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E*Trade Cuts Profit Forecast, Citing Write-Downs on Mortgage
By FLOYD NORRIS
Published: November 10, 2007
The E*Trade Financial Corporation, the discount brokerage and banking firm, said yesterday that it would not be able to meet its previously announced profit targets because it expected to report “significant write-downs” in the value of mortgage-backed securities it holds.
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Times Topics: Mortgages and the Markets
The company said the Securities and Exchange Commission began an informal inquiry last month into “matters relating to the company’s loans and securities portfolios.”
The company also said that the head of its capital markets operations, Dennis E. Webb, ceased working for the company yesterday and would receive severance payments. It did not say whether he had resigned or was fired.
The disclosures were made in filings with the S.E.C. after the market closed yesterday. E*Trade shares, which had fallen 1 cent, to $8.59, fell in after-hours trading to as low as $7.30, the lowest level in four years.
The new S.E.C. inquiry means that E*Trade is facing two investigations by the commission. It had earlier disclosed that the division run by Mr. Webb, along with other firms, was facing an investigation into whether it had “traded ahead” of customers by executing its own orders for shares before it executed those of customers. The new filing said that investigation was continuing.
On Oct. 17, E*Trade said that for the third quarter it would report its first quarterly loss ever, but it said it still expected to earn 75 cents to 90 cents a share for 2007. The S.E.C. began the informal inquiry that day, the company said yesterday.
E*Trade said that the write-downs it now expects were greater than it had anticipated when it made the October announcement and that investors should no longer rely on that forecast. It said it would not make any more profit forecasts.
The company pointed to declines in the value of its portfolio of securities backed by mortgages, in part because of downgrades by bond rating agencies, and said it expected more such declines.
It said the cost of those securities was about $450 million but did not estimate how large the write-downs might be. It said it expected to remain “well capitalized” under securities rules.
E*Trade had expanded its lending, including mortgage lending, aggressively in recent years. In September, it said it planned to get out of the business of holding mortgage-backed securities, although it said then that it was having trouble finding buyers for the holdings.
Even before the company’s share price fell in after-hours trading yesterday, it was down 62 percent since the end of last year, a performance worse than that of all but 3 of the other 92 financial stocks in the Standard & Poor’s 500-stock index. Those three include two financial guaranty firms, Ambac and MBIA, and one mortgage lender, Countrywide Financial.