E*Trade Is Killing Me!

I’ve fielded a bunch of questions about my investment in E*Trade from friends and family. I’ve been an outspoken fan of the company and their services. Yes, I have a large paper loss in the stock, and I am not happy about it. But I am well-diversified, and E*Trade is only one holding in my portfolio. I also own shares of other companies, and a variety of mutual funds and ETFs. I’m still in positive territory for the year.

I am disappointed in the stock. Their core business is doing great. Thanks to the magic of direct deposit, their accounts continue to grow. E*trade saw an overall growth of assets of 4% last month! I don’t blame the management for what happened, and I don’t think that they should be blamed for investing in the asset-backed securities. After all, that is how banks make money, they take deposits and loan it out. E*Trade actually had very little sub-prime exposure, and the problem that they face are a result of the deteriorating AAA-rated mortgage-backed securities.

The real problem and the blame belong to two entities. First, I think the investing community and the general public should be very angry at the rating agencies. Besides some regulatory probes, they really are not being forced to change their ways or face the music. The companies did not do what they said they were doing.

Secondly, much of the reaction and speculation that is in the marketplace is a result of a single analyst. The analyst currently works for Citigroup, which is not exactly a neutral party. Citigroup is facing multi-billion dollar write-offs, and is facing a possible break-up. In addition, the company has often been named as a potential suitor for E*Trade.

I am disappointed that a stock that I thought was safe from this type of turmoil is now being traded by speculators. As a conservative investor, I try to avoid these situations. Right now, I am hoping that E*Trade will be able to get out of the securities that are causing them pain and to rally out of this slump. If they can get past this debacle, I hope that the strength of their core franchise will help them grow in the next few years.