E*Trade Woes Renew Buyout Chatter

E*Trade said in a statement responding to the Citi downgrade that it is "well capitalized" and "capable of adapting to shifting market trends."

A spokeswoman did not respond to requests seeking comment about the possibility of a sale or other strategic options.

David Trone, an analyst at Fox-Pitt Kelton, says despite E*Trade's problems, there would be buyers of the company and at a premium to its current price of around $4, "even assuming fire-sale impairment," he wrote in a note Monday, when E*Trade's stock plunged 59% to $3.55 as a result of the bad news.

But Citi analyst Prashant Bhatia, who set off the decline after suggesting in his note that E*Trade's bank could fail, says neither consolidation nor a cash infusion would create "any meaningful value" for the company's shareholders.

"In its current form, burdened with a significant and deteriorating $42 billion mortgage portfolio, this franchise is an extremely unattractive acquisition candidate," Bhatia wrote in the same note.

Banking issues aside, E*Trade does have good momentum in its retail brokerage operations. The company's daily average retail trades rose 23% in October from a month earlier to 227,344 trades. It had a total of $227 billion in retail client assets as of the end of October.

Still, analysts worry that the positive retail brokerage momentum may not be sustainable as E*Trade struggles with its mortgage and other asset-backed securities and other negative news flow coming from the company.