting mortgages, and the people out there that have to put up with all of this naysaying nellie behavior all the while holding the hope that better days are going to come (gee, sounds like something right out of a Manifest Destiny Utopia). Here is where I ask you a question? Will there be better days to come?

    I think aajones had a lot to say here and very few picked up on this with exception of the original author. The seat that we are in right now would have been a much nicer seat had we sat down a little less sudden, which could have easily been had with a little less "the sky is falling rhetoric". We all knew this was coming (and not just Etrade), so why did the sky have to fall so suddenly?

    Seriously here, I should be thanking all of you who cried SELL, you have created a great opportunity for me to get into the market. I would have been just as happy without all of your help though. I have to look at one really positive thing though, without all of this, I would have missed what a great show a turn around could be. I actually enjoyed the "bobo" the clown commercial better than the superbowl. I am curious as to when the next wave will start. And quite frankly, I am looking forward to it.

    And for what it is worth, I have yet to see one person tout Etrade as a "dead cinch,wildly undervalued,misunderst... financial ". Of course it is a gamble, but I would rather put my money on eTrade than on Red. On top of that, I do business with eTrade.
    2008 Feb 19 10:52 PM | Link | Reply
  •  
    Ha -- Mr. Shinnick, now you have support of Ms. JBMaria - a well
    known ETFC basher. I would be scared to keep such associations.
    Make sure you don't leave any trails if you talk to any hedge fund
    managers or any "analysts" or any other media persons about a joint
    effort to derail ETFC.

    Let me ask you a question: Have you compared ETrade platform vs.
    Ameritrade Vs. Schwab Vs. BOA Vs. Fidelity?? Then you can see why
    any of these companies would like to pickup ETFC for pittance by
    market manipulation. Not to mention that ETFC was coming after their banking business!

    The point is -- how loud will all you people have to scream bankruptcy to make ETFC customers AND shareholder believe?
    I think it is not working anymore! Tell everyone you know to
    cover their shorts and try to find some other victim company.
    2008 Feb 19 11:00 PM | Link | Reply
  •  
    jbmaria

    Thank you for the comment. The Article was in all sincerity about the risk in E*Trade which, by reading other SA Articles, I thought was underappreciated. In fact, I am still long on E*Trade and I even added some shares today because I sincerely believe that barring any major "event" in the next few weeks that we might see a spike as bad news is already priced in and these types of cases, no news is good news. As you say, it is a GAMBLE and not a sure thing as many would imply. Many investors simply do not appreciate this fact do not even know there is still a loan portfolio. That was the whole reason that I wrote the article, so it is genuinely nice to see someone recognize the information for its intended purpose.

    To answer your questions:

    Why would they have taken such a lousy deal? Maybe they needed a "deep pockets" partner to align interests with them. Maybe they were just plain scared. In the end, whether it was a good or bad deal, it only addressed an immediate problem that E*Trade had. This mortgage portfolio is still huge relative to the company's earnings power so I am glad Citadel is involved.

    Is Citadel "passive," no way..they got a seat on the board and took over some trading from what I understand. Do they want to get paid back and see their investment rise, or do they really want to simply pick up the trading platform and clients at some point and jettison the mortgage bank all to the detriment of shareholders? Plausible, but for what it is worth the board seat makes them a fiduciary relative to comapny it's shareholders and fiduciary duty is a powerful legal incentive to keep things above board and to me this indicates a freindly bias. If they were merely a creditor with no board seat, they would not have any fiduciary responsibility. In many instances, bondholders and shareholders are adverse. The board seat is, therefore, probably a huge positive indicator that Citadel has aligned itself with E*Trade.

    Really, quite honestly I have no idea about any analyst's motivation, honesty or candidness. It was certainly in their proper purview to issue an opinion... but "honest," I really have no idea. It always amazes me how violently stocks react to these upgrades and downgrades which are often simply based on old public information.
    2008 Feb 19 11:31 PM | Link | Reply
  •  
    Hi quasimatter,

    Seems we were both typing at the same time so I missed your comment before responding to jbmaria. I tried to give her an honest response (you say she is a Ms. so I will take your word she is a she). As to your point on trading platforms, I will take your word it, but my article was about the loan portfolio and the risk it poses so please stay on topic.
    2008 Feb 19 11:43 PM | Link | Reply
  •  
    "Daffy' and "quasimatter' and a few other pumper elves will undoubtedly slander me for being cautious on ETFC but it is of no matter. People with forums like Bhatia, S&P, Merrill and now Mr. Shinnick are saying the things that support my caution-truth will out. With over $40 Billion in mortgages and a market cap of just over $2 Billion it's not a stretch,given the news and state of the housing market to see danger and advise caution.
    I know this company from owning and studying it for over 7 years.My bona fides are real and verifiable. I was a vocal ETFC long from '02-07,sold my last big block on June 6-'07 at the precise top and have been cautious since.You can verify all of that on the Yahoo boards and if you need help I'll provide links.
    Simple test-ask those who would criticize me for similar bona fides and they will disappear.
    All I ask is the ETFC cultists stop trying to intimidate Mr. Shinnick who is trying to provide honest analysis and opinion to the investing public.
    2008 Feb 19 11:45 PM | Link | Reply
  •  
    Jbmaria,

    Thanks. "Caution" is the perfect word. Not red light, not green light, but yellow light. There you go. That would have been a great word to work in to the title. Really, I am not intimidated, I am happy to see the interest and I can't reiterate this enough, I am having fun. Moreover, as long as someone is making sense, their bona fides really don't matter to me.

