How to Deal with the E*Trade Run on the Bank

by Johnny Debacle

So of you may have heard how some Citi (NYSE: C) sell-side jockey named Prashant Bhatia (nickname being “Capital IQ”) said that E*Trade has a 15% chance of bankruptcy and faces a potential run on the bank. This is probably the most hysterical piece of sell-side analyst I can recall, but it may be a self-fulfilling prophesy. The best way to create a run on the bank that would lead to a serious dimunition in the E*Trade’s share price is to talk about how you think a run on the bank is likekly to happen and then publish that report as “research”.

Hysteria aside, how does an E*Trade customer protect his assets, if they are above $100,000 (FDIC guaranteed) or $500,000 (SPIC guaranteed)?

I have devised a simple strategy. Assuming a binary outcome that E*Trade (NASDAQ: ETFC) is either 100% effed or 100% ok, the dominant decision is to sell all of your assets and use the proceeds to go 100% long E*Trade. This way either E*Trade stock’s rebounds to its pre-hysteria levels and you have what I like to call a double or maybe a triple. Or you lose all your money that E*Trade would not have been able to give you anyway, so you in effect lose nothing.

Full Disclosure: I now have 100% of my PA long ETFC. Also E*Trade accounts are guaranteed up to $500,000 under SIPC for anything other than loss in the actual value of securities, so let’s step back into the real world.

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POSTED: 11/12/07 5:28 PM
Comment (11)


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Comments

  1. Pete
    November 12th, 2007 | 6:33 pm

    What if you took a Etrade home equity loan and bought some Etrade stock?

  2. Climateer
    November 12th, 2007 | 7:36 pm

    If it goes into SIPC liquidation your securities can be tied up for up to three months.
    Usually shorter, but 90 days can seem like forever in a bear market.

  3. you were right
    November 13th, 2007 | 6:48 pm

    wish i would have followed this advice = +40% yesterday?

  4. Nick
    November 13th, 2007 | 8:54 pm

    Good points. +50% on the January calls I bought.

  5. James
    November 28th, 2007 | 11:21 pm

    Are you nuts?? It’s your investments, held by a custodian that may change. Going long ETFC could actually result in $0 per share, as did WorldComm.
    SIPC doesn’t cover ya fer that unhappy scenario.

    Or maybe I am missing the joke.