gwinner

Why Is E*Trade's CEO Giving the Company to Citadel?

The magnitude of the problem exposed in the fall of 2007, a $3 billion dollar CDO and $42 billion mortgage/HELOC portfolio, is the Augean Stables for the mighty E*Trade brokerage. As a loyal and long-time E*Trade customer, it is easy to fall in love with this stock. However, previous management made terrible decisions the weight of which has been and will continue to be staggering.

Citadel knows E*Trade better than anyone. It would not be in their best interest to overpay or underpay for E*Trade stock. E*Trade management telegraphed that current shareholders would be diluted and the market discounted the statement. In fact, the market reacted insanely last week upon learning that Ken Griffin had joined the board and a deal was forthcoming.

Wouldn't common sense suggest that meant current shareholders were about to be significantly diluted, as promised?

Wouldn't E*Trade management wait until it had announced good May results before dropping the dilution bomb?

Wouldn't waiting to make the dilution announcement a day later have been more manipulative of the stock price than timing it the way they did?

Citadel also has, from the initial deal, a competency in disposing bad loans (on which I'm guessing it has mined a significant profit). It is uncertain what that may mean for the future of E*Trade, but they are going to be inseparable from Citadel for the near future and that business knowledge in a close partner could be invaluable for survival.

That E*Trade no longer offers industry leading rates on savings accounts has got to be hurting deposits. Perhaps by easing the debt burden payed on notes they will resume paying high-interest rates to attract new customers and retain current customer deposits. I hope so. If new account growth slows or deposits move elsewhere, they may be toast.

Most emphatically, it may not matter that the mortgage loan portfolio performance is improving right now. The Option ARM/ALT-A reset/recast disaster begins this fall and will last 3 years. That "may" strike at the core of the E*Trade portfolio. Couple that with the ongoing HELOC bleeding and one would have to believe that management at E*Trade is very concerned.

FDIC Reserve Ratio Plummets

With the FDIC insurance fund so vulnerable and the government guarantees are becoming less meaningful due to staggering deficit/debt projections and office balance sheet items like social security, we are becoming increasingly vulnerable to a "run on the entire banking system".

Revisiting WaMu

Don't forget the role that Charles Schumer played in all this. It was his comments that caused the run on a well-capitalized WAMU. He's experienced and smart enough to know what his words might do, so they had to be intentional.

Yet another example of "government stimulus".

The Next Wave of Foreclosures

"What to do about this"?

Well, "we've" already done it. Monetary and fiscal policy since 9/08 has pointed to a policy that suggests "they" intend to inflate us out of the problem. It is risky business. Leave the peddle to the metal just a little too long and your have our next really ugly economic problem, hyperinflation.

Ironically, in spite of all the rhetoric of the the Obama admin of being the friend of the working man, inflation and hyperinflation are the worst form of "taxation" on the poor and middle class (perhaps with the exception of state lotteries, but at least that is discretionary). Those with assets and "in the know" (e.g. the wealthy) stand to profit from inflation. Unintended consequences?

Construction Plummeting Is Good News for Housing

With materials costs down, subs bidding aggressively for work and fire sales on developer owned lots, there's never been a better time in recent history to build for those who "can". Some of those who "can" are sitting on the sidelines renting and patiently waiting for the economic planets to align.

This is a deep cycle, but it is a cycle. Government fiscal and monetary policy are clearly aimed at an attempt to "safely" inflate us out of the financial mess and interest rates are at historic lows. However, if the guys at the controls don't get the "safely" part right, look out if you don't own a home with a fixed payment. If you're renting -- inflation won't be your friend and hyperinflation will be a cruel master.

I'm not calling bottom on the real estate market, rather I'm pointing out that there are compelling economic reasons to consider building a home now if that's been a harbored desire. It is also a form of personal stimulus built solidly on the backbone of private enterprise and capitalism.

Suburban Housing Markets Are Unsustainable (Part 2)

> A nice dose of runaway inflation could solve this dilemma. Are you
> up for it?

You'd better be. Once the gravity of the situation became "clear" the Fed charted monetary policy that will result in inflation. I've been of the belief that was the end game all along to re-inflate housing prices "nominally". That will come at a price and there are already educated calls to take the foot off the peddle NOW before it's too late and we overshoot with hyperinflation. The fact that no one really knows where we are economically is partly a result of the aggressive counter measures. We're in uncharted waters everywhere you look.

Thank you for the article. More than any other I've read, it accurately summarizes cultural, economic and political facts regarding the financial crisis.