    BTW, I am familiar with the discussions on the Yahoo message boards that were going on last night and today. My wife keeps asking me "what is so funny" but seriously some of the comments on all sides are hilarious. I think the discussions on Seeking Alpha are generally a little more informative though and I hope they stay that way.
    2008 Feb 19 11:56 PM | Link | Reply
  •  
    Daffy,

    I actually enjoyed the "bobo" the clown commercial better than the superbowl.

    This is OT, but the last 10 minutes beat bobo, that was thrilling. Ok, back to E*Trade's loan portfolio risk. Stay on topic.
    2008 Feb 20 12:08 AM | Link | Reply
  •  
    Mr. Shinnick,
    Glad to see you have a sense of humor and a thick skin,you'll need both in spades to use "inflammatory' words like "caution" in front of the "pumper elves" and two days on that board is barely a visit. Between the politics,the pissing matches,the homophobia,the racism,the amateur pumping and bashing there actually was some decent analysis and a world of humor.You'll have noted that I've already been accused of being you (actionable slander given my curly mane) and for months many were absolutely convinced I was Prashant Bhatia-If only,the kid is 27! So anything goes when it comes to ETFC discussion,every alleged fact or premise should be checked twice as pumpers and bashers will allege any and all bits to achieve a perceived influence on the stock price.The ultimate irony being how little any of these discussions actually affect the pps.
    Have fun.
    JB
    2008 Feb 20 12:26 AM | Link | Reply
  •  
    About Citadel's deal;

    "Why would they have taken such a lousy deal? Maybe they needed a "deep pockets" partner to align interests with them. Maybe they were just plain scared. In the end, whether it was a good or bad deal, it only addressed an immediate problem that E*Trade had. "


    That deal scared the living crap out of me. Two things.
    It was the best offer out of 40 examined?
    My god,it cost them 20% of the stock,put them on the hook for $200 million per year in interest on that loan,as I understand it forced them into an order routing deal that benefits Citadel,cost ETFC at least one board seat and only netted $800 million for the toxic CDO's. What incredible horrors might have been contained in the other offers????
    And did we really get an understanding of the role of the Office of Thrift Supervision in pushing ETFC into the arms of Citadel? I see the OTS with a pistola to Lillien's head telling him to kneel in front of Griffin if he wanted to live to see tomorrow.Could this once proud franchise have voluntarily struck this embarrassing deal?

    I wish I could share your conviction Citadel is a good partner but it's not passing my smell test.

    That off my chest, two quick questions.

    Would you approve of J. Lillien being named CEO?

    In your opinion,where are we in the unraveling of this "banking crisis', 3rd inning, 6th inning, other????
    2008 Feb 20 01:29 AM | Link | Reply
  •  
    Mr. Shinnick -- if you want to stay focused on loans and "analysis";
    here it is. I wish you had done some analysis before the post.

    Let us consider $11.9B HELOC portfolio - as that seems to be the
    major cause for concern. About half is with CLTV over 80% -- so
    that means about $6B is over CLTV of 80%.

    If CLTV is 80% and price decline is 15% -- banks won't lose
    anything. If CLTV is 95% and decline is 15%; banks will
    lose 10% of their value. Let us assume average CLTV for
    loans over 80% is 88% (assuming no loand over 95% CLTV).

    Next we need to assess what is the price decline in those
    properties AND what percentage of borrowers would choose to
    walk away??

    So we need three parameters to play around with
    numbers:
    1) What percentage will default?
    2) What is the LTV (loan to value ratio at the time
    of origination) on defaulted houses?
    3) How much the real estate value has declined in those
    market since loan origination.

    Industry is stating 6-8% default rates right now -- let us
    even assume 10% default rate (i.e., 1 in 10 homeowner
    has defaulted and destroyed any chance of getting credit
    in future). Note again -- if 1 out of 10 American is insolvent,
    we would have much worse problem as a country so I believe
    10% default rate is too excessive. The question is not what
    how much properties have declined -- most owners will continue
    to live there and service loan and hope the prices to go back
    again instead of walking away from "dream" of owning a home for
    a long time to come.

    So once again, 10% of $6B is $600M. Let us again take a worst case
    assumption that in those 10% defaulters ENTIRE amount is lost
    (There may be some recovery in some cases -- i.e. where prices
    have not declined more than 12%).

    So under a very conservative analysis, I come up with 600M losses
    on $6B HELOC portfolio. So yes, $1-1.5B projected losses are well
    beyond reasonable.

    Similar analysis can be done for other loan portfolios. The key being,
    you have to decide what percentage of borrowers will walk away??
    I believe 10% is way too much (except for sub-prime borrowers
    who are running at 12-15% default -- but as we know ETrade does
    NOT have subprime exposure).

    So honestly, the ONLY WAY this company can go bankrupt is if
    they are FORCED to sell their mortgage portfolio at a loss (as opposed to orderly servicing taking losses as they occur by
    defaults). And they would be forced to sell IF customer withdraw
    money from E*Trade Bank. And the only way customers will
    withdraw money from E*Trade bank is by people like Bhatia
    and yourself go screaming "run for your money" the bank is
    going down. (Which was precisely the reason they were forced
    to sell to Citadel!).

