E*Trade USA Headed for Bankruptcy?

E*Trade has been getting shredded in the market place, with speculation the company is involved in some huge sub-prime write offs. What E*Trade, an online broker, is doing with sub-prime CDO’s is anybodies guess. One thing is for sure, the market doesn’t want a piece of it. On the right of this page you can see a graph showing off the huge decline of E*Trade. The volume numbers don’t look good either; thats what we call a dump.

Citibank responded with a strong sell rating:

“Bankruptcy risk cannot be ruled out,” Citi analysts wrote in a note Sunday. They also lowered E-Trade’s rating to sell.

Mish said it best:

“We estimate that trying to liquidate E-Trade’s loan and ABS portfolio would result in over $5 billion of losses, more than wiping out tangible equity,” Citi analysts said. They estimated the write-downs and provisions would total about $500 million.

My Comment: That is essentially all you need to know right there. E-Trade’s balance sheet shows $4.32 Billion in shareholder equity. So a $5 billion loss would indeed wipe that out.

Good news for Australian investors, E*Trade Australia is fully owned by ANZ. No need to panic and pull any accounts held in E*Trade Australia. It’s still rather scary that an online broker, whether its from the USA or not, could go under thanks to holding assets that are nearly unrelated to its core business. Maybe the sub-prime crisis has more teeth than I imagined.