E-Trade and Ameritrade:Pre-Merger Housecleaning?

[qi:053] In a post-market-bell bomb, E-Trade (ETFC) lowered its 2007 profit guidance by 31%. Even worse was why: It’s backing out of wholesale mortgages. This is, on the face of it, scary stuff. Few predicted E-Trade would be broad sided by the mortgage mess. So, the story in the financial press is that that this bodes ill for other financial companies.

I see it differently. My first thought was that E-Trade is cleaning house ahead of a rumored merger with TD Ameritrade (AMTD), just as Ameritrade on Friday came clean – after months of complaints – about the hacker who made off with millions of its customers’ contact information. I’d argue that these two companies are gussying themselves up for a wedding.

E-Trade is unlikely to encounter the funding problems of many mortgage-lenders. About 2% of its $17 million in mortgages, largely bought from other lenders, were delinquent at August’s end, according to the Wall Street Journal. But E-Trade’s silver lining may prove a dark cloud for other financial companies, who start reporting earnings Tuesday. Consider this quote from E-Trade president Jarrett Lilien on MarketWatch.com.

“The changes we’re making have very little to do with subprime lending,” Lilien said. “It appears that some people with second mortgages are defaulting more at this point in the credit cycle. They extended themselves way too far.”

The fear, written here between the lines yet in bold caps, is that the bad loans are spreading from subprimes to investors speculating in real estate, and maybe even those who got greedy in home-equity loans – a notion hinted at in the Journal’s story.

That may well be, but I also sense a bit of spin from Lilien and E-Trade. Lilien’s comment about second mortgages could mean: E-Trade doesn’t buy bad loans. Also, look at how E-Trade framed the news. It wasn’t we were burned by the mortgage meltdown and we’re working hard to fix it. It was this:

“The Company is exiting or restructuring non-core businesses that lack a direct and strategic connection with its retail customers. The Company is also accelerating plans to shift the composition of its balance sheet toward retail assets and liabilities and to synchronize balance sheet growth with customer engagement.”

Zero mentions of mortgages. Two mentions of retail investing. So let’s get this straight. E-Trade insists it wasn’t hurt by the subprime market. But it emphasizes its focus on retail investing, even though many are forecasting a recession and a bear market, both of which have a soporific effect on retail trading. By that logic, E-Trade is jumping from the frying pan to the fire. Why trumpet this fact?

For the same reason Ameritrade finally confessed that its customers (disclosure: they include me, although I am seriously considering jumping to Schwab) were victimized by a hacker who pwned Ameritrade’s customer database.

That story got little play on Friday, even though Ameritrade confessed it had no idea whether the hackers also took social security numbers – about as serious as a security breach gets for consumers. Some are suing Ameritrade for the privacy breach and for not notifying them in time about it.

These disclosures from TD Ameritrade and E-Trade, coming within a trading day of each other, are quite a coincidence. Both aim to distance themselves from regrettable relationships. Both are an attempt to padlock a skeleton into a closet. As such, both could be ways to appease the concerns of a potential mate.

If the press gives both companies a pass – and if neither one is saddled in an ugly, protracted lawsuit – the odds are very good that these two companies will send out betrothal announcements by year’s end.