E*Trade Financial Corporation (NDAQ:ETFC) may become yet another victim of the subprime crisis after a Citigroup analyst downgraded the stock to a "Sell" and lowered his price target from $13 to $7.50. The analyst said that there's a 15 percent chance that E*Trade will declare bankruptcy and said management may be forced to sell loans and securities at significant discounts.

The Citigroup analyst expects the value of E*Trade's home mortgage holdings to fall significantly and lead to bigger-than-expected write-downs in the fourth quarter. It's $3 billion portfolio of asset-backed securities contains $450 million worth of collateralized debt obligations and second-lien securities. Meanwhile, the company is also facing a SEC informal inquiry related to issues with its loan and securities portfolios.

E*Trade responded this morning by saying that it can absorb an immediate write-down as high as $1 billion and still remain well capitalized. The company also acknowledged that "news in the market" will get worse before it gets better as the company takes "prudent measures" to manage its balance sheet. The company expects additional write-downs to this end.

The Citigroup analyst noted that this continued negative news flow about charges resulting from its mortgage and CDO exposure, an SEC inquiry, and continued deterioration of its financial condition, all increase the likelihood of significant client attrition. However, the company noted that its client base did increase by four percent during October.

In the end, this is bad news for shareholders that only promises to get worse before it gets any better. While the company may be safe from any liquidity issues, these combined problems may cause problems with customers and impact future growth. However, if the company can turnaround, this stock could end up becoming a great value play!

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