    I hope someday people like Bhatia are prosecuted for deliberate
    attempt to kill a company.

    Anyway, I hope you are genuine enough to agree with the analysis
    here -- and I hope your average reader will read all the way down
    for some realistic analysis instead of fear-mongering statements
    like "11.9B HELOC is in trouble".

    If anything, I think ETrade suffers from too much disclosure on
    their loan portfolio. Which other company (Citi/BOA) gives this
    level of details and breakdowns about their loan portfolio?

    Fortunately, there are people who can analyse the numbers
    themselves and are not prone to fear-mongering (including
    big institutions like Citi -- who has increased their holding of
    ETrade by 600%).
    2008 Feb 20 11:38 AM | Link | Reply
  •  
    JBMaria,

    I find it funny you call me or daffy "pumper elves". I maybe post at
    most one article a day on Yahoo Message board (much less than
    you). There are many real pumpers who keep posting one liners
    entire day -- maybe you should reserve your titles for them
    to retain some credibility.

    I am simply a long who is just upset how Bhatia and big professional
    players have screwed retail investors on ETrade.

    Hats off to you on a perfect sale at the precise peak. If you are
    not short on the stock and now have sold, why are you posting
    so much on all forums? Out of pure kindness of your heart?
    Thanks -- I appreciate your efforts to give us some advice.

    Regarding Citadel -- you claim it was a BAD deal -- let us get
    the facts, at the time Citadel went to E*Trade with offer, the
    stock was at $3.57 with a market cap of $1.5B. Why would
    someone pay $800M and loan another 2.1B in a company
    which had a market cap of $1.5B for a 20% stake? Given the
    fact that ETrade was forced into that deal by run on the
    bank caused by Bhatia and naked short-selling which scared
    some customers to pull some money out - it was not a bad deal.
    (Of course, I wish it was better than that)

    And yes, you are right -- other offers were definitely worse.
    Idiots like Ameritrade other pursuers were probably going for
    the kill or probably offered $5-6 per share which I believe
    would have been much worse outcome for ETrade (All because
    of Bhatia's comment??). I am glad it did not work. If any of
    the buyers had any vision (balls?) they would have offered $8-10
    per share which would have still been a great deal and they
    would have gained technology and LOYAL customer base.

    But no, they were ready for the kill and felt they could drive the
    company to bankruptcy with Bhatia's help and naked shorting
    and then pick up pieces for cheap!

    Good luck JBMaria -- I hope you cover your shorts soon or
    stop wasting your time here with fear-mongering with
    no vested interest in the stock (as you claim).
    2008 Feb 20 11:58 AM | Link | Reply
  •  
    Hi JBMaria
    Would you approve of J. Lillien being named CEO?

    Unfamiliar-I am not claiming to be an expert on E*Trade and you seem to have in depth knowledge. The article was limited to the loan portfolio risks and as I have said I wrote it to get that out in to the mix of all the other single issue positive spin articles.

    In your opinion,where are we in the unraveling of this "banking crisis', 3rd inning, 6th inning, other????

    No. Most estimates I see range around $400 billion in total write offs, I think we are at $168 billion or so. Somebody still has some splaining to do Lucy. I wrote about this on SA, "New Models Show $700 billion in losses" was the title, tounge and cheek article but I was trying to make the point that we are far from done.

    Quasimatter

    Thank you for the breakdown. I think you are a little more conservative than even E*Trade, they are planning for worse losses. The one comment about 1 in 10 Americans walking away on their debts made things seem a little worse than they are, I think 35% of Americans own their home free and clear and many do not have these equity lines at all. I personally know too many people who are living on their equity lines, that is my bias I guess. Thank you for the input though.
    2008 Feb 20 12:28 PM | Link | Reply
  •  
    OK,Quasi,you insist on making this personal but you obviously missed my post on motive from 1-26-08,here it is and BTW,I've NEVER been short ETFC :

    "
    A few points:

    Like a few others,I've been posting here since '02 (look it up),mostly as a BULL on ETFC,so in effect you and the horde of pumper elves and daytrading shorts are in my "living room". I'm entitled to my opinion,to change my opinion and to post anything I wish so bet big on me continuing to do so.

    I like analysts who get it right and don't like to see them trashed by morons caught on the wrong side of that opinion.If we vilify the analysts who get it right we'll deserve to be stuck with the "me too" morons that we all complained about during the dot com days.

    I expect that if ETFC survives,someday I'll be back as a long.Currently I expect that day is at least 6 months off. In the meantime,I've learned a lot about the OLB sector and will use this forum to discuss plays in the sector and its various issues because I'm accustomed to do so.

    My guess is you don't give a rat's ass about my motives/agenda or you'd have read some of my 20k posts,not just the ones that seem to go against your investments? You just want to demean my perceived "influence".
    Trust me,I have no influence over this stock price,nor does anyone here-we're irrelevant."
    *******
    Sorry quasi,you belong to the class of pumper elves that blame an analyst who did his job for your losses.The topic grows old,my views are found here,please review:
    messages.finance.yahoo...

