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 The New York-based online broker told account holders their money was safe due to government protections and additional insurance. E-Trade Financial Corp. even took out a full-page advertisement in The Wall Street Journal to assuage broader fears of a collapse after its stock plunged due to the credit market turmoil.
E-Trade, like other financial institutions dealing with credit problems, faces defections as customers pull accounts without realizing that their assets are protected. Some investors have even opened accounts at other brokerage firms to spread their money around.
"Until the smoke clears, we reduced our holdings tremendously," said Steve Kaloroplos, a retired small business owner from South Carolina. "We like E-Trade, but we're just not willing to risk our money. We don't want assets tied up while there is a problem."
That scenario was confirmed by E-Trade Chief Operating Officer Jarrett Lilien, who said some clients "have moved some of their money aside."
He expects the move might be temporary -- similar to investor angst during height of the market turmoil in August. And the possibility of E-Trade going bankrupt is remote.
Even in the worst-case scenario, rivals would offer to buy E-Trade's accounts, or the company would be sold entirely, before accounts suffered any problems. Experts say most investors can rest easy.
Protecting consumers is the government-backed Federal Deposit Insurance Corp., which guarantees bank accounts to at least $100,000 in cash. Meanwhile, the Securities Investor Protection Corp. protects customers of failed brokerages.
These protections came in place to prevent bank failures if customers rush to cash out of their accounts. There were long lines in front of Calabasas, Calif.-based Countrywide Financial Corp.'s bank office during the summer on concerns of a possible failure. Meanwhile, British mortgage lender Northern Rock PLC saw panicky customers withdraw billions of pounds from their accounts on similar worries.
The FDIC was created in 1933 after the U.S. faced a number of bank failures during the Great Depression. The SIPC was created in 1971 to restore funds to investors with asserts in troubled or bankrupt brokerges, but is instead backed by financial firms.
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 Banks and brokerages are also required to keep a certain amount of free cash on their balance sheets
-- or would by forced to take out more insurance, pump in more capital, or face heavy restrictions. They could also be forced out of business by the Securities and Exchange Commission.
Don Montanaro, chief executive of online brokerage TradeKing, said major brokerages also take out additional insurance. His firm has a policy through Lloyds of London that would offer protection of up to $25 million per account, with $1 million of that guaranteed in cash.
"At the very worst is that the accounts get sold," he said. "The relationships have a value, and some healthy firm will come along and buy up the assets."
That's what happened to NetBank, considered one of the pioneers in online retail banking. The company was launched in 1996 and became a public company amid the dot-com frenzy in 1997.
After rapid-fire expansion between 2000 and 2004, its balance sheet came under stress as the mortgage industry began to slump. The company in 2006 attempted an unsuccessful reorganization, and was forced by the FDIC and the Office of Thrift Supervision to close down. Its deposits and businesses were acquired by the only online unit of Dutch bank ING.
Ric Edelman, a financial adviser and personal finance author, suggests customers who are worried might diversify their money into safe investments like Treasury bills until they feel more comfortable. Though he doubts a worst-case scenario, financial companies facing hardships might have temporary, short-term restrictions on emptying accounts.
"I don't believe that it's doomsday for E-Trade or anybody else for that matter," he said. "But, if you're awake at night worried about this, then just move your account someplace else."
[Associated Press; By JOE BEL BRUNO]
Copyright 2007 The Associated Press. All rights reserved. This
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