E*Trade Sinks on Liquidity worries, Risks continue to mount

Investors fled from E*Trade Financial (ETFC) this morning as rising worries or more loan loss write downs and the possibility of a liquidity crisis hit the stock. Shares fell over 50% in the early market hours on the heels of an analyst report that brought up the possibility of Bankruptcy.

No, this analyst didn't get Wheel Of Fortune re-runs mixed up with E*Trade, there are legitimate concerns here. The Citigroup analyst made the point that the possibility of bankruptcy is only 15-20% right now, but that can certainly rise if things get worse in the loan department. E*Trade's core business is their discount brokerage and if that starts to go it's lights out for the company.

Management is trying hard to reassure the Street that the company is well capitalized and can afford to take an immediate $1Billion hit. While that may be so the lingering thunder-cloud here is that E*Trade's own brokerage customer may flee and demand their cash. If this happens in droves, E*Trade is in real trouble. If things do get so bad that E*Trade will have to go into bankruptcy protection the masses of angry customers and lawsuits will keep the company tied up for years and years and make E*Trade "Uninvestable".

The sheer drop today makes for some potential day trades off of lows but until things get better -and all signs point to things getting worse first- E*Trade has to be ignored as a stock to own. There are no catalysts here for the company right now except for the general North American economy and more potential reassurances. Traders didn't seem to buy today's reassurances so future press releases from Management will have to be much more convincing of a recovery to business as usual.

Disclosure: Author holds no position in ETFC