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.
Bookmark: del.icio.us Digg StumbleUpon
18 responses so far ↓
1 Phil S // Nov 12, 2007 at 9:58 pm
I think it was a few months ago in a post you had about different brokerage accounts that I mentioned a friend of mine who optained his MBA in the USA said that in the USA, accounts held with a brokerage firm are counted in the assets of the brokerage firm when it applies to creditor protection. In other words, if E*Trade goes into Chapter 11, the assets inside the accounts belonging to customers of E*Trade can be frozen and liquidated by the courts in order to repay the creditors. So, customers of E*Trade may only receive pennies on the dollar after everything is liquidated if it came down to that…
2 White Eagle // Nov 12, 2007 at 10:22 pm
When questioned about their Cash Optimizer account, the E*Trade rep stated that it’s covered by the CIPF and not the CDIC (like I originally thought as well).
The questions I now have are:
1) How long would it take the CIPF to make the assets available to claimants?
2) Which Cdn. discount brokerages are currently offering to cover the costs of switching to them (and also have no fees for RRSP accounts)?
3 moneygardener // Nov 12, 2007 at 11:13 pm
Very ironic moments on BNN today considering E*Trade is probably one of their largest advertisers and Amanda Lang basically said ‘TAKE ALL YOUR MONEY OUT OF YOUR E*TRADE ACCOUNT NOW!”
4 Dave // Nov 13, 2007 at 4:12 am
Email I got from ETrade upon logging into today:
AN IMPORTANT MESSAGE TO E*TRADE CANADA CUSTOMERS
To our valued E*TRADE Canada customers:
This is a challenging time for the financial services industry. You will be familiar with recent negative news, particularly from the U.S., in the credit, housing, and stock markets, and the financial services sector is not immune to these market conditions.
We want you, our customers, to know that E*TRADE Canada and its parent company, E*TRADE Financial Corporation, continue to be well capitalized in accordance with applicable regulatory requirements.
We also want to assure you that, as E*TRADE Canada is a separate legal entity, separately regulated under the jurisdiction of Canadian regulatory authorities, our customers continue to enjoy the benefits of:
* state-of-the-art asset protection, including the E*TRADE Complete Protection Guarantee and CIPF coverage (the details of which are available on our website)
* custodying in Canada of customer assets through our carrying broker arrangement with Penson Financial, itself an independent Canadian regulated broker-dealer
* the segregation of customer assets from company assets in accordance with Canadian regulatory requirements.
Not only is E*TRADE Canada well capitalized, maintaining capital significantly in excess of Canadian regulatory requirements, E*TRADE Canada invests only in high quality government issued short term paper and has no direct investments in the asset-backed paper you have been reading about in the press.
If you have any questions about E*TRADE Canada in these financial markets, please do not hesitate to contact your customer service representative or Relationship Manager.
We appreciate the opportunity to continue to serve you and your investing needs.
Sincerely,
Duncan Hannay
President
E*TRADE Canada
5 Canadian Capitalist // Nov 13, 2007 at 9:00 am
Phil: I’m not really sure how it works in the US but even with all the protection, I won’t be surprised that clients are panicked.
WE: Other than Questrade, I can’t think of a broker who has no RRSP account fees. Many brokers offer to cover the transfer fee depending on the size of the account.
MG: At least two of my colleagues did just that (our ESPP and stock option accounts are with E*Trade).
Dave: I’m surprised I didn’t get that email from E*Trade. But then, I don’t have any money in my account!
6 James // Nov 13, 2007 at 10:19 am
I haven’t received any email from them yet, and I have over 6 figures in accounts with them between my wife and myself.
Is anyone strongly considering moving their accounts?
I started the paperwork with Qtrade last night in a bit of a panic. Now I’m wondering of I should keep moving quickly as the whole process may take several weeks.
Or should I pause and consider all my options?
7 Canadian Capitalist // Nov 13, 2007 at 10:29 am
This article on MarketWatch suggests US account holders are safe:
Link
8 ThickenMyWallet // Nov 13, 2007 at 11:34 am
Under Canadian bankruptcy laws, a creditor cannot seize assets of the bankrupt held in trust for a third party. There is a pretty strong argument (ignoring the insurance and regulatory protections for a second) that the the assets of accounts not on margin would belong entirely to the client and not the creditors (margin accounts are a different bag). In a worse case scenario (again pretend there isn’t any regulatory protection), one can file with the trustee in bankruptcy to release the account (obviously, this takes time though).
9 nobleea // Nov 13, 2007 at 11:55 am
Your stocks and shares will be safe in the event of a bankruptcy. It could take up to 1-2 years to gain access to them, with little chance of trading them though. There’d be all kinds of lawsuits, court trials, paperwork, etc.
Any cash you have lying in your account could be gone.
