GOIH Global Capital Markets:E*Trade Sale May Hinge On Mortgage Portfolio

E*Trade Sale May Hinge On Mortgage Portfolio
By DENNIS K. BERMAN, SUSANNE CRAIG and MATTHEW KARNITSCHNIGNovember 26, 2007; Page A2


As E*Trade Financial Corp. moves closer to being sold, prospective suitors for the company are haggling over the value of its deteriorating mortgage portfolio, people familiar with the discussions say.
E*Trade, while best known for its discount brokerage operations, has made a big move into home mortgages, lines of credit and mortgages securities in recent years. As the housing market has declined, the value of mortgage securities has plummeted, forcing E*Trade to seek a buyer or an infusion of capital.
As of Sept. 30, the company's mortgage portfolio, including home loans and home-equity lines, was valued at $29.3 billion, and the company owns mortgage-backed securities valued at $12.4 billion. To date, it has announced $197 million in pretax write-downs on its securities portfolio, and it has set aside $237.8 million in loan-loss provisions.
Rivals looking at the books in recent days, believed to be TD Ameritrade Holding Corp. and Charles Schwab Corp., are worried that some of the assets haven't been marked to current market values, these people say. While the mortgages and related securities may not be as imperiled as the current market suggests, any buyer would need to value the assets on a mark-to-market basis.
E*Trade stock has plunged 77% in six months. The root of the company's troubles has been E*Trade Bank, which buys and originates mortgages and has acquired mortgage-backed securities. E*Trade has issued four warnings about the falling value of these assets. In mid-November, the company announced that losses would stop it from meeting its 2007 earnings target and that it wouldn't provide a new target, given market conditions.
That announcement sent E*Trade's stock down sharply, to $3.55, and prompted one stock analyst to suggest there could be a run on the bank, which the company has disputed. Friday, the stock closed at $5.33, up $1.07, or 25%, in Nasdaq Stock Market trading after CNBC reported the company was in serious negotiations with rivals to sell itself. Friday's price put the company's market capitalization at $2.28 billion. The stock traded as high as $26.08 in January.
Looming over any sale is the role of federal regulators, primarily the Office of Thrift Supervision, which oversees E*Trade's bank. It is unknown what stance the OTS is taking in the situation, although people involved in the process say it could end up having a critical role.
OTS could, for instance, demand that most of the proceeds of a sale be injected back into E*Trade's bank, leaving little left over for E*Trade's shareholders. Or regulators could request that E*Trade find a buyer that best insulates the struggling mortgage portfolio from the bank depositors.