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!

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Norwegian firm StatoilHydro (NYSE: STO) announced it's paying at least $1.8 billion to Anadarko Petroleum (NYSE: APC) for stakes in oil exploration and extraction projects in Brazil and the Gulf of Mexico.

StatoilHydro said it's paying $1.8 billion, and as much as $300 million depending on the market price of oil, to Anadarko Petroleum. StatoilHydro gets the 50% interest it didn't already own in the heavy oil Brazilian Peregrino project in return. StatoilHydro also gets a 25% interest in a deep-water oil platform in the Gulf of Mexico from Anadarko - slightly more than half of the platform is owned by BP (NYSE: BP).

"This acquisition strengthens our position in Brazil and adds an important new legacy operatorship to StatoilHydro's international portfolio. We are establishing leading positions in attractive core areas. This is exactly in line with the strategic roadmap we presented at the Capital Markets Day in January - here focusing on deep water and heavy oil," said StatoilHydro's Peter Mellbye, Executive Vice President for International Exploration & Production.
 
The Brazil project, estimated to begin production in 2010, is estimated to have at least 500 million barrels of oil, but StatoilHydro plans on stretching that number by improving the oil recovery factor.

StatoilHydro doesn't expect the Gulf of Mexico project to improve its profitability for some 6 years, but the acquisition is in line with its focus on increases its long-term reserves.
 
Anadarko said the offer was unsolicited but it was happy to complete the transaction and use the capital to invest in existing projects. Anadarko CEO Jim Hackett said, "With our anticipated double-digit production growth in the Rockies and the inventory of high-impact projects in our development pipeline, we are confident in our ability to achieve our targeted production growth rate of 5% to 9% annually - combined with organic reserve growth - over the next five years."

It remains to be seen which company got the better end of this deal - StatoilHydro need the increase in reserves and analysts estimate, based on current production projections, that it paid a very reasonable price for the projects; however, oil exploration is always a gamble.

Both StatoilHydro and Anadarko are down slightly on the news.

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Bond insurer MBIA, Inc. (NYSE: MBI) seem to be dropping like rocks, but that isn’t deterring respected value investor Martin Whitman’s Third Avenue Funds from increasing its stake in the company. The move pits him directly against the famous activist investor Bill Ackman’s Pershing Square, which has taken an aggressive short position in the bond insurers and sees imminent bankruptcy. So, where should you place your bets?

Whitman believes that there is much profit to be made in the bond insurers, whether they continue as going concerns or write no new policies and sell off their existing business. The value investor, known for buying up questionable assets, currently holds around 10 percent of MBIA. Whitman insists that the bond insurer is very well financed and it should easily qualify for an AAA rating with a $17 billion claims paying ability. The value investor went on to say that the MBIA is being victimized by a “well organized bear raid” headed by Ackman that is preventing it from winning a stable outlook.

Whitman believes that MBIA shares are currently trading at a 70 percent discount to tangible book value and represent a great investment opportunity. The value investor also believes that the company will be able to raise the cash that it needs to pay any upcoming claims. In fact, Whitman himself has put in over $300 million and now counts the company among his fund’s largest holdings. Meanwhile, the company itself is saying that the $3.7 billion mark-to-market loss on credit derivatives is completely reversible if the market doesn’t deteriorate any further. Obviously, any reversal in the losses and increased liquidity bodes well for the troubled firm.

Bill Ackman has taken the opposite stance, having been bearish on MBIA for around five years. He warned investors back in the 90s that the company’s collateralized debt obligations (CDOs) may put its Triple-A rating at risk and now his predictions are coming true. The activist investor also brought up several “questionable transactions” that involved insuring a loss after the loss and then collecting on the insurance. Ackman even decided to write a 60-page paper entitled “Is MBIA Triple A?” in December 2002 shortly before these problems began.

Ackman estimates that the bond insurer faces more than $11 billion of potential losses, which would make it nearly impossible to avoid bankruptcy if it does not find a substantial amount of outside capital. The activist investor took a particular interest in the holding companies, reasoning that if the bond insurers’ holding companies were deprived of cash flow, their ratings would fall, and their operating units’ ratings would fall as well. In fact, Ackman remains convinced that these companies will be forced into bankruptcy if they are not bailed out.

In the end, the reason these two great investors are at ends is a debate over liquidity. The crisis facing MBIA is not one based on losses perse, but rather one of how much loss they can handle before they are forced to sell. The fact is that nobody knows how much worse the credit markets will get and, as a result, how much lower these CDO valuations will become. Ackman estimates that claims will reach $11 billion, which would cause huge problems for MBIA. Meanwhile, the company itself and Whitman believe that the market will turn sooner than later and reverse Ackman’s fortune. Regardless, this is definitely a situation worth watching as two of the world’s best investors take opposite sides!

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