Will E*Trade Take the TARP Tack?

Posted by: Ben Steverman on April 29, 2009

A full-scale crisis hit the world’s financial system last fall, but for E*Trade Financial (ETFC) by that point it was old hat. A crisis of confidence began for E*Trade a full year earlier.

Unfortunately for E*Trade, an early start to the crisis hasn’t meant an early end. The online brokerage’s latest earnings report caused E*Trade shares to drop 34% on Apr. 29 to close at 1.63.

In November 2007, a Citigroup analyst warned the firm had a 15% chance of going bankrupt. E*Trade’s problem — then and now — wasn’t its online brokerage business; others in the industry had long admired the firm’s technology platform. Rather, E*Trade executives had loaded up on toxic subprime assets in the firm’s banking unit. The Citi analyst worried E*Trade customers could get spooked by huge losses on E*Trade’s balance sheet and pull their money out.

In E*Trade’s latest quarterly earnings report, there is certainly good news: A loss of 41 cents per share was close to what Wall Street had expected. Customers continue to use E*Trade’s brokerage: One measure of activity, “daily average revenue trades,” jumped 18.2% from February to March. Also, delinquencies fell on home equity loans and other outstanding loans. “Overall, credit performance appears to have stabilized and shown some signs of improvement,” wrote FBR Capital Markets analyst Matt Snowling.

E*Trade’s problem, however, is a big one: Its main banking regulator (the Office of Thrift Supervision) has told E*Trade it needs to raise more capital and cut its debt load — soon.

Snowling estimates E*Trade may need another $400 to $450 million in capital, and must pay down about $1.7 billion in debt, for a total of $2.1 billion in new financing. That’s a staggering number considering the entire market value of E*Trade stock was, after Apr. 29’s decline, $932.4 million.

E*Trade shares plunged because of the strong possibility the firm will have to issue hundreds of millions of new shares, heavily diluting current shareholders’ stakes in the company. As Raymond James analyst Patrick O’Shaughnessy wrote on Apr. 29:

There is no certainty over whether the firm will be able to find the necessary capital and how much it will raise. We don’t believe it would be a stretch to envision a doubling or even tripling of the common share count, however.

One possibility, raised by E*Trade, is that the firm could seek federal bailout funds from the U.S. Treasury. However, the firm warned this “would also produce significant dilution.” Also, it involves waiting for bureaucrats to approve its request: “The company can not predict when or if its application will be acted upon,” E*Trade said in a statement.

E*Trade tried to emphasize the positive in its earnings announcement, pointing to its busy online brokerage. But, at a time like this, E*Trade’s main business unit is irrelevant to shareholders, paling in significance to the problems at its banking unit.

O’Shaughnessy writes:

Despite the strong metrics of the brokerage business, we continue to believe that the performance of the unit is relatively immaterial to E*Trade’s share price given the overhang of banking losses.

And so, for E*Trade, the financial crisis continues.

Reader Comments

Class action if you please

May 1, 2009 7:44 PM

It seems illegal what they did a few days ago...wasting everybody's shares as soon as trading ended. They did it at the beginning of After Market Hours so Stops would become useless... Bye bye...25 thousand dollars. I'm sure teh CEO made out on the deal.

Class action if you please

May 1, 2009 7:54 PM

It seems illegal what they did a few days ago...wasting everybody's shares as soon as trading ended. They did it at the beginning of After Market Hours so Stops would become useless... Bye bye...25 thousand dollars. I'm sure teh CEO made out on the deal.

Ioannis

May 3, 2009 2:15 PM

I would like to ask if the e-trade bankrupt what happen with the money we have in stock that we have buy via e-trade
Thank
IG

pheobe

May 5, 2009 9:49 PM

It seems illegal what they did a few days ago...
http://www.customs-data.net.cn/American-Customs-Data/
wasting everybody's shares as soon as trading ended. They did it at the beginning of After Market Hours so Stops would become useless... Bye bye...25 thousand dollars. I'm sure teh CEO made out on the deal.
http://www.customs-data.net.cn/BAR-HARBOR-ME/

Greg

May 22, 2009 2:12 PM

ETFC is not looking out for shareholders.

They stated on the 'CC they COULD have posted a $500MM PROFIT under the new M2M rules everyone is doing but CHOSE not to.

They, incredibly, opted for a wider than expected loss.

By not posting a profit and seeing a huge surge in stock price which they could have easily sold to replenish OTS required cash-reserves, they told Wall Street they want the stock lower.

Oh, they are also owened by a hedge-fund. Don't they short stocks a lot?

Gee.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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