The buzz today is that bad mortgage-related bets may end up costing E*Trade Financial its solvency, with National Mortgage News citing a Citigroup analyst as saying there is a 15 percent chance the depository will file for Chapter 11 bankruptcy protection. NMN isn't alone, with market commentary at Forbes speculating that E*Trade could be going out of business:
According to a recent E*Trade's Securities and Exchange Commission filing, 70% of the firm's total assets are related to residential real estate loans and mortgage-backed and asset-backed securities. In that filling the company warned that "overall pressure in the residential real estate market including slowing home price appreciation or depreciation, rising mortgage interest rates and tighter mortgage lending guidelines across the industry are impacting the mortgage portfolio performance, which could drive additional charge-offs in the future." With wide exposure to the subprime mess, E*Trade is looking like a risky bet, according to Citi analyst Prashant Bhatia. He downgraded the company to "sell" from "hold," and lowered his price target to $7.50 from $13.
The company disclosed late Friday that its $3.0 billion portfolio of of ABS holdings has $450 million of exposure to the CDO market and was at significant risk due to worsening conditions:
Management believes the additional deterioration observed since September 30 will likely result in write downs that exceed the previous expectations included in the Company's 2007 earnings outlook updated on October 17, and investors should no longer expect these earnings levels to be achieved. Actual securities-related losses will depend on future market developments, including the potential for future downgrades by rating agencies, which are extremely difficult to predict in this environment. Accordingly, management believes it is no longer beneficial to provide earnings expectations for the remainder of the year.
The stock clearly took a beating in Monday trading, as shares plunged 54.5 percent in early afternoon trading to $3.91.