E*Trade Crushed By Mortgage Backed Securities Problems

The story stock of the day is E*Trade (ETFC), the popular discount brokerage that some time ago expanded into commercial banking.

On October 17, E*Trade reported a $197 million writedown for mortgage backed securities when it reported 3rd quarter earnings and implied that that was it (3Q Earnings Release).

However, on Friday after the close E*Trade released a press release, in conjunction with the filing of their 10-Q with the SEC, saying that the value of their mortgage backed securities had declined further since the end of the 3rd quarter and that there would likely be more writedowns for the 4th quarter (Press Release).

They segregate their $3.0 billion into holdings into $450 million that they categorize as riskier and $2.6 billion of mainly “prime residential first lien mortgages”. 

Of the $450 million in riskier securities, the 10-Q discloses that $208 million has been downgraded by the ratings agencies since the end of the 3rd quarter (pg. 13, 3Q 10-Q).

The stock is getting crushed in a way that suggests investors fear that depositors will make a run on E*Trade. 

E*Trade is by far the most actively traded stock on either the Nasdaq or the NYSE with about 192 million of its 424 million outstanding shares, 45% of the company, trading hands so far today (2:15pm EST).

It is also the worst performer on either exchange with shares down 58%.

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