Although E*Trade's main business is online investing, the company also runs a bank that makes and buys mortgage loans and invests in securities backed by mortgages. The company on Friday warned in a filing that problems with these investments would lead to bigger-than-expected losses, prompting Wall Street analysts to downgrade the shares of the company.
This is the lates hurdle for the brokerage company that helped pioneer online stock trading, soared during the dot-com bubble, then crashed and ousted its chief executive. E*Trade made a comeback in the past few years, but yesterday's trading wiped out $2.2 billion in market value as its stock fell $5.04 to $3.55 on the Nasdaq Stock Market. The shares are now back to their August 2002 level.
The fallout from the market for high-risk mortgages has begun hurting companies that on first glance wouldn't seem vulnerable, including some that deal with individual investors. Some money-market mutual funds, for example, have come under pressure because of exposure to the debt of troubled bank-affiliated investment pools called structured investment vehicles, or SIVs, that invested in mortgage-backed securities.
A Safe Place
Money-market funds are normally considered among the safest places for investors to park their money. It's extremely unlikely that investors in money-market funds would lose their money, in part because some fund-management companies are providing a backup to guarantee that any SIV losses are absorbed by the parent company, not fund investors.
"The mortgage black hole is, I think, worse than anyone thought," said Tony James, president of private-equity firm Blackstone Group, in a call with analysts yesterday.
E*Trade said customer calls spiked yesterday after Citigroup Inc. stock analyst Prashant Bhatia wrote in a report that, given the company's troubles, "customers may withdraw assets, and ask questions later." Mr. Bhatia estimated there is a 15% chance E*Trade will be forced to file for bankruptcy protection. E*Trade also announced Friday that the Securities and Exchange Commission is looking into its mortgage holdings.
E*Trade reacted angrily to the Citigroup report's implication that it could face a run on the bank. Jarrett Lilien, E*Trade's president and chief operating officer, said the report was tantamount to someone yelling fire in a crowded theater. "The call was irresponsible," he said in an interview. "We are impacted by the recent credit crunch but there is no fire."
E*Trade says it has 3.6 million customers. Its bank has a million accounts and $40 billion in deposits, which are insured to at least $100,000 per customer by the Federal Deposit Insurance Corp. A company spokeswoman said there was a "slight increase" in withdrawals yesterday but nothing that "could possibly be defined as a run on the bank."
'Mission Impossible'
E*Trade's chief executive, Mitch Caplan, took over in 2003 after his predecessor was revealed to have an $80 million pay package even as the company's stock was tanking. Mr. Caplan set his cellphone ring tone to "Mission Impossible" and recruited a new board to tighten corporate governance.
Most people associate E*Trade with online investing and trades that run as little as $6.99. Its key competitors, notably TD Ameritrade Holding Corp. and Charles Schwab Corp., haven't run into subprime troubles. But for E*Trade, the mortgage business has been a big driver of earnings growth over the past few years.
Mr. Caplan, who arrived at E*Trade after the discount broker bought a phone-based bank he ran, argued that the company could balance the volatility of its stock brokerage with the stability of a retail banking business that took