E*Trade in Free Fall

"We are somewhere near the bottom, but my own feeling is there is another shoe to drop," Chief Operating Officer Hamilton James said on the company's third-quarter earnings conference call, in response to a question about Blackstone's view on the asset-backed securities market.

What is new in Bhatia's comments is the notion of a run on the bank. But, as financial institutions' reputations slide amid an avalanche of losses and turmoil for financial companies, investors are fearful about the security of their funds. Bhatia says that 50%, or $15 billion, of E*Trade deposits are over $100,000, the upper limit on an account that the Federal Deposit Insurance Corp. insures.

The notion of a run on E*Trade is not so far-fetched. In August, depositors in Countrywide's(CFC - Cramer's Take - Stockpickr) banking arm lined up outside branches in California after the first signs of the mortgage giant's lending losses in the first round of the summer's credit crisis.

Bhatia estimates that if E*Trade needed to liquidate assets to meet customers' withdrawal requests, selling loans and asset backed securities could end in a $5 billion loss. He adds that investors should expect fourth-quarter writedowns and provisions, or money set aside to cushion further loan losses, to amount to $500 million.

In the letter to customers posted Monday, Lilien writes: "As a matter of fact, we could absorb an immediate write down in excess of $1 billion and still remain well capitalized."

The news sent shares of some other brokers down as well, including Merrill Lynch(MER - Cramer's Take - Stockpickr) and Bear Stearns(BSC - Cramer's Take - Stockpickr).

Elsewhere, the financial sector is seeing a minor resurgence as some analysts and traders take the view that there's so much negative sentiment on the group that it's time to start picking which financial stocks will outperform from these depressed levels. Shares of Goldman Sachs(GS - Cramer's Take - Stockpickr) and Lehman Brothers(LEH - Cramer's Take - Stockpickr), among others, are gaining ground Monday.

Punk Ziegel & Co. analyst Dick Bove singled out Goldman Monday, upgrading the stock to market perform from sell on the idea that the firm's technology systems "may protect it from the worst of the excesses now in the market place." He says Goldman's investment in its databases and systems far outpaces its competitors, giving the firm an advantage in valuing illiquid securities like collateralized debt obligations or asset-backed bonds.

Goldman shares were up over 1.6% in afternoon trading to $214.71.