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ETrade stock falls 58% after forecast

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Bloomberg News / November 13, 2007

NEW YORK - ETrade Financial Corp. lost more than half its market value after the online brokerage forecast a decline in fourth-quarter earnings and a Citigroup Inc. analyst said the company may go bankrupt.

ETrade will book "significant writedowns" this quarter for asset-backed securities that sank in value last month, the New York-based brokerage said in a Nov. 9 regulatory filing. Citigroup's Prashant Bhatia wrote in a report Sunday that there's a 15 percent chance the company will seek protection from creditors after poor management "put the viability of the franchise at risk."

Chief executive Mitchell Caplan's strategy of building ETrade's bank by tripling loans outstanding backfired as borrowers fell behind on payments and US home prices declined. The Securities and Exchange Commission also began an informal inquiry on Oct. 17 "into matters related to the company's loan and securities portfolios," ETrade said.

"A drop in the stock price this severe could prompt retail trading customers, who likely see the performance of ETrade shares, to withdraw cash from their accounts," Lehman Brothers Holdings Inc. analyst Roger Freeman, who has an "overweight/neutral" rating on the shares, wrote to clients yesterday.

In a letter to customers posted on the company website, chief operating officer Jarrett Lilien said ETrade is taking "prudent measures" to shore up its balance sheet. The firm would remain "well capitalized" by US banking standards even if it had to write down $1 billion of assets, he said.

ETrade dropped $5.04, or 58.7 percent, to $3.55 on the Nasdaq Stock Market. The stock has fallen almot 85 percent this year, wiping out about $8 billion in market value.

The company is the worst performer in the 12-member Amex Securities Broker/Dealer index this year, followed by Merrill Lynch & Co., which ousted CEO Stan O'Neal last month. Merrill shares are down 40 percent.

Bhatia estimated ETrade will post a loss in the fourth quarter after setting aside $500 million in extra money for bad loans and writedowns.

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