    Hope that helps.
    2008 Feb 20 01:17 PM | Link | Reply
  •  
    Mr. Shinnick,

    My issue with JL is he was on the bridge with Caplan when they" hit the iceberg".We probably will never know how involved he was in the bad decisions or how loudly he might have protested. Can we ever shake the suspicion he'd continue to cover up for past sins,his and friends?
    I'd prefer fresh eyes from outside the co. come in to survey the scene and report to shareholders. JMHO.

    As to the banking crisis,I suspect "they" are feeding us the bad news in digestible bites and I'm prepared for possibly years fighting indigestion. Every business day that passes seems to bring a few $billion more in writedowns from all financial corners.
    I smell real fear from Paulson and friends and a "mere $400 bill." wouldn't necessarily engender such a response,again IMHO.
    2008 Feb 20 01:37 PM | Link | Reply
  •  
    Jbmaria,

    You have a point with respect to letting the gas out of the balloon slowly and this impacts all financials including E*Trade. The sillyness went way beyond American subrime although that is the scapegoat, it was funny listening to the British yesterday sort off blame the Northern Rock thing on America, Europe may simply be a few months or a year behind us, but they have some issues that will pop up as well. Welcome to globalization and the beginning of worldwide "correlation." I will say, the old models may simply be irrelevant now. Securitization, and the greed and willful blindness that went with, changed everything.
    2008 Feb 20 01:52 PM | Link | Reply
  •  
    I think that this moves to depreciate the company are just mere tactics to buy the company a cheaper price. Since E*trade has the best technology that does not jam during heavy trading. I hold a position when it was at 3 so I have gained quite a return in one month. prefer to stay with the company a bit longer I guess all the bad news have been already told and the stock is so low that the only way is up.
    2008 Feb 20 02:39 PM | Link | Reply
  •  
    KISS. Keep it simple stupid. Richard's article was enlightening about it being really a mortgage business w/ a brokerage business attached.
    I knew it was in some lousy mortgages but maybe not to the degree Richard indicated. Nonetheless, having been an e-trade customer I went long in the stock awhile back, written some options against it and have it now around $3 and change. We see it as a non expiring option on the company and will hold. @ $5.00 its a money maker.
    2008 Feb 20 03:49 PM | Link | Reply
  •  
    JBMaria,

    Hats off to you -- 20,000 posts and you don't even have a position
    in this stock? Looks like you do this full time.

    Shinnick -- I have not seen you even once question any comment
    or data reported by JBMaria and now I see a clear sense of "lovefest"
    starting between you two with your following comment "Unfamiliar-I am not claiming to be an expert on E*Trade and you seem to have in depth knowledge." So now you are trying to put JBMaria on a
    pedestal and build her credibility. This puts you squarely
    in "manipulator" crowd (they always tend to gang up and never
    question each others data/statements).

    Why did you not question JBMaria's comment about 40Bil loan
    portfolio Vs. 2B market cap? These two number are completely
    unrelated. Loan portfolio is related to customer deposits and
    if anything "cash reserves" is what one needs to look at not stock
    price. But it is a very clever trick used by JBMaria to create a
    fear as though 40B loan portfolio could wipe out 2B market cap
    with losses. The fact is ETFC has nearly 200B in customer assets
    and loan portfolio is just a part of it and these have NOTHING to do with market cap. The fact that you do not question such fear
    mongering tactics and instead shower her with praise; shows that
    you are out of your depth now and would like any support from any
    one who can back you up.

    Have you gone long on BAC already? Any chance BAC may be
    trying to buy ETFC? You suspect the price of ETFC is being kept
    down till the buy-out plays out? Are you part of that "scheme of
    manipulation"?

    Good luck to both of you -- I have said enough. Intelligent readers
    can read through all this and decide for themselves. [Comment edited for abusive language. Commenter put on notice]
    2008 Feb 20 04:38 PM | Link | Reply
  •  
    Following may not be news anymore;

    www.reuters.com/articl...

    Just trying to do arithmatic -- even without considering the growth
    of daily trade or all the possble newly added accounts, suppose Etrade has 211,978 daily trades for the whole year, suppose it's $9.99 per trade, further suppose there are 245 trading days each year (correct me if I am wrong). Then the revenue from trading alone will be 519 million/year.
    2008 Feb 20 05:55 PM | Link | Reply
  •  
    Mr. Shinnick,

    "Naturally, I immediately opened a small position and then I decided to do a little research. I know, that is a little backwards but I was really caught up in the fervency of E*Trade’s supporters. After doing a little digging on their investor relations website, I came to a conclusion that surprised me. E*Trade is not a broker that got in to trouble by delving in to the mortgage business. E*Trade is now a mortgage business that happens to own a brokerage. In fact, the E*Trade brokerage franchise may exist for years merely to try to earn enough money fast enough to keep up with the losses generated by the mortgage and consumer loan book."

    Now that I'm on the outside,no longer an owner,the question becomes when is it safe to get back in the water.You saw water and dove in and then ran an analysis.My stated game plan is to wait until ETFC delivers 1-2 Q's without increased writedowns and pricing returns at least to the less toxic types of mortgage paper.
    I'm aware that could take a longer time than I might have at my age but what other signs or tells of ETFC stability would you want before you allowed your "sainted Mom" to invest.What takes ETFC out of the wild ass gamble category?

