E*Trade's Application for TARP Funds is Still Pending

In one of the longest delays that we've seen, E*Trade's application for government capital through the Trouble Asset Relief Program still awaits approval.

After the Treasury Department announced last fall it would provide money to banks and other financial companies in return for preferred stock and warrants, E*Trade applied for $800 million in funding.

From time to time, E*Trade has issued updates about its application.  Early last November, the company issued a press release stating that its application was "currently being reviewed" by the Office of Thrift Supervision.  "We remain optimistic that we will receive approval and expect to make an announcement this month," said Donald H. Layton, E*Trade's chairman and chief executive.

Eighteen days later, it issued another press release stating that E*Trade "continues to work constructively with regulators through each phase of its application for the U.S. Treasury's TARP Capital Purchase Program. The Company remains optimistic that it will receive the necessary approvals and expects to make an announcement in the near future."

That was November 25, 2008.

E*Trade has struggled mightily in the past two years, as have many other online brokers and financial services companies.  Before the economy started unraveling in the fall of 2007, the stock traded at just over $23 a share, compared to today's trading price of $1.19.

After it ended 2007 with a $1.42 billion loss, E*Trade announced a "Turnaround Plan" and said that it expected to return the company "to a full-year profit in 2008."

But 2008 didn't bring the expected improvement. It finished last year with a loss of $512 million, as higher provisions for bad loans took their toll on the bottom line.

E*Trade also absorbed big losses from its heavy  investments in Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies that were put into conservatorship. Press releases issued last year (available here and here) indicate that E*Trade liquidated its long-held stock in Fannie Mae and Freddie Mac after losing more than $100 million on those investments.

E*Trade took other steps to reduce risk and strengthen the company's cash balance. Since then, there have been successes and setbacks in E*Trade's attempted recovery.  

On Jan. 3, this article reported that E*Trade paid its second fine in less than a year for failing to follow securities trading rules.  Most recently, Financial Industry Regulatory Authority (FINRA) fined E*Trade $1 million for "failing to establish antimoney-laundering policies and procedures that can detect suspicious securities transactions" between Jan. 2003 and May 2007.  E*Trade didn't admit or deny the charges, but it consented to FINRA's findings.  The earlier fine occurred in May, 2008, when E*Trade paid fines for failing to follow audit-related rules.

But the events since then have been more positive.

Earlier this month, this article declared E*Trade's move to swap more than $1.8 billion in debt for bonds that can be converted to common stock a success. The story noted that the swap had the support of Citadel, E*Trade's largest creditor and shareholder and said he believed it was "the best move to keep the discounter from buckling." It  concluded that even though the company expects another loss for 2009 and the "road to recovery [would] be long"... "at least the discounter isn't making the dangerous mistake of standing still."

Another article, published June 23, 2009, noted that Friedman, Billings, Ramsey analyst Matt Snowling upgraded E*Trade from "underperform" to "outperform."  Snowling was quoted as saying, "Although we expect mortgage-related losses to remain elevated, we believe the worst is now behind E-Trade, as the nearly $2 billion of fresh equity capital at the company should alleviate regulators' concerns and take the worst-case scenario off the table."

Just yesterday (July 9), E*Trade confirmed in a Securities and Exchange Commission filing that it had received the required consents for the debt-to-bonds swap.  And the filing gave a clear indication that E*Trade still hopes that the Treasury Department will approve its application for the TARP money.  It said: "The supplemental indentures amend the terms of the 2011 Notes and 2017 Notes to permit the Company to participate in the U.S. Department of Treasury's TARP Capital Purchase Program in the event the Company's application is approved."