It struggled as a result of a large stake in complex bonds tied to the American housing market.

Securities and Exchange Commission had begun an inquiry into its investments and that it would have to write down its stake in collateralized debt obligations and other debt instruments which caused a setback in confidence and trust.

The company has $29 billion in customer deposits. About half the deposits are over the $100,000 threshold covered by federal deposit insurance. Customers are more likely to withdraw cash not covered by government. This is not easy on financial institutions where shareholders and customers are restless.

Like many other financial companies, ETrade built a significant mortgage business during the housing boom, making loans to its customers, packaging them into securities and investing in the bonds backed by mortgages. The company’s approach was similar to the model followed by many investment banks.

“ETrade has been forced again to reconsider its investments because credit ratings agencies like Standard & Poor’s and Moody’s Investor Services have downgraded tens of billions in mortgage securities in recent months. Mortgage specialists expect more downgrades because more homeowners are likely to default on loans as house prices fall and it becomes harder to refinance loans.

“Sean Egan, managing director of Egan-Jones Ratings, an independent credit rating firm, said it was hard to envision ETrade taking a write-down as small as $1 billion. The company recently said it held $16.6 billion in mortgage-backed securities for sale at the end of September, up from $13.9 billion in December. It also held $32.4 billion in loans receivables, up from $26.4 billion.

“The name ETrade is a misnomer in the sense that their mortgage business is now dwarfing their securities business,” Egan said. (http://www.iht.com/articles/2007/11/13/business/etrade.php)

Liquidity and credit crisis is spreading: subprime, nearprime, and prime mortgages, commercial real estate, consumer loans, securitized products, derivatives markets, leveraged loans, LBO market, SIV’s and conduits, CDO’s and CLO’s; CMO’s, and others.
Liquidity injections and rate cuts by central banks point to insolvency and illiquidity. Are US households going to be able to prevent default with home price drops and a rising cost in credit?

Reduced market discipline where mortgage brokers, mortgage originators, investment banks, credit rating agencies were making money out of fees and transferring the credit risk to someone else is not appreciative of the fundamentalism that has creeped into our free market system.

Easy liquidity and credit boom led to massive re-leveraging where assets were leveraged to unprecedented levels.
Implementation of FASB 157 for such illiquid assets will only increase losses, worsening liquidity and credit leading to falling assets, net worth and consumer and corporate spending.
Contracts designed to protect investors against default and used to speculate on credit quality has led to this insanity of incompetence trading for the cupidity of our financial brain trust.

(By the way, it’s an odd feeling to walk by an airport newsstand and see a classmate’s picture on the cover of one of the magazines. At this point it’s happened to me twice: Forbes and Newsweek, two different classmates.)

But to get back to the subject. That’s certainly true with another Williams alum. Stories I’ve read about Herb Allen ‘62 say he’s powerful on Wall Street because he’s an absolutely straight shooter. If he thinks he can’t help, he says, “I can’t help.” Needless to say, after he’s proven that the commission isn’t everything to him, he gets called in again and again–and at some point finds a deal where he can help and where he can make some money.