    And perhaps a more interesting question is how have ETFC's "troubles" affected the competitive landscape.SCHW appears to be doing well despite the mysterious near term downdraft . Their stated intention to build out their banking arm would appear to mean they will essentially now mimic ETFC's full service model sans the issues with the loan portfolios as I doubt they'll be doing much subprime or "liar loans".
    Ergo,I fail to see how SCHW won't enjoy a huge competitive advantage going out 2-3 years? Obviously the difference in multiples reflects that advantage but is it irresistable or simply "fool's gold"?
    2008 Feb 20 06:36 PM | Link | Reply
  •  
    quasimatter

    Wow! Lovefests and conspiracies. Tell you what, you did a great job of balancing out JBMaria, you seem like an expert too. Thank you.

    JB Maria
    I really can't answer your question regarding SCHW, you are getting in to names I have no familiarity at all with. I will say this, regardless of any "company" risk, the "sector" and "market" risk is palpable these days. All long positions in anything financial, and really anything at all are currently subject to major shocks. You can pick a stock in virtually any sector and wait for your moment on a 300 point down day to make an entry.

    I would love to spend my time looking at individual companies and pick best of breed, etc. The problem is that every time I go long, I feel like a Prarie Dog sticking his head out of his hole only to have the farmer take a shot at me. It does make perfect sense that Schwab would mimic E*Trade, E*Trade's model is not broken, it works great. E*Trade management went beyond that model though (wholesale loans, etc) and got stupd\greedy. From everything I have ever heard E*Trade's model is superb and of course its competitors are going to emulate it and use E*Trade's weakness to their advantage-nothing personal, just business.
    2008 Feb 20 07:17 PM | Link | Reply
  •  
    Mr. Shinnick,

    I warned you the pumper elves don't respond well to caution about ETFC and I'd like to apologize if your civility to me provoked quasi's obvious irrational outbursts. He's obviously not well.

    True enough,investing in financials is walking thru a minefield these days.Still,if you can find some names that aren't involved in reckless lending and are still beaten down,wouldn't one be fishing in the right pond.Names that I'm watching in addition to SCHW are obviously AMTD which I admittedly like less than Chuck.
    (Full disclosure-a few weeks ago I bought a tiny bit at $16.60 thinking it was just too cheap)
    Also scoping ING,reported today good numbers yet minimal writedowns despite exposure to all the things we might fear to be toxic. Not sure how they do that frankly,might be worth some investigative reporting?And a big Canadian banks like TD doesn't seem to be getting hit from bad loans,again somewhat mysterious and with those guys you get a short dollar kicker to boot.

    www.marketwatch.com/Ne...


    So many ideas,so little conviction. <g>
    2008 Feb 20 08:35 PM | Link | Reply
  •  
    And just out to highlight the state of the banking crisis we discussed earlier:
    *******
    US banks borrow $50bn via new Fed facility

    By Gillian Tett
    Financial Times
    February 18, 2008

    US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

    The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

    However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

    “The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

    The Fed announced the TAF tool on December 12 as part of a co-ordinated package of measures unveiled by leading western central banks to calm money markets.

    The measure marks a distinct break from past US policy. Before its introduction, banks either had to raise money in the open market or use the so-called “discount window” for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.

    The Fed has not yet indicated how long the TAF will remain in place.

    But the popularity of the scheme is prompting speculation the reform will stay in place as long as the financial stresses last.
    “Some Fed officials have expressed an interest in keeping and possibly expanding the TAF,” says Michael Feroli, economist at JPMorgan.

    Nevertheless, Mr Feroli said banks now appeared to be using the TAF instead of other funding routes, meaning that the overall level of reserves in the system was remaining constant.

    “The banking system certainly has its problems, however the notion that ... banks have trouble maintaining reserves stems from a superficial reading of the Fed’s statistical reports,” he said.
    2008 Feb 20 08:44 PM | Link | Reply
  •  
    Mr. Shinnick,

    On last thing on the ETFC conundrum. I just read your 1-30-08 article which was excellent.

    seekingalpha.com/artic...

    But frankly,knowing you authored that article and then went out and bought some ETFC is a bit incongruous and not a little amusing.Impulse buying at its finest.
    2008 Feb 20 11:00 PM | Link | Reply
  •  
    After further research with modeling calculation, I would like to ask
    why not just let the number speaking?!

    I won't bore you with those valuation models or excel calculations,
    yet I am more than pleased to share if you are interested.

    The main conclusion is Etrade's 40.9 bil mortgage related is not
    a big problem at all. What matter most are Etrade's own ability
    to generate revenue & the cost of capital of Cidatel's injection.


    Market data, data from Etrade's filing and some assumptions:
    ----------------------...
    Etrade's outstanding share is: 423.8 million

    In 2006 Etrade's net cash inflow is: $629 million
    (Suppose Etrade performs the same in 2008 as in 2006)

    From 2001 to 2006, its average growth is: 17%
    Suppose in the coming years, its average growth is: 10%

    Citadel's injection is: $2.55 billion

    Suppose the cost of debt for Cidadel's injection is: 10%
    (does anyone know what it should be?)

    Etrade's market value as of 02/20/08 closing is: $2.1 billion

    Its current equity beta (after the subprime) is: 2.6

    Etrade's mortgage related value is: 40.9 bil
    Suppose 7.5% of those mortgage related got lost: 3.0675 bil

    10 year treasure is: 3.29%

    Market return is: 12%
    ----------------------...

