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E*Trade in Free Fall

Updated from 12:30 p.m. EST

E*Trade Financial (ETFC) shares were in free fall Monday after a Citigroup analyst stoked panic about a higher "probability of a run on the bank."

Citigroup analyst Prashant Bhatia also downgraded the stock to a sell rating, sending E*Trade shares plummeting almost 60% to $3.55. While some other brokers also dropped on the news, the financial sector overall was rebounding slightly from last week's selloff.

"There may be layers of protection for customers (multiple charters, other forms of insurance, etc.), but in our view, customers may withdraw assets first and ask questions later," writes Bhatia, adding this could lead to forced selling of the firms' newly devalued asset-backed securities portfolio.

E*Trade posted a letter to customers and issued a statement Monday afternoon taking issue with the Citigroup report. In the statement, E*Trade says the bank is "well capitalized by regulatory standards," and calls the Citigroup report "irresponsible," and "sensationalism based on unfounded speculation."

But E*Trade President and Chief Operating Officer Jarrett Lilien couldn't offer too much comfort in the letter posted to customers Monday.

"Nobody knows for certain what the ultimate impact will be from these markets, but it is our expectation that news in the market will get worse before it gets better, and armed with these expectations, we are taking prudent measures to effectively manage the company's balance sheet," writes Lilien.

Bhatia's comments come on the heels of the banks' warning late Friday that recent ratings agency downgrades of asset-backed securities would result in more writedowns for E*Trade, based on its $3 billion portfolio of such securities. The firm also said the Securities and Exchange Commission has opened up an inquiry of the firm's loans and securities portfolios, according to a filing.

Writedowns are no surprise. Nearly every Wall Street brokerage and many large banks are announcing more hits tied to their mortgage lending or asset-backed securities portfolios. And most executives agree it's not over.

Private equity firm Blackstone (BX) chimed into the chorus of warnings Monday, after swinging to a third-quarter loss. The firm's bottom line was weighed down by $802.6 million in non-cash charges related to its June IPO.

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