Shares in online broking firm E*Trade fell by over 50% Monday on speculation that the company may file for bankruptcy protection due to exposure to bad debt as part of the wider sub-prime mortgage crisis.
E*Trade is a granddaddy amongst online service providers, having been found in 1991 by TradePlus as a e-stock broking service for users of America Online and Compuserve. The company boomed during Web 1.0, and despite the downturn continued to thrive as more and more share owners moved away from traditional high priced broker services to low price online alternatives.
E*Trade’s quest to expand its business and sustain growth may end up being its downfall; the company built a “significant” mortgage business providing loans to its customers, but in doing so moved away from the fundamental product that had kept them well during previous downturns.
Citi Investment Research analyst Prashant Bhatia said that the loan writedowns and a Securities and Exchange Commission inquiry “could lead to a significant number of clients closing accounts,” suggesting a run on E*Trade accounts may be possible. E*Trade has a $3 billion loan exposure with a market cap of just $1.52 billion.
As I understand it the $3 billion is the estimated writedowns not the total loan exposure.
If we take the market cap before the share price collapse at $3.7bn then deduct a subsequent writedown of 3bn this would give a market cap of $0.7bn. In reality the market only penalised the company’s value by $2.2bn, this reflects the fact that loan writedowns have little impact on cashflow which is what keeps the company running.
The biggest risk is a liquidity crisis of funding its loans. Not sure the breakdown between wholesale funding (other banks) and retail funding(individual depositors) but with an online bank it makes little difference as depositors can easily withdraw deposits.
Northern Rock in the UK was taken down by a liquidity crisis and not because it couldn’t cover its loan writedowns.
My understanding was the $3b was the loan exposure. Obviously not all of that will be bad debt, but even if a decent portion of it was, presuming that the debt is tied to bonds and lending (which I believe it is) you’ve got a massive liquidity crisis waiting to happen.
Very Good!!
How many total companies in TechCrunch’s Deadpool. How many point percentage of total companies end into deadpool annually and monthly.
http://tekno-wo...ld.blogspot.com
here is the message they have posted to their customers:
This is a challenging time for the financial services industry. Bad news in the credit, housing, and stock markets continues to dominate and E*TRADE is not immune to these market conditions.
However, you, our customers, should know that we continue to be well capitalized by regulatory standards. As a matter of fact, we could absorb an immediate write down in excess of $1 billion and still remain well capitalized. Nobody knows for certain what the ultimate impact will be from these markets, but it is our expectation that news in the market will get worse before it gets better and, armed with these expectations, we are taking prudent measures to effectively manage the company’s balance sheet.
We will continue to earn your confidence, providing state-of-the-art asset protection, including E*TRADE’s Complete Protection Guarantee, SIPC Protection for E*TRADE Securities customers and FDIC Insurance for E*TRADE Bank customers.
We appreciate the opportunity to continue to serve you and your investing needs.
Damnit.. I have a broker account on etrade.. I think that they have excellent services ..
if indeed they file for bankruptcies, I’m doomed.. I use their services to help me bank in my foreign US money…
before going under they will most likely have their customer accounts and assets taken over by one of their competitors. Their user base is quite valuable and places like scottrade or td ameritrade would love to monopolize on this.
Can we PLEASE have a filter on the TechCrunch home page and RSS Feeds to filter out Duncan’s posts!???
No surprise.
I never really liked their service when I was one of their clients. Even after I closed my account with them, they kept sending me account statuses for a .01 balance. Over time, that seems like a costly practice. I moved my accounts over to TD and then over to Scottrade.
I think google should buy etrade of they are headed for death. Google finance is a great product that needs a wider platform. Integartion with brokerage website is quite amazing possibility.
When I read about this, I shot to the nearest ATM and got my money out… Is this just speculation or is it real that they would be filing bankruptcies?? or part of their operations would be singled out only? Like their loan services..
Anyone know a news corner where you can follow up closely about this? It’s really important to me..
Etrade heading for bankruptcy? if so, this is big.
My advice to you all: Don’t believe it, unless you read it off of CNNMoney…because TC is known for speculating on rumors.
Duncan, please, please do some research before you start writing. TechCrunch is an influential site, and your misinformation and speculation based on untruths helps form the opinions of your readers.