    With above base data and assumptions, using CAPM model:

    Etrade's WACC is 17.93%

    It's book value is 2.3116 bil

    And it's stock price should be $5.45 per share

    ----------------------...
    Other base Scenario:
    Scenario 1
    All other keeps the same but only 5% of the 40.9 bil get lost.
    Stock price: $7.87
    ----------------------...

    ----------------------...
    Worst Scenarios:
    Scenario 2 (I doubt this will happen)
    All other keeps the same and 10% of the 40.9 bil get lost
    Stock price: $3.04

    Scenario 3 (The end of the world)
    All other keeps the same and 13% of the 40.9 bil get lost
    Stock price: $0.15
    ----------------------...

    ----------------------...
    Better Scenarios:
    Scenario 4
    All other keeps the same but 5% of the 40.9 bil get lost, cost
    of Cidatel's injection is 12%, and Etrade's growth rate is 12%
    Stock price: $9.85

    Scenario 5
    All other keeps the same but 5% of the 40.9 bil get lost, cost
    of Cidatel's injection is 10%, and Etrade's growth rate is 12%
    Stock price: $14.17

    Scenario 6
    All other keeps the same but 5% of the 40.9 bil get lost, cost
    of Cidatel's injection is 8%, and Etrade's growth rate is 12%
    Stock price: $21.44
    ----------------------...

    ----------------------...
    Best Scenario
    Scenario 7
    All other keeps the same but 5% of the 40.9 bil get lost, cost
    of Cidatel's injection is 7.5%, and Etrade's growth rate is 12%
    Stock price: $23.69

    Scenario 8
    All other keeps the same but 2.5% of the 40.9 bil get lost, cost
    of Cidatel's injection is 7.5%, and Etrade's growth rate is 12%
    Stock price: $26.36
    ----------------------...

    ----------------------...
    Other Scenarios to show the importance of the cost of debt and
    Etrade's ability to generate revenue.
    Scenario 9
    All other keeps the same but 15% of the 40.9 bil get lost, cost
    of Cidatel's injection is 8%, and Etrade's growth rate is 12%
    Stock price: $11.79

    Scenario 10
    All other keeps the same but 15% of the 40.9 bil get lost, cost
    of Cidatel's injection is 10%, and Etrade's growth rate is 12%
    Stock price: $4.52
    ----------------------...

    So, 40.9 bil of Etrade's mortgage related is not a big problem at
    all. What matter most are the cost capital of Cidatel's injection
    and Etrade's own ability to generate revenue!

    Please notice that if all the Etrade's tax shield has been taken
    into consideration then its value will higher at each scenario.
    2008 Feb 20 11:32 PM | Link | Reply
  •  
    I have talked with E-trade's IT, analyst, etc, they are brillent and confident, that's why I have bought/kept some more recently. Yes, Mr. Shinnick, I hope you will also have a good sleep tonight.

    2008 Feb 20 11:40 PM | Link | Reply
  •  
    Wow,

    You guys look at investing with alot of passion. I bought ETFC because I like the products and services and I use them. Yes they have problems and those problems have been more than factored into the price of the stock.

    Etrade is not in a position of going bankrupt. It has to be extra careful navigating through the next year or two. If they fail to navigate they could be back in the position of possible BK.

    Not all loans fail, and when loans fail they don't all get together and do it in the same day. If you are long in the stock and you beleive in the idea that the economy will recover then stop getting so excited. August to Novemeber of 2007 is when this all started, it has only been a few months. Once more time has gone underneath these loans they are more supportable. Once the economic situation gets better the loans are more supportable.

    If things fail at ETFC they will probably fail at other institutions as well. Littlle comfort, but we need deversity.

    One thing the author did put out is that ETFC in comparision to WAMU or Countrywide, ETFC has other business units to help support the system through the crisis. A year or two from now ETFC should zoom back.

    I liked the article and glad it came out now and did come out a month ago, zealous shorts would have loved it.

    Prescient11, you are why I love reading this stuff. I think you held the authors feet to the fire.

    Etrade is one of best values in the stock market right now. I love ETFC.
    2008 Feb 21 07:12 AM | Link | Reply
  •  
    Newcomer: Fantastic, thank you for your contribution.

    Jeffyboy: You are right, E*Trade has the brokerage going for it, that is it's saving grace, it it had just been a mortgage bank, I don't think their would have been a company left to write about.

    JB Maria
    I also wrote positively on BAC. I look for "least worst" scenarios and limited downside and generally sell puts..the bet not necessarily being that a given equity will go up, just that it will not go down too much. On long trades, I will inevitably sell calls these days.

    Anyway, as far as the financials in general: Hey, look the tide mysteriously went out and there are so many pretty seashells out there, lets go collect some!
    2008 Feb 21 01:21 PM | Link | Reply
  •  
    JBMaria, no one is hiding. Your comments normally do not need any refutation or response. I cannot believe you cut and pasted an article onto this forum. Bush league. I'm not posting on the Yahoo board until next week. By the way, any time you want to debate I'm game - just save it until next Tuesday.

