E*Trade Shares Fall on TARP Worries

E*Trade Financial's (ETFC Quote) shares were down more than 3% Monday after Standard & Poor's said the online broker could face further downgrades to its debt ratings if it is denied federal bailout money.

S&P removed the negative credit watch it had on E*Trade's debt ratings, only to replace it with "developing" from negative, depending on the outcome of the company's application for funds from the Troubled Asset Relief Program, or TARP, as well as a review of the overall health of the franchise. S&P currently rates E*Trade's long-term counterparty credit rating with a single-B and its bank subsidiary with a double-B negative.

Market participants have been increasingly wary of the broker's prospects for the federal investment, given that it has not received approval yet. Rumors have floated that the government does not want to be seen as bailing out E*Trade's largest investor, Citadel Investments, given the large hedge fund's own troubles this year.

An E*Trade spokeswoman did not immediately respond to a request for comment on Monday.

CreditWatch highlights the potential direction of a short- or long-term rating, and the "developing" designation means that a rating may be raised, lowered, or affirmed, according to a spokesman for the company.

S&P said that while an approval of the funds would most likely not result in any upgrades, "failure to be approved could result in at least a one-notch downgrade." S&P had placed E*Trade on CreditWatch Negative on Nov. 13.

E*Trade applied for $800 million of the TARP funds on Nov. 7 with its primary regulator, the Office of Thrift Supervision. It issued what was meant to be a reassuring statement on Nov. 25 that it was working with regulators and remained optimistic of an approval for TARP.

"Although some performance metrics showed modest improvement in third quarter 2008, overall operating performance remained weak in a difficult environment," S&P said. A TARP approval would "provide support to the bank's balance sheet in light of the problematic real estate-related loan portfolio," it said.

One of E*Trade's rivals Charles Schwab (SCHW Quote) indicated this fall that it does not plan to apply for TARP capital.