Real estate loans:

One- to four-family

Home equity lines of credit (“HELOC”), Home equity installment loans (“HEIL”) and other

Consumer and other loans:

Recreational vehicle

Marine

Commercial

Credit card

Automobile

Other

Unamortized premiums, net

Allowance for loan losses

Total loans receivable, net

Available-for-sale securities are summarized as follows (dollars in thousands):

Unfortunetaly, E-Trade trade does not provide more comprehensive information on its mortgage loan portfolion, but we will try to work from this data. To my knowledege E-Trade primary problems are surrounding its asset-backed securities and CMO exposure. Therefore, let us tackle this first. Looking at the data we see that E-Trade's total asset-backed securities and CMO exposure is approximately $2.16 billion and $1.10 billion, respectively. Therefore, in a worse case scenario E-Trade Financial's maximum loss exposure related to such securities is capped at approximately $3.36 billion (this is under the assumption that they do not insure their portofolio. If they do their loss exposure will be less). E-Trade has approximately $4.20 billion in equity. Thus, if E-Trade were to write down the value of its entire asset-backed securities and CMO portfolio the Company's worse case scenario equity would fall to about $840 million, which is about $1.97/share. The companies average price to book multiple over the past ten years is about 2x (I exluded the abnormally high price/book mulitpe of 4.45x in 1999). Thus, if we accept this as E-Trade's fair price to book multiple the implied fair value price after a material write down would be about $3.94, which is about what the market values the Company at now. Therefore, it appears that the market is expecting E-Trade to face such a worse case scenario, or some combination that and increaseing losses on its real estate loans. I would argue, however, that such a worse case scenario while possible, is probably unlikely.  Perhaps a more reasonable situation is for E-Trade to write down approximately 60-80% of its asset-backed securites and CMO portfolio and to experience a increase in its loan loss reserves of about  0.30 to 0.50 basis points. Under this assumption E-Trade would could loose somewhere between $2.15-$2.85 billion in total equity, which would place total equity somewhere between $1.35-$2.05 biilion, or approximately $3.17-$4.81/share. This would imply fair value prices between $6.34-$9.62 using 2x book as the fair price multiple. Thus, assuming it takes about 5 years for everything to settle out and E-Trade to return to a normal status the implied compounded rate of return under these latter situations would be approximately 9.65% and 19.19%, repsectively (assuming a $4 purchase price). Therefore, while the returns have the potential to be compelling, I would argue that given the uncertaintly surrounding the issue the returns are not high enough to compensate one for the assumed risk. However, others may have a different opinion. After all things may not turn out as bad as I have suggested above. Also, I have not made any estimates for growth. If, for example, E-Trade returns to its normal 10yr compounded annual growth rate in book value of 13.37% in, say, 2009 and maintains that growth until 2012 total book value/share would approximate $4.62, $7.01 billion in each of two situations I discussed above. This would imply prices of $9.24, and $14.02 and equate compounded annual 5YR returns at 18.23% and 28.51%, respectively, which I think compensates one accordingly. 

Angell       

December 31,

****IGNORE THE INFORMATION BELOW****

Mortgage-backed securities:

Backed by U.S. Government sponsored and Federal Agencies

Collateralized mortgage obligations and other

Total mortgage-backed securities

Investment securities:

Asset-backed securities

FHLB stock

Municipal bonds

Corporate bonds