E-Trade Financial Corp. lost more than half of their shares' value with the company being at risk of bankruptcy.
Other analysts said the pictures was not as bleak, though, and the company said assets actually improved in October. It also moved to reassure customers that it could withstand a substantial writedown of assets and remain in business.
Shares of E-Trade tumbled 58.7 percent, to $3.55. Earlier in the session, shares fell as low as $3.50. Shares had traded between $8.02 and $26.08 during the past year.
The online brokerage firm said Friday afternoon it would take an undisclosed writedown on a portfolio of securities and collateralized debt obligations, known as CDOs, backed by mortgages.
E-Trade said it has a $3 billion (2.06 billion EUR) portfolio of asset-backed securities, which includes about $450 million (308.6 million EUR) in complex financial instruments known as CDOs and second-lien securities. As the mortgages backing those investments have increasingly defaulted, the value of those securities declined, forcing firms to write down their value.
E-Trade's president and chief operating officer, Jarrett Lilien, said in a letter to clients Monday the firm could handle an immediate writedown of $1 billion (690 million EUR) and "still remain well capitalized." Lilien added the company is taking "prudent measures to effectively manage the company's balance sheet."
Early Monday, Citi Investment Research analyst Prashant Bhatia laid out a worst-case scenario for E-Trade, saying the writedowns and a Securities and Exchange Commission inquiry could lead to a significant number of clients closing accounts. Bhatia pegged E-Trade's chances of filing for bankruptcy at 15 percent.
But other analysts said the risk of a run on deposits was fairly low, exacerbated only by the Citi note itself. Fox-Pitt, Kelton analyst David Trone said the risk of such a run was 5 percent before the Citi note but more like 20 percent afterward.
Trone also discounted the chance of bankruptcy, though he said a $4 stock price implied a prediction by the markets of a 65 percent chance of insolvency.
"The board would likely sell (E-Trade) before allowing bankruptcy," he said in a client note.
E-Trade was not available to comment on the Citi note. Bhatia was traveling and not available to comment, Citi said.
Despite the gloomy predictions, E-Trade actually added accounts in October, the company reported Monday. E-Trade ended October with 4.7 million accounts, about 1 percent more than it had the previous month. Of the total accounts, about 1.07 million were deposit and lending accounts. Those are the accounts Bhatia said could dwindle soon.
Sandler O'Neill & Partners LP analyst Richard Repetto downgraded the company to "Hold," but said E-Trade's brokerage business was still strong.
Repetto expects E-Trade to look for alternatives to deal with the weakness at its bank, including a capital infusion similar to Bank of America Corp.'s August investment in Countrywide Financial Corp., a sale of bank assets or a sale of the company all together.
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