ETrade: Standing at the edge of the cliff

A recent article in Fortune about E*Trade gives an insiders view of the panic that hit the firm as billions in losses piled up as customer fled. Defying Wall Street expectations, the firm fought back and stayed alive. However it is not out of the hot water yet.

Since October, E*Trade has watched $56 billion in customer assets evaporate, while it still has $39 billion in mortgage related securities and loans on its balance sheet. This is a significant exposure for a firm that only has a $1.9 billion market capitalization.

Only the intervention of Citadel, a Chicago-based hedge fund, enabled the firm to avoid bankruptcy in November, and these funds came at a tremendous cost. Citadel now owns 20% of the firm, holds 12.5% interest rate bonds from E*Trade, and acquired a $3 billion portfolio for $800 million. All of this for a mere $2.5 billion in cash. It provides the impression of a vulture picking at a carcass.

E*Trade is working to sell divisions to raise cash; nobody wants the toxic mortgage securities. The company expects to raise $350 million in cash by selling a wealth-management division, an institutional arm, and a partnership in Japan. Still the future prospects of the online brokerage firm are touch and go. A number of analysts question if it will survive 2008 as an independent entity or be purchased by a stronger firm.