E*Trade Slips on Sale Worries

Traders are concerned the value of asset-backed securities could be holding up a rumored buyout.

Author:: Laurie Kulikowski
Publish date:: Nov 26, 2007 4:48 PM EST

E*Trade Financial

shares slumped 14% on further concerns that the online brokerage firm's troubled mortgage portfolio could be holding up a sale of the company.

The stock took a hit Monday after the

Wall Street Journal

reported earlier in the day that prospective buyers were still wrangling about the value of E*Trade's mortgage portfolio.

Interested parties, which include

TD Ameritrade

(AMTD) - Get Report

and

Charles Schwab

(SCHW) - Get Report

, are worried that E*Trade's mortgage assets haven't been marked to current market values, the

Journal

says, citing people familiar with the discussions.

"People don't know what to put it on the value of the mortgage portfolio -- whether it be zero or what," says Matt Shields, a bank stock trader at FIG Partners in Atlanta. "The mortgage portion has single-handedly torn that company apart."

The selloff comes after E*Trade's stock

surged 25% on Friday after

CNBC

reported that the company was in discussions with at least two of its competitors to sell itself.

Long-running speculation about a deal had

heated up again after the company disclosed earlier this month that it was taking further writedowns in its $3 billion asset-backed securities portfolio, primarily within collateralized debt obligations and second-lien securities. E*Trade had already taken $197 million in securities writedowns in the third quarter.

Investors had scrambled for the exits after a Citigroup analyst suggested that there could be a run on the company's bank following the announcement of the writedowns. Shares of E*Trade are down 80% this year.

E*Trade is also facing a

Securities and Exchange Commission

investigation into its loan and securities portfolios

But the troubled $29 billion mortgage portfolio, as well as an additional $12 billion in mortgage-backed securities, is a big sticking point in any potential deal for E*Trade.

One possibility is for TD Ameritrade, if it were to buy the company, to keep the retail brokerage assets, while its parent TD Bank takes on the mortgage loans and related securities, observers say.

A spokeswoman for E*Trade declined comment.

Shares closed down 73 cents to $4.60.