California: More than Just Economic Problems (Plus Some Potential Solutions)

One by one we vote in the only way the politicians will understand, with our feet. Born in California 48 years ago, the paradise I once knew in San Diego left me and I've found something closer to what I knew far away from the ocean. Politically, culturally and economically I see greener pastuers elsewhere. With local and state civic and natural resources on the decline, I've purchased property elsewhere and will make my move this summer. Financially, I estimate an instant $40k per year raise in after tax savings, money I would have paid to stay in San Diego, if other issues discussed in this article and subsequent posts were not in play.

E*Trade: Why the Strange Earnings Report?

Would Layton risk going to jail by manipulating numbers to the demise of current shareholders? I agree that "missing" by a penny had to be intentional given the reasoning expressed in this analysis, but were the motives to try to get TARP funds? Or something else? Also, is E*Trade being more forthright than others holding large loan portfolios (it was stated that they are ahead of the game compared to others)? So, are they reserving for the ALT-A/Option ARM calamity that is about to hit?

The Next Leg up in Financials

I called E*Trade the first day they started offering mortgages again and the call demand was already high, with no promotion. Jason's analysis is sound, but it is a mixed bag. Most posters still don't seem to understand that E*Trade got rid of the ugliest problem, the "subprime" CDO's, to Citadel in 2007. My understanding is that most of the mortgages E*Trade originated were of reasonable high quality, with an average FICA of around 720. And E*Trade is reserved for losses into the future. However, assume that most who are refinancing now are those who "can" and only those loans will transfer off the E*Trade books (deleverging) and E*Trade will earn origination fees. That's all good for E*Trade. However, it stands to reason that the worst case mortgages won't be able to refinance and will remain on E*Trade books to either weather the storm or croak. So, a higher percentage of the remaining mortgages will be "at risk" when the great refi of 2009 is done. Worst case, E*Trade will be in a first lien position. Unfortunately, the second biggest problem after getting rid of the CDO's has been the HELOC portfolio. They've done their best to close untapped lines, but the portfolio is still nervously large. BAC has a much larger problem with the CountryWide portfolio, but is a cash generating monster. That's another reason why Ken Lewis still smiles.

Long on ETFC and BAC.

Red Hat Poised to Beat the Street in Upcoming Report

Just ten years ago Scott McNeally was gloating about Linux eating Microsoft's lunch. Well, it ate his and IBM finally appears as a vulture descending upon the still moving carcass. In the mean time, Red Hat has continue to steadily gain market share and expand its product offering, even recently working through a technology arrangement with Microsoft. Red Hat's open source, subscription-based business model is better for both the vendor and customer. For the vendor, it stabilizes the revenue stream. No more need to hoist upon the customer releases just to boost numbers. For the customer, large upfront costs are avoided, spending become predictable and vendor lock-in is avoided.

E*Trade: A Bet Worth Making

Dissenting Opinion needs to include E*Trade's huge advertising burn into his/her interesting models. That was strategic, to keep new accounts and assets coming in. However, E*Trade recently decided to significantly reduce the ad burn. I think getting back into the mortgage business is a huge statement, if you trust the current management team.

I just called the E*Trade Mortgage number. As of today, they have started offering mortgages again. I think that is good news and another huge statement, if you trust the current management team.

Disclosure: Long on E*Trade, long-time satisfied customer and someone who trusts the current management team.

Why Is Everyone Blaming the CEOs? It's the Government's Fault

We need Mad Max's Thunderdome. If nothing else, the entertainment value would provide temporary relief from reading the dismal outlook at Seeking Alpha.

Put Ken Lewis in with Barney Frank first. Two men enter, one "man" leaves. I know who my money would be on.

New Home Market Inches Closer to Normal

No job equals no down payment or qualifying for a loan.The effect of the burst of the housing bubble may be played out long before the housing market returns to normal if unemployment continues to soar and the recession lasts long.

In San Diego, I'm still seeing long lines for gas at CostCo to save only a dollar or two on a tank of gas in a well off area. The US consumer is frightened and holding on to every dollar tightly.

John Thain Called Out by the President

If this is the way wire line brokers managed their own houses, why would anyone want them to manage their money. I'm looking for E*Trade, Schwabb and TD Ameritrade to benefit in two ways: 1) More investors are taking control of their own portfolios, 2) Brokers with trust relationships are leaving the wire lines to form their own boutique firms that use the discount trading platforms to execute trades for their customers.

High publicity stories of abuse like this by a wire line CEO can only accelerate this process.

Bucking the Trend with a Microsoft Purchase

Thought I can't fault the fundamentals analysis, the warning signs of market change should not be overlooked. Google is killing Microsoft in search and hosted collaborative apps. Redhat is starting to eat into Microsoft in the enterprise like they did to Sun. The impact won't be as dramatic, but the shift is underway. And, new enterprise business is tough right now for everyone. In the technology sector, these changes are often swift and merciless, so watch your downside with stops.