E*TRADE's TARP Dilemma (ETFC)

E*TRADE Financial Corporation (NASDAQ: ETFC) announced this morning that it is continuing to work with regulators through each phase of its TARP application and that it "remains optimistic that it will receive the necessary approvals and expects to make an announcement in the near future."  There is more to this story than meets the eye.

Back on November 7, the company disclosed that it received$800 million of funding under the TARP.  But then on November 13,  it said it would retire all $450 million of its 6.125% subordinatednotes due in 2018 in and issue 25 million shares of common stock on November 18, at a price of $18 per share.  This is technically a wash as E*TRADE saidthat the notes were not able to be remarketed because of the creditmarket turmoil.

Here is the problem.  The Treasury and TARP administrators and decisionmakers are taking flack over giving capital to institutions which arenot loaning out the money into the system.  They are using it to makeacquisitions and using it to add liquidity against charge-offs andother liabilities or asset write-downs.  While this is merely part of atransaction, it does not signal an absolute need to regulators that thecompany is in dire need of the funding.

We have covered E*TRADE for some time in our weekly "Under $10 Stocks"newsletter, and we have long maintained thatbased upon the very creative practices in its past lending that thecompany has not gotten all of the financial asbestos off its books.  Webelieve that there is an incredible value in E*TRADE.

On November 7, the stock was at $1.71 and already in trouble.  Todaythis sits under $1.00.  Unfortunately, the company should have probablybeen a bit more forthcoming over the TARP uses.  We cannot say when therest of the financial asbestos will be off of E*TRADE’s books.  But ithas been overly punished with other financial stocks during thismalaise and has not had any of the real recovery since Thursday’smarket lows.

Shares are up over 6% today at $0.94.  We still wonder if the companyreally needs the TARP or if it is just taking the funds as an insurancepolicy for what may lie ahead.  It almost seems as though the company would have been better off if it would have issued a statement saying that it did not need the TARP funds.

Jon C. Ogg
November 25, 2008