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.

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.

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.

Countering the AP's 'E*Trade Financial Earnings Preview'

I'm a long-time customer and have been holding ETFC long but I got out of my position after hours (I wanted to sleep tonight). The stock will probably retreat into the $2 range yet again, almost certainly with the next macro mortgage meltdown, which is inevitable in the current economy.

I'd like to know how much of their loan portfolio is ALT-A and Option-A (e.g., the next mortgage cliff)? Is anything else hidden shareholders should know about? I was disturbed by the announcement regarding Fannie and Freddie, was this well known (e.g., Cindy, did you know)? Why hadn't E*Trade disposed of these non-core positions before the recent free fall? I guess they were "trying" to avoid taking more losses in 2Q.

Financials like BAC and WFC will be rewarded with increased business and stronger earning in Q3 and Q4 as opportunity, customers and money migrate their way. E*Trade has a longer, slower trajectory to recovery due to past transgressions. Great company and market opportunity, but saddled with untimely baggage left by the previous management team.

Disclosure: No longer long