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Dire Straits for E Trade

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Popular online broker, and bank, E Trade Financial Corporation (ETFC), may be the latest company to fall into the subprime and CDO vortex, facing trouble on November 12 as its stock traded in mid-afternoon at $3.58, down $5.01. That’s more than 58% lower Friday’s closing price of $8.59. The company filed a 10Q on Friday, November 9, and Citigroup analyst Prashant Bhatia downgraded ETFC in a Sunday, November 11, report. The analyst explained in the report that “the firm could face a potential run-on-the-bank scenario.” Bhatia’s report includes “a 15% probability of bankruptcy.” Bhatia has changed his risk rating of ETFC to “Speculative Risk.”

The Citigroup analyst’s report, obtained by Investment Advisor, listed a target price for the stock of $7.50, down from $13.00, and E Trade’s stock blew right through that $7.50 price target at the market’s opening, with the stock price opening at $5.50. As of mid-afternoon, sellers outnumbered buyers 4.5 to 1. The Citigroup report goes on to note that “50% of E Trade deposits” an aggregate $15 billion, are over the FDIC insurance limit of $100,000, “and we view these deposits as having a higher risk of leaving. The $15 billion of deposits in 57,000 accounts represent roughly 25% of E*Trade’s funding, and deposit attrition could lead to forced selling of the assets that are supported by these deposits.”

Bhatia says in the report that the deposit concerns; additional write-downs in E Trade’s subprime and CDO portfolio–including certain parts of the portfolio that were previously AAA-rated; and the announcement of “an SEC inquiry, and the filing of “three class-action lawsuits, and three verified shareholder derivative complaints,” in October, are troubling. E Trade’s home equity portfolio of more than $12 billion is problematic, as well, Bhatia explains in the report, with “over 60% of the home equity loan portfolio not having ‘full documentation,’” and he estimates that the company will have to make higher loan-loss provisions of “$100 million per quarter going forward (versus $10 million to $13 million per quarter in 2006).”