[octaveshift]

Good article in the WSJ earlier:

Bids or Offers for E*Trade?

This is one trade Mitch Caplan won't be calling his discount broker for.

Mr. Caplan, chief executive of online brokerage firm E*Trade Financial Corp. -- which saw its share price tumble 59% on Monday amid worries about mortgage securities on its books, before partially recovering in the past two days -- is now faced with two main options as his company struggles to regain its footing, according to people familiar with the matter.

In recent days, these people say, the firm has received calls from various parties suggesting a cash infusion into E*Trade similar to the $2 billion investment that Bank of America Corp. recently made in Countrywide Financial Corp., which gave Bank of America a stake in the nation's biggest mortgage lender.

At the same time, Mr. Caplan, who led the brokerage firm into banking and mortgage investments, has been weighing the pros and cons of selling E*Trade to a rival, these people say.

Monday's drop in E*Trade's stock price, fueled by an analyst report suggesting there could be a run on deposits at E*Trade's bank, was on the heels of four separate company announcements about the deteriorating state of its mortgage holdings. Those holdings include mortgages it has bought and originated, and assets backed by mortgages that have plummeted in value.

The company is sitting on a mortgage portfolio, including everything from home loans to home-equity lines, valued as of Sept. 30 at $29.3 billion, and it 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 has set aside $237.8 million in loan-loss provisions.


The Virginia-based Mr. Caplan, who backed out of a high-profile speaking engagement yesterday at a Merrill Lynch & Co. investment conference, is all but living in New York these days -- working to steer E*Trade out of its predicament and hang on to his job, which is on the line in light of the recent write-downs.

A cash infusion has some benefits. The firm's stock-market capitalization has sunk to $2.28 billion from $10.9 billion in recent days, and a cash infusion would help restore investor confidence. As well, the stock would likely rise with such a vote of confidence.

For now, the company, with 3.7 million customers and $40 billion in bank deposits, says it is "well capitalized by regulatory standards" and would continue to be so even if it absorbed an immediate write-down of more than $1 billion.

Mr. Caplan could also sell the company, but that option is fraught with issues. The most likely potential buyer is TD Ameritrade Holding Corp.

There are benefits from the two joining forces. Namely, the online-brokerage business is a game of scale, and customer accounts can be added or transferred at almost no cost.

Some industry executives say the long-term savings of an E*Trade/Ameritrade combination would be $600 million annually. Add those savings up over five or so years and such a deal would pay for itself.

As long as Ameritrade can get assurance that E*Trade's bank is fundamentally sound, it could make an offer well in excess of the current stock price. But here's the catch: If the bank is restored to health, E*Trade shareholders would likely demand a higher price for their shares, making any such deal less attractive to Ameritrade.

Another option: Ameritrade could lobby to purchase only the electronic-brokerage assets of the company.

That aside, Ameritrade has long expressed private reservations about the amount of risk on E*Trade's books because of its mortgage holdings. Now, should Ameritrade merge forces with E*Trade, it would inherit any legal or regulatory troubles that could stem from E*Trade's current predicament.

People familiar with the matter say that Ameritrade is keeping a close eye on E*Trade, and that its board in recent weeks has talked about a possible bid.