    And Mr. Shinnick you're free to join us, when I laugh at some responses or comments my wife also looks at me, so I got a kick out of that. Glad to hear you added to your long position. The odds are very high you will be rewarded. My view is that we are at $15 by 1Q. Regards.
    2008 Feb 21 08:56 PM | Link | Reply
  •  
    Brief point of clarification - $15 by 1Q '09, in my opinion.
    2008 Feb 21 09:00 PM | Link | Reply
  •  
    Prescient,

    " I cannot believe you cut and pasted an article onto this forum. Bush league. I'm not posting on the Yahoo board until next week. By the way, any time you want to debate I'm game - just save it until next Tuesday. "

    Why exactly is cutting and pasting an informative article meant to inspire thought and possibly debate "bush league". Are you so vain that you think only your childish utterings worthy of consideration??

    And why exactly should I adhere to your odd schedule and not just post when I wish?

    And frankly,until you refine your thought processes and lose your biases, I have better uses for my time than to debate with
    lightweights.
    2008 Feb 22 12:14 AM | Link | Reply
  •  
    Mr. Shinnick,

    When you wrote this piece I'd bet big money you didn't expect 75 responses. Your welcome, it was a good article on a contentious subject.

    JB
    2008 Feb 22 12:18 AM | Link | Reply
  •  
    Mr. Shinnick: it's fun to read the articale/replys and it's a great chances to learn something real, something can't be read from my taxtbook.

    Prescient11: Glad to get your great insights and I agree with you about its price, but perhapes, considering Druskin's joining the board and the reduce of its risk -- namely Etrade's equity beta reduced from 2.6 to 2.5 (I believe further reductions will happen soon), Etrade's price will get higher and sooner. Guess most people are still in the nightmare/panic of the rumor.

    I rerun the model this morning, with updated information and under the base assumption its book value price should be: $9.55.

    Most company has a market to book value way bigger than 1, yet for Etrade, its market (with yesterday's closing price) to book value is only 0.504. Etrade's value has been completely under-valued.
    2008 Feb 22 09:30 AM | Link | Reply
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    Newcomer:

    One thing for your model, supposing they don't refinance, the fact is that Etrade will be paying 12.5% per annum (I believe I'm right on the per annum part, but the 12.5 percentage is definitely accurate) on $1.75B from Citadel -- the remaining $800M was a cash payment for Etrade's CDO portfolio. Just curious as to how that affects your valuation modeling? Best regards.
    2008 Feb 22 04:46 PM | Link | Reply
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    Prescient11:

    Thanks for the data. Since the first calculation, Etrade's beta has
    been reduced to 2.5 and its market value changed to 2.0bil

    Plugging them in, we have following are the scenario/sensitivities...

    Scenario 1 -- suppose 2.5% of the 40.9 bil mortgage related got lost.
    Growth: 6.00% 7.00%- 8.00%- 9.00%- 10.00% 11.00% 12.00%
    -Price: $9.14 $10.56 $12.29 $14.48 $17.31 $21.12 $25.54

    Scenario 2 -- suppose 5.0% of the 40.9 bil mortgage related got lost.
    Growth: 6.00% 7.00%- 8.00%- 9.00%- 10.00% 11.00% 12.00%
    -Price: $6.73 $8.14- $9.88- $12.06 $14.90 $18.71 $24.13

    Scenario 3 -- suppose 7.5% of the 40.9 bil mortgage related got lost.
    Growth: 6.00% 7.00%- 8.00%- 9.00%- 10.00% 11.00% 12.00%
    -Price: $4.32 $5.73- $7.47- $9.65- $12.48 $16.30 $21.72


    Scenario 4 -- suppose 10% of the 40.9 bil mortgage related got lost.
    Growth: 6.00% 7.00%- 8.00%- 9.00%- 10.00% 11.00% 12.00%
    -Price: $1.90 $3.32- $5.05- $7.24- $10.07 $13.88 $19.30

    My expectation is Etrade's beta changes to 2.00 in three months,and
    there are about 5% of the 40.9 bil mortgage got lost. Then we have
    following expected scenario/sensitivities...
    Growth: 6.00%- 7.00%- 8.00%- 9.00%- 10.00% 11.00% 12.00%
    -Price: $10.18 $12.45 $15.41 $19.42 $25.18 $34.13 $49.95
    2008 Feb 24 10:48 PM | Link | Reply
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    This article talks about the problem loans (assets) but does not mention the non problem loasn(assets) such as AAA rated muncipal securities whicj could be sold to pay off future problem loans, this would result in writedowns but it needs to be taken into account or am i missing something>
    2008 Feb 25 09:05 PM | Link | Reply
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    Thanks for the heads up Rich, I was getting ready to buy some until you gave me cause for pause. Looks like the market agrees.
    2008 Mar 04 01:52 PM | Link | Reply
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    newcomer,

    thank you.

    being a numbers guy, I appreciate this type of stuff. Models are good, and I in good faith have to take your model, the ONLY model I have seen, and go with it.

    I just want to say one thing. I am calling on $15 by the end of the year, prescient is calling $15 1Q09. Close enough when we look at time lines and the fact that I am in at about $4. It was great to see that Prescient corrected the cost of the 1.75B. It was nice to see that you ran the model again with the limited constraint, but the first showed the importance of the variables(and the ones that matter). I have to assume (and hopefully not to liberally), that the powers that be at Etrade know these potentially wayward variables and are taking measures to correct them (i.e. refinance the whole 1.75B with a new win of a government auction). I know very little about all of this, but isn't it possible that Etrade could, over the next year, refinance that down to 8%? Is there a prepayment? et cetera?

