E*Trade Financial Corporation (NDAQ: ETFC) shares dropped more than 12 percent today after newly appointed chief executive Donald Layton announced that there are no plans to sell or break up the troubled online brokerage in an 8-K filing with the SEC. The troubled firm likely experienced some difficulty attracting a buyer with some $12 billion in troubled home equity loans on its books that may still present a going concern risk. Meanwhile, the firm is also facing lower revenues and higher expenses stemming from a mass exodus of its brokerage clients amid concerns about liquidity. So, is E*Trade a potential turnaround play or a hopeless cause?

E*Trade began its fall from glory when it announced massive write-downs related to its exposure to subprime mortgages that currently stand at around $12 billion. Private equity firm Citadel infused the troubled brokerage last year with $1.7 billion in debt to keep it alive, but many are still concerned that the firm could be insolvent in another quarter or two if write-offs continue at their current clip. Meanwhile, E*Trade continues to struggle with keeping its brokerage clients onboard, which is putting pressure on both its earnings and liquidity.

Despite these problems, many shareholders are finding hope in E*Trade’s new chief executive Donald Layton. Mr. Layton retired from JPMorgan in 2004 after 29 years where he supervised investment-banking and retail operatations at the bank. Since joining E*Trade, he has won praise for the way he tackled the mortgage mess and helped put the company on firmer financial ground. He also helped enact last month’s appointment of Robert Druskin to the brokerage firm’s board, which may end up paying some dividends in the future.

The price drop seen today is evidence that many shareholders were looking or a quick-fix in the form of a sale. There was speculation that E*Trade would break up its bank and brokerage business and sell them off, but Mr. Layton quickly rejected the notion saying that the ideas are “not practical and do not work”. Instead, he remains focused on being good, long-term fiduciaries focusing on shareholder value. He did caution, however, that the road would be a long one that would likely see lower earnings and liqudity pressures before spectacular results.

In the end, E*Trade is still facing some substantial issues, but it now has a great new chief executive and is hoping to turn things around. The road is likely to be long and dangerous, but investors willing to stick it out may see substantial gains. However, it may be prudent to wait until we figure out just how bad the $12 billion home equity portfolio losses will be before initiating an investment. Combined, these factors make ETFC a stock worth watching over the next year!

Related Companies
TD Ameritrade Holdings Corp. (AMTD)
The Charles Schwab Corporation (SCHW)
The Bear Stearns Companies Inc. (BSC)
Interactive Brokers Group, Inc. (IBKR)
TradeStation Group, Inc. (TRAD)
optionsXpress Holdings, Inc. (OXPS)
Siebert Financial Corp. (SIEB)
Stifel Financial Corp. (SF)
Gartner, Inc. (IT)
Raymond James Financial, Inc. (RJF)