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Careful with E-Trade

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April 27, 2008 – Comments (7) | RELATED TICKERS: ETFC

E-Trade is having major upper management turnover, no doubt over its almost bankrupcy and extreme challenges due to its involvement in the subprime mortgage mess.

I would not be betting that they are out of trouble yet and I don't see these two leaving as a good sign, more a get out while you can kind of move. 

I just had another look at the deal that gave them a $2.55 billion cash injection when they sold $3 billion of mortgage assets at the same time. 

So, these assets were on the books for $3 billion and they got $800 million for them, immediately taking a $2.2 billion loss. 

Citdel put up $1.6 billion in notes paying 12.5%, or a debt servicing charge of $200 million per year.

At the same time Citdel gets 20% of E-Trade -- I am not sure where or how that works out.  They also bought $150 million of E-Trade at what seemed to be the prices retail investors would have paid, so 16x as many assets at fire sale prices, which may or may not be fair value after the Great Deleveraging.

Their income statement looks like a disaster.  I'm having a closer look and look back historically to see where the income might come from to cover their problem of costs exceeding income.  On a quick look I question how much of the income was coming from their high risk mortgage activities.  What would the financial statements look like with that stuff excluded?  They have $180 million less revenue this quarter compared to the quarter one year ago.  Out of that difference $105 million went to gross profit.  Then there is an extra $60 million in interest expense.  There is an extra $15 million in administration expenses.  Depreciation and ammortization are up.  I don't see where the money comes from so they stop the losses. 

The gross profit margin was 35-36% and now it is 31%.  That doesn't include the extra administration expenses, or the extra interest expenses.  Additionally there will be more write-off from their mortgages.

Speaking of leverage, E-trade still has a whopping 122 times.  I personally think you've got to be insane to have an account with them or to buy their shares.  This is simply a very good way to ask for trouble.

7 Comments – Post Your Own

#1) On April 27, 2008 at 1:30 PM, chk999 (99.97) wrote:

The account holders are probably safe for the shares that E-trade holds for them in street name. There is an analogue to the FDIC that covers stocks in brokerage accounts called SIPC. It has a maximum limit of 500k per account, so most people should be ok if they go under.

I agree with you about the insanity of buying their shares now. 

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#2) On April 27, 2008 at 1:41 PM, kdakota630 (29.53) wrote:

I have an E*Trade Canada account, which they assured me back when they announced their huge losses was a separate entity from E*Trade and would be insulated from anything that happened to E*Trade.

Can anyone shed some light on this one way or the other, or suggest another Canadian discount broker?

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#3) On April 27, 2008 at 3:09 PM, chk999 (99.97) wrote:

Shouldn't the Canadian branch be called Trade*Eh?

I kid, I kid. 

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#4) On April 27, 2008 at 3:31 PM, kdakota630 (29.53) wrote:

That's actually a pretty good one.

Also, thanks for the reassurance, although I am looking into it a little more already. 

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#5) On April 27, 2008 at 3:40 PM, dwot (67.78) wrote:

kdakota630, I don't know, I am simply not a trusting soul in these matters.  Rules seem to change all the time and when I looked into brokerage insurance in Canada I wasn't impressed.

Brokerage insurance looks self-regulated and experience has left me without trust of any business model self-regulated. 

I was in another discount broker and I went to move money and the request was ignored or lost for weeks.  That freaked me out.  I had the bank manager where I was moving the money resubmit the request 3 times and when I was in contact with them they simply said they had no record. 

They didn't even respond when I threatened that I would report them to authorities if they did not move my money as requested.  I gave them a week and then I reported them and it still took an additional 3-4 weeks to get my money moved.  In the meantime I made arrangements to move the rest.  I had intended to keep about 30-40% to continue in the markets, but that experience completely changed my mind.

In this market I took that as a very, very bad sign. 

It could be that they just grossly incompetent in doing things like processing transfers, which the law gives them 5 days to do so, but, the market is so financially unstable right now I think if something makes you uncomfortable you are best to just move you money and be safe rather than sorry.

I have been ripped off by failing businesses several times.  I see no reason to be passive, hopeful, or trusting.

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#6) On April 28, 2008 at 11:23 AM, kdakota630 (29.53) wrote:

E*Trade's response to my question:

"We are a member of CIPF (Canadian Investor Protection Fund), their website address is: www.cipf.ca. Your registered account(s) are insured for up to one million and your non-registered account(s) are also insured up to one million."

I'm glad you're here to provide information the way you do so that I can keep an eye on E*Trade's financial health just in case. I've already looked into a couple other brokerages should I need to bail.

Thanks. 

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#7) On April 28, 2008 at 2:22 PM, dwot (67.78) wrote:

Yes, that was the same web page I was referred to.  Brokers are not regulated like banks, and that isn't a government guarantee.

There was no signs of trouble when I decided to move my account and that it didn't move easily just made me very concerned about what hope you would have if you wanted to move quickly. 

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