E*Trade (ETFC) dropped more than 50% today when it announced that it will take a “significant writedown” for asset-backed securities that had dropped in value over the past month. Though the company says it remains “well-capitalized” and could absorb an immediate write-down of as much as $1 billion, at least one analyst is saying the b-word about the company’s chances.
So, should you be worried if you are a customer of E*Trade? First, the chances of E*Trade filing for bankruptcy is still pretty low. Second, even in the unlikely event of a bankruptcy, customer assets are likely to be intact (unless there is fraud). Third, the Canadian Investor Protection Fund (CIPF) is likely to make good any shortfall up to $1 million under various conditions. E*Trade also says client accounts have private insurance that will protect from net losses in excess of CIPF limits up to $9 million in the event of a bankruptcy.
I was under the mistaken impression that the E*Trade Cash Optimizer account was a savings account (and hence eligible for CDIC protection for the Canadian Dollar but not the US Dollar account) but it appears that it is actually an investment account and will qualify for the CIPF and the additional insurance protection.
I don’t own stock in E*Trade anymore (luckily, I sold out our entire stake earlier in the summer) but I think the biggest risk in its ill-fated foray into the mortgage market is for its shareholders because clients are likely to be rattled by the negative headlines and move assets to competitors.