Tuesday, November 13, 2007

The Final Bits

What we are seeing are the remnants of the blowout by the subprime mess. While the US economy will continue to be weak over the next 2 quarters, the stock markets could be finding its feet now. Darkest before dawn, they say... then its true for E*Trade.

Everyone knows that E*Trade is primarily in online investing, and a successful one at that despite strong competition from TD Ameritrade and Charles Schwab. However, they found that their margin financing business is so good for stock trades that they went and bought a "phone-based bank" that makes and buys mortgage loans, and invests in securities backed by mortgages as well. Since beginning of this year till June the stock held firm just above US$20-US$22 level. The initial subprime surprise in July and August sent the shares down to US$13 and there were days it went close to US$10. Well, that's the good news, cause last night the shares fell another 59%!

There were reports flaming rumours that investors could withdraw funds and ask questions later which will put E*Trade at a real bankruptcy risk situation. The company said its US$3bn portfolio of asset-backed securities includes about US$450 million in so-called collateralized debt obligations. E*Trade is sitting on US$12.4 billion in home-equity lines of credit, in which people borrow against the value of their homes. Of that, US$404 million was delinquent at the end of September. While the lion's share of the home-equity loans was made to borrowers with strong credit, 60% didn't require "full documentation" and at least 25% of the loans were extended to people in California or Florida.

They had their run cause the bank purchase allowed the company to register record revenue from 2003 to 2006, so much so that trading commissions made up only 20% of revenue last year. Well, someone will need to step in and offer about US$500m-US$1bn as capital infusion and take control of the plane with engine failure.

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