(Adds details, analyst's comments, background)
By Nivedita Gupta
BANGALORE Dec 3 Banc of America Securities
downgraded E*Trade Financial Corp (ETFC.O) and said, despite a
$2.55 billion capital infusion into the online bank and
brokerage, Citadel Investment Group emerged as the winner after
buying the company's mortgage-related securities portfolio.
Banc of America cut its rating on E*Trade to "sell" from
"neutral" and slashed its price target on the stock to $2 from
$9. It also lowered its 2008 earnings estimates on the company
to a loss of 20 cents a share from a profit of $1 a share.
E*Trade shares have lost about 80 percent of their value
since January as Wall Street brokerages have taken billions of
dollars of write-downs on assets underpinned by subprime
mortgages. Escalating defaults on these loans to people with
weak credit have roiled credit markets worldwide.
On Nov 29, E*Trade said it was getting a $2.55 billion cash
infusion from investors led by Citadel Investment Group, which
is also buying the mortgage-related securities portfolio that
has been the primary source of the discount brokerage's recent
Several brokerages, including Goldman Sachs and Credit
Suisse, on Friday cut their earnings estimates on E*Trade,
citing the high costs and dilutive terms of the bailout deal
between the company and Citadel.
BofA analyst Michael Hecht believes negative value at
E*Trade cannot be offset by the retail brokerage business,
which he said was a dwindling asset.
Hecht expects the best-case scenario for E*Trade to be
another $1 billion addition to its reserves, while the worst
case would be a continued fire sale of assets resulting in an
outright sale of the company's home equity portfolio.
E*Trade's firesale of mortgage-backed securities has
conjured up a new worst-case scenario for Wall Street's
portfolio of subprime assets by knocking their value even
The company had on Nov 29 also named Chief Operating
Officer Jarrett Lilien as the acting chief executive officer,
to replace CEO Mitchell Caplan, who stepped down.
Hecht said he found the move "odd," raising the question of
how much has really changed in the senior management suite, and
limiting the board's ability to attract new senior talent.
Shares of the company closed at $4.60 Friday on the
(Editing by Pratish Narayanan)