Citigroup analyst caused run on E*TRADE in November 2007

[Jane Eyre]

http://www.investmentadvisor.com/News/2007/11/Pages/Dire-Straits-for-E-Trade.aspx

Popular online broker, and bank, E Trade Financial Corporation (ETFC), may be the latest company to fall into the subprime and CDO vortex, facing trouble on November 12 as its stock traded in mid-afternoon at $3.58, down $5.01. That's more than 58% lower Friday's closing price of $8.59. The company filed a 10Q on Friday, November 9, and Citigroup analyst Prashant Bhatia downgraded ETFC in a Sunday, November 11, report. The analyst explained in the report that "the firm could face a potential run-on-the-bank scenario." Bhatia's report includes "a 15% probability of bankruptcy." Bhatia has changed his risk rating of ETFC to "Speculative Risk."

In light of today's news about the pending buyout/bailout of CitiBank by U.S. taxpayers, I thought this 2007 incident was interesting. Is there a reason that a Citigroup analyst would publicly report a "potential run-on-the-bank scenario" on another bank, thus causing a run on the bank at E*TRADE, when the same thing was happening in his own company?

[On the Road]

1. To Some Extent

it's a damned-if-you-do, damned-if-you-don't situation. If the analyst said nothing and concealed information, they are concealing information from investors. That seems to be pretty much what all the bond analysts did.

Maybe the analyst was just a tool of management trying to launch a competitive attack. It shows how deeply conflicts run since Glass-Steagal was repealed.

I don't know why Citi would want to launch an attack on E*Trade. Maybe there's a reason. I think it's more likely the analyst had some good analysis, wanted to make a name for himself, and his employer saw no reason to stop him.

[Jane Eyre]

2. I agree

Some say that the analyst "had it out" for E*TRADE. Who knows? No question that mortgages were a problem for E*TRADE, and they subsequently got out of that business. The bigger issue is that bad mortgages were a problem across the board, not limited to any one bank thanks to the way that paper is sold.

The repeal of Glass-Steagal was a huge mistake for many reasons. Potential competitive attacks are certainly an issue. Also brokerages have no business getting into the business of doing retail mortgages.