GOIH Capital Markets: ETFC Bankrupt---down sharply in trading

The shares fell in late trading Friday and weakened further before the bell, precipitated by the company

(Sponsored by: GOIH Global Capital Markets)

ETFC 4.45, -4.14, -48.2%) backing off an earnings forecast made less than a month ago because the value of its asset-backed securities portfolio dropped further.
"The continued negative news flow about charges resulting from its mortgage and CDO exposure, an SEC inquiry, and continued deterioration in its financial condition, all increase the likelihood of significant client attrition," Citi analysts said Sunday.

"Bankruptcy risk cannot be ruled out," they said. Citi also lowered its rating on E-Trade to sell.
The after-hours selling in E-Trade shares on Friday also came as the broker revealed that it's the target of an informal Securities and Exchange Commission inquiry regarding its loan and security portfolios.
E-Trade said the fair value of its $3 billion asset-backed securities, or ABS, portfolio has continued to decline since the end of the third quarter. Collateralized debt obligations, or CDOs, and other securities backed by second-lien mortgages saw the biggest hits, the broker explained.

"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.

E-Trade had roughly $450 million in total exposure to asset-backed CDOs and second-lien securities on Sept. 30. That includes about $50 million of AAA-rated asset-backed CDOs that have been downgraded to junk status.
The drop in value will result in further write-downs in the fourth quarter, the company added. Those extra write-downs weren't expected when E-Trade updated its 2007 earnings outlook on Oct. 17.
"Investors should no longer expect these earnings levels to be achieved," the broker said in a statement.
For their part, Citi's analysts estimated that the write-downs and provisions would total about $500 million.
"Actual securities-related losses will depend on future market developments, including the potential for future downgrades by rating agencies, which are extremely difficult to predict," the company added. "Accordingly, management believes it is no longer beneficial to provide earnings expectations for the remainder of the year."