For a more balanced, informed article, head over to GigaOm:
http://gigaom.c...o-little-words/
PS. Market Cap has nothing to do with this situation. Last time I checked, Apple has a market cap of 134 Billion. Does that mean they could lose 133 Billion this quarter, and still be a viable company?
Reporting on financial markets is a bit tricky. I think he wanted to expose the story, but the headline hints at speculation that E*Trade will go under. E*Trade is a well established brand will billions in revenues, and millions of customers who trust E*Trade to handle their finances. They are not one of the thousands of social networking sites that have fallen by the wayside. Be careful how you characterize this story, because, as you can see, many of you readers have accounts with E*Trade.
My old company used etrade for their stock purchase plan. I’ve got a fair number of shares there. That’s not at risk is it? Should I move those shares to my other broker?
This surprised the heck out of me… if it turns out to be true a heck of a lot of customers will be looking for alternatives (a boom for their competition). Lesson learned… don’t get too far off-base no matter how lucrative it may seem. If it can (maybe) happen to e*trade then it can happen to any business!
Jon
As many other commenters have pointed out, market cap has nothing to do with bankruptcy. I usually don’t critique the author, but there seems to be a quota of articles that has to be completed here, which explains absolutely shoddy reporting.
Can you look at the balance sheet information first, analyze the quality of assets there, look at what liabilities they have (in terms of account holder balances), income statements and cash-flows and then make a judgment about the possibility of bankruptcy?
@SC,
That would make for the most boring blog of all time.
Duncan doesn’t “research”. He just skims the latest headlines and tries to regurgitate the best he can.
However, when he doesn’t know much about the subject matter, it sometimes turns out not so great.
ETrade is back uo by 15%. And since when has TC become interested in financial sector and stocks
Duncan,
This is an incredibly irresponsible post and you are on your way to making this a self-fulfilling prophecy, as did the Citi analyst who idiotically suggested the likelihood of bankruptcy (which only became a possibility after Citi published its report). Clearly if a sufficient portion of ETrade’s customers pull their assets out of their accounts, ETrade can go bankrupt — but customers are only doing this because of your actions and those of Citi, not because of any inherent problems at ETrade. Etrade’s problems and exposure to the mortgage market are no different today or yesterday than they were 2-3 weeks ago. The difference is that there are now several people yelling “fire!” in a crowded theater.
When a company has assets that it needs to mark to market, and there is no market for said assets, it leads to a loss that has minimal effect on cashflow. In fact, as long as mortgage-holders are not insolvent, mortgage backed securities may actually be a pretty good investment today as you can still earn interest and acquire the mortgages for pennies on the dollar. The only rub is that you won’t be able to sell what would normally be a freely traded stock. Imagine a stock that pays a good dividend but that can’t be sold for 5 years. As long as you hold on for the 5 years, you’re in good shape, but if you need liquidity, you’re screwed.
The market cap of a company has nothing to do with its revenue, cash flow, or liquidity. In theory, they should be related, but the market cap of a company has much more to do with buy/sell demand. (Look at Facebook).
I would hope you would clarify your post and not engage in such incendiary posts in the future.
Bill
(I have zero affiliation with ETrade)
what a load of rubbish – please do your homework – derelict of any journalistic responsibility – i am surprised you aren’t sued.
Duncan Heading To The Laid Off Pool? His articles are getting more and more moronic. Commenters are getting sick of him. One commenter even requested a filter to not show his stories in the RSS feed. It’s a logical next step to think that he may be getting laid off tomorrow.
#8.
I have a duncan filter. Whenever I see a post by him, I disregard whatever premise it is based on, and I try (although this last part is very difficult) to ignore the mangled grammar.
In previous postings I thought comments were overly harsh on Duncan. However, I agree with many of the criticisms from TC readers on this piece, Duncan really should have done his homework.
What this all says to me is that it’s probably a pretty good time to buy some ETrade shares.
#11 “When I read about this, I shot to the nearest ATM and got my money out…”
I thought there’s a $300 withdrawal limit per day on E*trade ATMs inside Target and Chevron stores.
Ugh, Google Finance is hideous.
