Read This Before Buying E*Trade
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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
This article has 87 comments:
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.
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.
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
Shinnick
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.
Shinnick
To be fair, the mortgage paper carried by E*Trade is generally not subprime.
more_compost
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.
z
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
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.
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
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.
Shinnick
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.
Game, set, and match.
Shinnick
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.
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.
Shinnick
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.
Shinnick
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.
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&quo... 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.
Shinnick
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.
"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.
Shinnick
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.
z
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!!!
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...
Shinnick
Hallelujah brother! Hallelujah!
Very enjoyable!
Shinnick
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.
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...
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...
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.
57
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."
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?
Shinnick
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.
Shinnick
Found the original title
E*Trade: What Investors Need To Know!
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&quo... (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&qu... 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.
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.
Shinnick
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.
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.
Shinnick
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.
Shinnick
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.
..."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.
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.
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.
Shinnick
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.
Shinnick
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.
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.
Shinnick
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.
Shinnick
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.
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
"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????
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 muc