E*Trade (ETFC) investors cheered when they heard that the company’s chairman, a former senior executive at JP Morgan (JPM) was taking over as CEO.

The reality of the situation did not take long to come around. The new man said that the firm would not be sold, at least as far as he knows. Worse, it began to dawn on Wall St. that ETFC still have $12 billion of home equity loans on its balance sheet. The value of those is probably dropping by the minute.

E*Trade is down 13% today to $3.77.

Citadel put money into E*Trade but that left the company with $1.7 billion in debt. If write-offs in the home equity business hit the levels that the some analysts think they will, the brokerage will be insolvent in another quarter or two.

Bernanke told bankers today that the foreclosure problem is getting worse. He asked for their help. There is little reason to believe that they have any to give.

For most homeowners, especially those whose property values are down 10% or more the home equity loan may be what puts them in a position where their mortgages exceed the value of their homes.

That means that being a home equity lender like E*Trade puts it at the bottom of a hill under a lot of junk being pulled down by gravity.

Douglas A. McIntyre

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