E*Trade was unjustly punished. Over $8b has been knocked off its market cap for a $3b risk? The Citigroup analyst also is a competitor to E*Trade, which seems highly irresponsible. Maybe an E*Trade analyst should say that Citigroup has a 10% of going to the deadpool and that online brokerages are recovering and see what happens
http://fishtrai...7/11/12/etrade/
Oh god, i almost set up an investment account on Etrade. Glad i did not.
Oh god, i almost to set up an investment account on Etrade. Glad i did not.
Get the facts straight: The write downs came from third party mortgages i.e. the wholesale mortgage business, and less from their core retail banking business. Don’t write about it if you don’t have a clue. The chance of bankruptcy is low–they still have a decent balance sheet. And also, Google Finance really looks terrible.
I have $5 mil in ETrade and I’m pulling them out as we speak.
I just purchased 1,200 shares of Etrade to add to my existing holdings. The company had a market cap of $11B just four months ago. It is true that their exposure is significantly higher than the $3B you see quoted by TC. Nonetheless, it would be hard to believe that their exposure is large enough to wipe out almost $10B in market value over such a short time frame. This is a good buying opportunity.
Not only crap reporting but more perspective is needed.
In the unlikely event that your broker goes bankrupt, this does not mean you lose your investments.
They should be in a segregated protected account.
the company dying does not mean your cash dying – of course illegal skimming aside.
let me explain with an example. It is ILLEGAL for Etrade to say ” darn, we are losing money” and then sell YOUR IBM stock to cover the losses
What is the most cost effectively online broker I can use now? any suggestion?
Bill Hunter, Your post is to be commended.
Mart
bye bye blogging, hello duncan doughnuts
here’s one i picked up on a random google discussion forum:
take all your investment money under your etrade account and put it on actual etrade stock, if etrade pulls out, then you have a hefty profit as price will go up. if etrade sinks, then you loose your money, but being that you would loose your money ANYWAY from the sink, then there’s assymetrical risk exposure!
btw, like michael woo up there, i’m an international investor with money inside etrade, cant get it from here immediately without shuffling way too many documents around so, i’m sticking with it (and also, not entirely sure what the ramifications of not beins a us citizen have on SIPC and other-type insurances), ignoring the news and hoping that if push comes to shove, some competitor will step in and grab us customers. etrade still seems to be afoot though.
here’s one in case people want to follow up on this issue:
http://news.goo...ashant+Bhatia+e*trade&as_drrb=q&as_qdr=h&as_mind=12&as_minm=11&as_maxd=13&as_maxm=11
-mp
-mp
Agree that this post is poor journalism. Better journalism would have identified the ETFC situation as extremely oversold.
“speculation that the company may file for bankruptcy protection”
No. One (one!) analyst mentioned bankruptcy and suggested it was highly unlikely.
“moved away from the fundamental product that had kept them well”
No. Etrade’s core business is doing as well as ever according to the same press release that you evidently did not read.
I’ve read TC since 2005, and I’ve never been compelled to reply to any article until this piece of trash. If this were just some little blog, no big deal. But TC should be held to a higher standard than this when “reporting” on a major publicly traded financial institution. Is the author short on ETFC? Fire this guy.
I thought mike fired duncan? damn.
Bravo! Bravo!
Duncan, Etrade’s not a startup. why would you consider worthy of the deadpool?
Some of us brought the stock yesterday and are up 40% today. Techcrunch should do its homework.
My company, Washington Mutual Bank, also had a 50% drop in it’s stock recently (from 46 to 19) http://finance....om/finance?q=wm.
Please add us to the Dead Pool as well.
wow… I remember the time when E*Trade was the king of innovation…
Ahh Since this is just a speculation by Duncan, I’m all relieved. Today their shares bounced back up to $5.50 which is a big relieve to me.
At first, I got a shock of my life when I read Duncan’s post saying that this company might go bankrupt with shares selling as low as $3.30
I have been a loyal etrade user for 1 year now and I think they provide excellent services.
*I should have bought some of their own share when it hit rock bottom and make a couple of thousands today*
I think I have found a new broker http://www.sogoinvest.com
They are offering stock trading at $3 per trade. Fractional stock shares are also available.