Investment-blog.net: Stocks, Emerging markets, Bonds, Currencies and Commodities

E-Trade Financial Corp., battered by a massive loss in its investment portfolio, is now unwinding the diversified businesses that once distinguished the firm on Wall Street.

Jan 10, 2008 Market Outlook

The decision to unwind the business could be the first of several retreats by E-Trade since it required a $2.5 billion cash infusion from Citadel in November and sent Mitch Caplan, its chief executive, packing.

E-Trade’s asset-backed securities losses wiped out three years of earnings and 85% of tangible equity, according to Citigroup analysts. Those losses were just half the story. The write downs halted the momentum of a company that used technology to break into a space dominated by staid brokerages.

The company also announced the appointment of former Wachovia Corp. (WB) official and mortgage industry veteran Robert Burton as chief operating officer of its banking business.

The New York online brokerage, said exiting its institutional trading desk will impact fewer than 30 employees. “The business does not align with the core retail business” and has not met the company’s financial expectations, E*Trade said.

E*Trade’s restructuring plan - which it calls a “turnaround plan” - is focused on further reducing balance sheet-related risk and leverage.

The company also disclosed Wednesday it has sold some $3 billion in available-for-sale securities, including a combination of mortgage-backed securities and municipal bonds. Through a series of transactions, the sale resulted in a realized loss of less than $5 million, the company said. Some of the transactions settled prior to Dec. 31, and the remainder will settle by February.

E*Trade also said its home equity loan portfolio “continued to run off as anticipated,” ending the year with under $12 billion in balances.

In addition to the asset sales and reduction in home equity loans, E*Trade reduced wholesale borrowing levels by cutting some $3.5 billion in Federal Home Loan Bank advances and repurchase agreements in the fourth quarter from the third quarter. The bank ended the year with $10.5 billion of excess borrowing capacity from Federal Home Loan Bank, and continues to expect 2007 year-end tier I and risk-based bank capital to be equal to or better than 5.9% and 11.1%, respectively.

E*Trade said it saw “turnaround momentum” in customer behavior, as the company continues to attract new customers and saw 87,000 gross new accounts opened in December. Total client assets ended the year at $190 billion, with $33 billion in cash.

The online brokerage also announced the formation of a special committee tasked to reduce the risk of its real estate portfolio. It will be led by Burton, who headed Wachovia’s retail credit businesses and products and responsible for mortgage banking and home equity lending.

“We have taken important steps in the execution of our turnaround plan by reducing balance sheet-related risk and maintaining strong Bank capital levels,” said Acting Chief Executive R. Jarrett Lilien.

In November, hedge fund Citadel Investment Group agreed to buy a $3 billion portfolio of E*Trade’s mortgages and other securities for $800 million. At the same time, Citadel injected $1.75 billion into E*Trade in exchange for 10-year E*Trade notes that pay it 12.5% interest and shares boosting its stake to almost 20% of E*Trade’s shares outstanding.

  Full details of the restructuring plan will be announced on Jan. 24, when the company reports its fourth-quarter results.

In the third quarter, E*Trade was badly hurt by the mortgage meltdown, as mortgage write-offs and related home equity loans led to a $58 million net loss, compared to year-earlier net income of $153 million.

Shares of E*Trade closed Tuesday at $2.25, and rose to $2.50 in pre-market trading.

-Donna Kardos, Dow Jones Newswires; 201-938-5963; donna.kardos@dowjones.com

Corrected Jan. 9, 2007 7:57 ET (1257 GMT)

(END) Dow Jones Newswires

January 09, 2008 06:54 ET (11:54 GMT)

 

Did you like this? If so, please bookmark it, about it, and subscribe to the blog RSS feed.

Possibly Related Posts:

• Depression? Oversold? Just the beginning? Close to the end? You will find zero guidance from quality analysts.
• A List of ETFs You Should Know In Stock Market
• Florida pension fund loses a quarter its value
• Good bye to U.S dollar. Say hello to Gold and Amero
• S&P 500 losses nearly $1 trillion more than 2000-02

Did you like this? If so, please bookmark it, about it, and subscribe to the blog RSS feed.