E*Trade: In Defense of Prashant Bhatia

Just as one shouldn't shout "fire" in a crowded theater, one shouldn't shout "run on the bank" in an analyst's report. If you do that, as Citigroup's Prashant Bhatia notoriously did in his report on E*Trade, you risk your report turning into a self-fulfilling prophecy. After all, no bank is immune to a bank run.

At the same time, however, I think it's rash to simply blame Bhatia and call him "irresponsible" for publishing what was actually a pretty sober piece of analysis. The key datapoint: half of E*Trade’s deposits, or $15 billion, are in accounts that contain more than $100,000, and are therefore not insured by the FDIC. If I was an E*Trade depositor, and I had more than $100,000 in the bank, and I saw that E*Trade was announcing subprime write-downs of unknown size, then I wouldn't need Prashant Bhatia to tell me to move my money somewhere a little bit safer.

If I were E*Trade, then, I wouldn't be running around shooting the messenger, I would be running around spending as much money as it took to buy private insurance on all of my deposits over and above the FDIC cap. Either that, or I would be simply trying to sell myself to someone rather better-capitalized.

As for Bhatia, he called it right. There are a million different things which can cause a bank run, and analysts' reports are hardly top of the list. What's more, for the time being there's still no evidence of any bank run at all. Although that might change tomorrow, when depositors start seeing the headlines. Even then, however, the proximate cause of the bank run would be the drop in the share price, not Bhatia's report per se. As we've seen with shares from Crocs to Sotheby's, there's no shortage of stocks which turn out to be just waiting for an excuse to crater. E*Trade turned out to be one of them, and that's not Bhatia's fault.