Another option to protect yourself is to withdraw your shares in the form of a certificate. This costs 35-70$ but registers your shares in your name with the company, rather than your brokers name (who is holding them in trust for you).
I am going to open an account at BMO investorline and start transfering over. E*trade has messed up a few times with my account and this would be the final straw.
10 Dave // Nov 13, 2007 at 3:55 pm
I would stay calm and not have a knee jerk reaction like nobleea here.
For a more fair reporting of this whole E*trade affair look here:
http://gigaom.com/2007/11/12/how-to-create-a-stock-panic-with-two-little-words/
Also check out this un-fair article here:
http://www.techcrunch.com/2007/11/13/etrade-heading-to-the-deadpool/
and then read some of the comments below, particularly these ones:
http://www.techcrunch.com/2007/11/13/etrade-heading-to-the-deadpool/#comment-1754012
http://www.techcrunch.com/2007/11/13/etrade-heading-to-the-deadpool/#comment-1754036
http://www.techcrunch.com/2007/11/13/etrade-heading-to-the-deadpool/#comment-1754192
http://www.techcrunch.com/2007/11/13/etrade-heading-to-the-deadpool/#comment-1754375
and many more…
11 tom // Nov 13, 2007 at 4:01 pm
its important for everyone to remember that there are many other brokerages that would go out of their way to take over the brokerage accounts that etrade manages for us if anything was to happen to put the company’s solvency at risk.
rather than looking to move my account i am analyzing the stock to see if it too should be in my account…
remember: its at times like these that the smart (read: long term) money is made.
12 nobleea // Nov 13, 2007 at 8:17 pm
Dave;
It’s not a knee jerk reaction. I understand that the whole hooplah was caused by one analyst’s comments (with perhaps some truth to them). Like I said, this was the final straw in a long list of mess ups, including:
Having me listed as an insider for a company (that I wasn’t)
Putting a cease trade order on a company for no reason (for all e-trade customers)
Having my cash balance mysteriously disappear, multiple times (in phone calls they couldn’t explain why it happened)
Having my cash balance affected by open orders for companies I have never heard of before (account hijack?)
Those suggesting withdrawing all your stock in certificates are those who are hyper-bearish on most banks, citing their huge exposure to Level 3 assets which include credit/default derivates (on CDO’s for example). These will have to be marked to market according to accounting regulations coming this week. But there is no market for these derivatives. So that would require large writedowns.
13 Neil F // Nov 14, 2007 at 12:20 pm
One should always invest to a risk levl that they are comfortable . If you are a depositor at Etrade, and you are uncomfortable with the risk (be it real or perceived) of having your money there, and you cannot sleep at night then you should move it out. Faceless people posting realatively anonymously on the internet are not going to come riding in like a knight in shining armour to rescue your assets should they get tied up for several years, or worse lost. For all anyone reading this knows, the posters suggesting to keep your money in Etrade are trying to stem the panic long enough to get their own assets out. Last one holding the bag gets screwed. My transfer documents are complete and submitted. I’m sticking with a big bank from here on in.
14 Dave // Nov 14, 2007 at 9:43 pm
Neil, please tell me, how would our assets get “lost”? CIPF is there for a reason. All this speculation of E*Trade going bankrupt is so ridiculous and premature.
15 Jennie // Nov 15, 2007 at 12:30 am
White Eagle: Most of the brokerage firms reimburse you the transfer cost / fees, if the assets transferred over is over $100K.
If I would transfer the money out from E*Trade, I would recommend ones belonging to Major Canadian Banks. I don’t trust small players investment philosophy, which is usually too risky and may invest customers cash somewhere in risky assets like CDO/non-bank ABCP for extra yield.
TD Waterhouse is my favorite choice (and I just submitted my transfer form today), because they are very conservative and safe. As of today, all the major banks announced their loss in the news related to sub-prime mortgages/or Non-Bank ABCP, except for TD — only TD.
16 nobleea // Nov 15, 2007 at 12:02 pm
Dave;
Do you have an account at E*Trade?
Yes, CIPF is there for a reason. They’ve never really been called to the task for a large scale bankruptcy of a brokerage. It could take months to sort it all out. Who wants to have their assets frozen for several months.
17 Dave // Nov 15, 2007 at 6:37 pm
Yes I am at E*Trade Canada and to me the trouble/bother of moving somewhere else is more than it’s worth considering the likelihood of anything happening. And even if my assets (just an RRSP) were frozen for several months, no it wouldn’t bother me as they are essentially frozen now as I never sell and only buy something every few months.
18 Weekend Reading - Nov 15, 2007 | Million Dollar Journey // Nov 16, 2007 at 3:32 am
[...] the show running? What will happen to your E-Trade account if they go bankrupt? Both Canadian Capitalist and Canadian Money Blogs Reviewer have answers to your questions. If you are looking for [...]
Leave a Comment