Don’t Panic About E*Trade

Wow, people are really panicked.

Here’s what happened. Yesterday, Citigroup analyst Prashant Bhatia wrote an extremely negative report on E*Trade based on their announcement of exposure to mortgage securities where he put the likelihood of bankruptcy at 15%. How he calculated this, I don’t know. Maybe he estimated their exposure and risk curve for their portfolio, and then he ran monte carlo simulations of possible futures. More likely, he squinted his eyes, held up his thumb, and said “1 in 7”.

More coverage here in Business Week.

In any case, I’ve had a few people email me today about whether or not their money is safe at E*Trade.

Here is what I know:

1) If you have bank accounts, they are FDIC insured up to $100,000. So if E*Trade folded tomorrow, you’d be able to open up a new account elsewhere, and the FDIC would wire money in (up to $100,000) within a matter of days.

2) The brokerage accounts are protected by SIPC up to $500,000. Not sure how the re-imbursement works, but I’m guessing it’s something like an insurance claim.

3) The brokerage accounts are protected by a separate insurance policy for up to $150M per brokerage account.

None of these scenarios are likely – other brokerages & banks would be completely moronic to not buy E*Trade or it’s accounts for customer acquisition. E*Trade’s brokerage and bank business is doing quite well at this point.

In fact, here is an article suggesting that this might be a great buying opportunity for the stock.

So, unless you have more than $500K in securities at E*Trade and $100K in bank deposits at E*Trade, you are fine.

Update (11/13/2007): Wow. While E*Trade stock is now up almost $1.00 per share right now on Wall Street, I must not be the only one getting email on this issue. Look at what greeted me when I logged into E*Trade today:

Update (11/14/2007):  The following letter was updated on E*Trade today, which details the complete protection of brokerage accounts up to $150M.

To All E*TRADE Customers:

The old adage “there is no such thing as bad publicity” does not apply to E*TRADE FINANCIAL this week. Seemingly by the stroke of a pen… or a few clicks from a keyboard… a Company with a core business that has generated impressive growth quarter after quarter has been bombarded by rumored reports of its imminent demise.

Well, we want customers to know that the entire E*TRADE team has come together with resolve and commitment, taking appropriate and decisive action to manage through this issue and to ensure that E*TRADE FINANCIAL continues to deliver the best value in the marketplace for our customers.

I have spoken with scores of customers over the past week. Many of you have openly expressed your confidence in E*TRADE. It is genuinely gratifying to know that our retail customers—the heart of our business—understand the value in our model and the strength of the franchise.

Many of you have also asked me about asset protection, so to be clear—your money is safe at E*TRADE FINANCIAL. Here are the facts:

  • FDIC insures all E*TRADE Bank accounts to at least $100,000 and Extended Insurance Sweep Deposit Accounts to $500,000.
  • SIPC protects E*TRADE Securities customers up to $500,000 (including $100,000 for claims for cash).
  • Additional E*TRADE Securities protection provides up to $150 million per brokerage account, underwritten by London insurers (aggregate $600 million).
  • E*TRADE is well-capitalized by regulatory standards.

E*TRADE was founded on the concept of empowering the individual investor. This value is still at the heart of our business. We look forward to continuing to provide you with the products, pricing, service and functionality you have come to expect in order to help you manage your financial world.

We haven’t lost focus on our customers, our business or our future. The credit crunch has had a tremendous impact, but we are taking appropriate and decisive action to manage through it.

Thank you for your continued business,
Jarrett Lilien
—Jarrett Lilien
President, COO and Director, E*TRADE FINANCIAL

One thought on “Don’t Panic About E*Trade

  1. The brokerage accounts are protected by SIPC up to $500,000. Not sure how the re-imbursement works, but I’m guessing it’s something like an insurance claim.

    Actually, SIPC is designed to protect you and your brokerage account’s contents against fraud by your broker; it’s not really comparable to having FDIC insurance on a bank account. See their website for more details.

    Better yet, check out a response I wrote on this very topic just yesterday, on AskMetafilter:
    http://ask.metafilter.com/76093/What-will-happen-if-my-bank-goes-bankrupt

    E*Trade’s brokerage and bank business is doing quite well at this point.

    Nuh-uh, the bank side is in deep doo-doo from owning both bad mortgages and bad mortgage-related MBS’s/CDO’s. But hey, at least they’re in good company with a lot of other banks out there…

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