E-Trade (Long Blog entry)

E*Trade (ETFC) is both bank and brokerage; as such, it has at times enjoyed successes from both market trading volume and banking sector gains. It’s sad, as both a customer and sometime shareholder, to see it currently under attack from many sides.


For one, there is security; they offer an RSA hardware dongle to generate a pseudo-random number once per minute to enhance my password security. You need to request it, but it’s worth it, and it may be free depending how much money you have across your accounts. There was a story released Wednesday stating customer accounts at E*Trade, Ameritrade (AMTD) and elsewhere had been compromised for an options scam; I very much doubt the E*Trade customer(s?) that was compromised had this dongle. Let me digress and say that individuals frequently create passwords that are not secure; further, if they happen to mistype a password at a web site and get an error they often try a password that may belong to another institution before they get it correct -- at that point a password somewhere is compromised. With this dongle I have my base password plus 6 more digits of security. If the base password is compromised, they don’t have the physical dongle and if they’ve got the physical dongle they still shouldn’t have my base password. In either case, it is more difficult for someone else to get in. (I know there are some bright people out there; I acknowledge you – please don’t try to hack me.)

I see one bank wants you to choose a picture to add “security” to your account login – cute, but it’s the equivalent of adding one extra fixed letter to your password. Apparently they include the picture if they ever email you – tip: don’t ever respond to an email correspondence from your bank unless it’s by calling the number on your account statement (not one contained in the email). Since the bank has a limited number of pictures to choose from and everyone chooses the cute picture that touches them, then someone just sends that cute picture to a few thousand addresses and a few of them will see their picture – not what I call secure.

Everything under one roof at E*Trade means only one secure login to handle everything financial. I can receive a direct deposit in my checking account, perform an immediate transfer to my margin account and then invest it immediately. I can likewise perform a direct transfer from checking to pay my VISA bill, or use the free online bill pay to pay any other bill in moments. I can move non-invested cash from my margin account to my savings account and make over 5% APR interest. No other company or site ever has to have access to any of my financial accounts; I can link external accounts if I wish for direct transfer from or to them, but I’d initiate those transfers only from within E*Trade. I receive alerts to my phone when transactions are processed, so I know quickly if something odd is occurring. I also appreciate the unlimited reimbursement of ATM transaction fees; E*Trade did (and may still) have the 3rd largest ATM network in the U.S. which gives them bartering clout to do this and I doubt it incurs cost to them.


What E*Trade did wrong

E*Trade followed the herd of banks trading in CDO paper. Had E*Trade limited their mortgage exposure to their existing customer base, to whom they do offer a small discount in rate by the way, and had they then maintained servicing for those loans while only seeking a reasonable percentage of outside mortgages, there would be no problem whatsoever. They did, however, follow many other banks. That being said, I believe they saw what was happening and were already exploring ways to divest themselves of the CDO line when, in early November, an analyst from a competing company said they faced the possibility of bankruptcy; further, he suggested a percentage possibility, which at 15% was near the 16.7% probability of throwing a number or a six-sided die. I believe they were already investigating ways to rid themselves of CDO paper because of the timing of the Citadel “vote of confidence” deal; it was too soon after the bankruptcy comment. Not too soon to complete the negotiations which were probably then expedited, but too soon not to have been researching their potential options to begin with.

The bankruptcy comment must have forced management to take quick action, and possibly not get as favorable an outcome as may have been possible otherwise. Still I don’t feel they did that bad. While Citigroup (C) has announced layoffs of over 13,000 employees within a year's time, is cutting dividends, accepting foreign investments, offering excess tenders (hmm) and still holding CDOs, E*Trade has (so far) only cut one section which was underperforming and under review anyway affecting fewer than 100 employees, yet has fully divested itself of its primary CDO problem.

I’ve heard an analyst recently reiterate his downgrade of E*Trade saying it was paying more in customer enticements and advertising to gain back customers. I can say they paid near 5% savings interest for nearly all of last year, so that hasn’t increased. I do see a lot of advertising, but that must be to counter some early defections after the bankruptcy comment. Strangely enough, I think it’s the same analyst, hmm… and he works for the competition and about the biggest losing financial services juggernaut to announce this quarter, hmm…

I guess we’ll see what develops next week during E*Trade’s earnings announcement, but I believe they tried to do the right thing. They’d already announced expected write-downs and that should have been built into their price at mid $8s before the bankruptcy comment. Their price should have been considerably higher coming into earnings next week. The bankruptcy comment also had other results…



It would be nice to say that buying a company’s stock shows support for that company, but since the shares you own can be borrowed and sold short, devaluing both your holdings and the company’s market capitalization, this is a fanciful illusion. Still, I love the company and have faith that it will find its way successfully through its troubles; it has often shown itself more nimble than its competition in the past, so when I realized where E*Trade was trading after the bankruptcy comment I bought in, mostly at mid fours. Before the projected annual earnings numbers were updated, the forward PE ratio was somewhere around 1.5; given that it is now trading closer to three (even if you do count a full 20% Citadel dilution)... well you figure it out. I’m pretty confident that I’ll get close to the returns I’ve made holding ETFC/ET/ETRD in the past, and probably at some point before the end of this year. I know people who are still opening accounts with them, and I know my trading volume was up last quarter and it will be increasing again this quarter. I have no affiliation with E*Trade other than being a loyal customer and holding a few shares, down and long.

With the poor opening to the year, I wish all a healthy recovery.