Richard Shinnick

Read This Before Buying E*Trade

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.

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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).

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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!

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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"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.

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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.

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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.

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Prescient:
Found the original title
E*Trade: What Investors Need To Know!

Read This Before Buying E*Trade

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.