    In any case, from what I can see of your numbers, and taking into account quaismatter's account of default rates and how they affect
    the mortgage portfolio, it seems to me like prescient and I are not too far off on our calls, especially if Etrade can muster a 8% growth rate.


    I now, thanks to jbmaria, have earned the name "pumper elf". Wow, I do not know what to say. I am kind of flattered. I guess the light at the end of the tunnel might not be a freight train after all. Imagine that for all of these years I have expected a train, to my suprise, to my suprise. Thank you jbmaria, for bringing me peace.

    And Rich:

    "Anyway, as far as the financials in general: Hey, look the tide mysteriously went out and there are so many pretty seashells out there, lets go collect some!"

    now that is scary . . . very scary. Have you ever heard of a tsunami? That is how people get washed out to sea.

    It is my personal opinion that BAC is about to have one of it's achilles tendons cut. It is already too fat to maneuver too much.
    2008 Mar 09 11:29 AM | Link | Reply
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    daffy,

    yes...I have heard of a Tsunami, that was the point of my joke-the financials as a group are dangerous. In fact, I have been so short the financials that to a degree BAC and ETFC have been my "hedges" on my short positions. Pure mortgage plays are toxic, but with BAC and ETFC you have companies that are beaten down due to their exposure but have a lot more than mortgage exposure going for them (but I am hoping BAC sees the light and punts on CFC).
    2008 Mar 09 02:37 PM | Link | Reply
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    After I wrote that, I figured you must have . . . the "pretty" gave it away. Forgive me for my lack of coffee in the AM.

    If BAC would punt on CFC, then I would retract on the tendon comment. I am not sure I would do a short term play on CFC even if it dropped to $3.00. It just really feels like CFC is REALLY unraveling, and the rope is running out, and it is raining, and someone smeared grease all over El Capitan. There may be something much bigger than two companies here at play.
    2008 Mar 09 04:04 PM | Link | Reply
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    daffy,

    no problem, a lot of people don't get my sense of humor at any time during the day...but you are right on the CFC thing, I feel the same way, maybe a lot of government pressure on BAC to complete the deal..who knows.
    2008 Mar 09 05:50 PM | Link | Reply
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    Do you think E*Trade will be able to sell any of it's $9.7 billion in agency CMOs to freddie and fannie after the 200 billion was freed up?

    "Government Sponsored Enterprises (GSEs) (Freddie Mac, Fannie Mae, or Ginnie Mae). GSE guaranteed loans can serve as collateral for "Agency CMOs", which are subject to interest rate risk but not credit risk. Loans not meeting these criteria are referred to as "Non-Conforming", and can serve as collateral "private label mortgage bonds", which are also called "whole loan CMOs". "
    - Taken from Wikipedia

    Since they are backing the default risk, wouldn't these be the instruments they are looking to buy?

    Serious question to all comers.
    2008 Mar 19 08:10 PM | Link | Reply
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    ETFC = $3.36
    CFC = $4.82
    BAC = $35.68
    2008 Apr 15 01:44 PM | Link | Reply
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    What is JBMARIA's agenda???

    Not only that s/he writes 24/7 negatively on E*Trade in such venues like Yahoo ETFC message board, but strangely positively on E*Trade's competitors on the discussion boards of E*Trade, even positively on the Schwab fund that a lot of their investors are now alleging being misled and suffer substantial losses, yet JBMARIA also claims that s/he HOLDs E*Trade shares!

    So JBMARIA,

    Do you mislead message/blog boards when you say you "hold" ETFC?

    Do you actually short ETFC?

    Do you hold SCHW or any of E*Trade competitors' stocks?

    Do you work, or in the loose sense of the word "work", for one or more competitor(s) of E*Trade and manufacture all your negative posts for some hidden agenda, like an attempt for E*Trade's competitor to acquire E*Trade on the cheap?

    p.s. another question: is JBMARIA and this article's author, Richard Shinnick, one and the same person??? I get this gut feel by the striking similarity of their writing and attacking styles - planting vague doubt, and even wordings and also by a strangely, almost self-praising kind of praise and defence for "Richard Shinnick" by "JBMARIA", and vice versa???!!! I hope his/her/their answer will be a "no" and a true "no", for this country has already enough crimes, financial or otherwise...
    2008 May 23 09:37 PM | Link | Reply
  •  
    aajones.

    " The real question is what are you doing to perpetuate a better America? Keep your posts of our economy in a positive light and you will see the light... However, throw on dire scenarios and focus on the ultimate risk, and you will keep the spirit of recovery in the gutter."

    this really sums up everything. If we start to see a glass half full, instead of empty, that would improve the situation a great deal.

    prescient11,

    I am long ETFC because I like their brand, yes the trading platform and customer service. They have also performed miracles raising capital. However, reading your posts, it definitely learned a lot more...
    Thank You!
    Feb 27 02:56 AM | Link | Reply
  •  
    Wonderful! Wonderful! Wonderful! I loved the stream of conversation this article started! I am long etfc and intend to double down at these extremely low prices. And yes, I call it gambling at this point...exciting, huh?
    ;-) Good luck and God bless to all. And thank you to all who shared their thoughts here.
    Mar 08 10:30 PM | Link | Reply
  •  
    Thank you Sherlock
    May 31 09:04 AM | Link | Reply
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