E*Trade (ETFC): Total Cost of Screw-Up: $9 Billion+

Once E*trade’s shareholders have been revived with smelling salts, they will have to come to terms with the reality of what has happened over the past five months. Trauma psychologists, please stand by.

In June, E*Trade had an $11 billion market cap, with shares trading at $25. Now, after the company’s insanely risky mortgage bets*, a bankruptcy scare, and a fire-sale emergency bailout, the company has a $2 billion market cap and the shares are barely clinging to $4.60. What’s more, according to Citi analyst Prashant Bhatia, the emergency bail-out will cut existing shareholders’ stakes in half.

So let’s add up E*Trade’s mortgage gambling bill*…

Loss of market value:   $8 billion
Equity Dilution:            50% ($1 Billion at current deflated market value)
Total So Far:                 $9 Billion

So E*Trade’s crazy mortgage bets* have cost E*Trade’s shareholders $9 billion (so far). Has anyone other than E*Trade’s shareholders paid a price for this?

Well, yes! One person at the company, CEO Mitch Caplan, has left. But don’t be concerned that this punishment is too over the top: Assuming Caplan availed himself of even a feeble contract attorney when he signed his CEO deal, his severance package will presumably run into the tens or hundreds of millions.

E*Trade shareholders, there’s only one thing left to do: Cry.

*PS: You object to the words “crazy,” “insane,” “gambling,” and “bets” to describe E*Trade’s mortgage trading behaviour? Then you must be buying the company’s bogus excuse that the mortgage market crash was an absolutely inconceivable, one-in-a-million, hundred-year-flood sort of thing. E*Trade’s bank was a SAVINGS BANK. Not a hedge fund. A SAVINGS BANK. A housing and mortgage crash had BEEN LOUDLY AND CONFIDENTLY PREDICTED FOR YEARS. And yet E*Trade’s traders made bets that were so insanely risky that shareholders have suddenly lost 80% of their money and half their stake in the company.

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