Careful with E-Trade
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.