Demolished E*Trade finally gets a gold star for disclosure. After months of spin and selective data releases, the company finally opened the kimono on its troubled $12 billion home-equity portfolio and turnaround plan.
The bad news:
- The company still needs more cash. It plans to raise this through asset sales and “capital market transactions” –presumably stock sales, presumably dilutive.
- The turnaround plan will take at least through the end of 2008.
- The company cannot sell its $12 billion home-equity albatross, because there is simply no market for it. It has raised the loss expectations for the portfolio to deal with expected further drops in the housing market.
- E*Trade’s loss assumptions call for a 10% decline in house prices in 2008 and an additional 5% in 2009. This is reasonable, but it’s also clearly not a worst-case scenario. If this housing cycle follows the previous one, house prices will likely decline through 2011.
The Good News
- The brokerage business appears to be stable despite the loss of some valuable customers when the company blew up back in November.
- Management finally seems to be shooting straight and providing a detailed picture of the company’s situation– the first critical step toward restoring confidence and credibility.
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