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E*Trade to exit US institutional business; shares plummet on ratings downgrade

09 January 2008  |  5317 views  |  0 graph

Troubled online brokerage E*Trade is disposing of its US institutional sales unit amid concerns that it needs additional capital to stay in business. The news comes after the broker's share price fell to an all-time low following a scathing report from a credit ratings agency.

E*Trade previously said it planned to divest its global institutional sales business, but had expected to keep the US unit. But in a statement E*Trade says it has decided to fully exit the institutional trading business by closing its remaining institutional trading desk.

"The business does not align with the core retail business and has not met the financial expectations set forth by the company," says the statement.

E*Trade says less than 30 jobs will be affected by the move.

In addition the broker says it has sold some $3 billion in mortgage-backed securities and bonds. Through a series of transactions, the sale resulted in a realised loss of less than $5 million. The sale is part of a restructuring plan to reduce risk to E-Trade's balance sheet and maintain capital levels, says R Jarrett Lilien, acting CEO and president of E*Trade.

In a further move E*Trade says it has also formed a special committee tasked with "aggressively reducing the risk of the company's real estate portfolio". The special committee will be led by Robert Burton, who recently joined the company and has been appointed E*Trade Bank's chief operating officer.

The latest E*Trade news comes after the company's share price took another battering after Egan-Jones Rating Company lowered its rating for E&Trade on Monday. The agency also said E-Trade is in "desperate need" of further capital, adding that the business may be "unsalvageable" if further support is not received.

E*Trade stock fell 58 cents, or 20.5%, to close at $2.25 on Tuesday. The stock, which traded as high as $26.08 last year, fell as low as $2.08 earlier in the day.

Many customers have pulled their funds from E*Trade accounts on speculation that the online brokerage might be forced into bankruptcy after it incurred heavy mortgage-related losses last year.

In November a Citigroup analyst downgraded E*Trade to 'sell' and warned of a potential bankruptcy risk due to mortgage-related losses. Since then analysts have also predicted that E*Trade would cut more jobs in the first quarter.

After receiving a $2.5 billion cash infusion from hedge-fund manager Citadel Investment Group in November E*Trade looked to stem customer defections by raising interest rates on banking deposits. In today's statement E*Trade says it sees a "turnaround momentum with regard to customer behaviour" with 87,000 gross new accounts were opened in December.

The broker says total client assets ended the year at $190 billion, with $33 billion in cash. This compares to $192 billion and $33 billion, respectively as reported on 29 November 2007.

In the past two months rival online brokers Charles Schwab and TD Ameritrade have reported a surge in new clients and assets - which is thought to be a direct result of customer defections at E*Trade.

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