E*Trade has a large stake in mortgage bonds tied to the American housing market. The US Securities and Exchange Commission (SEC) has ordered an inquiry into its investments. The company has admitted that it would have to write down its stake in collateralised debt obligations and other debt instruments.

Citigroup financial services analyst Prashant Bhatia said a bankruptcy filing could not be ruled out if customers lost confidence in E*Trade and withdrew their deposits, leaving the company without enough financing to operate. The company has $29 billion in customer deposits, around half of which are over the $100,000 threshold covered by federal deposit insurance.

It isn''''t an improbable scenario. The run on British mortgage lender Northern Rock earlier this year was prompted by concerns about the company''''s ability to finance itself in the short-term debt market. The run petered out only after public officials assured customers that the government would back their deposits.

In a note to customers on the company''''s website, E*Trade president R Jarrett Lilien has assured customers that the brokerage has enough capital to meet regulatory requirements and would be able to absorb a write-down of as much as $1 billion.

Like many other financial companies, E*Trade built a significant mortgage business during the housing boom, giving housing loans and packaging them into securities, as well as by a investing in bonds backed by mortgages. The company''''s approach was similar to the model followed by many investment banks.

On Friday, the company said it would have to write down part of its $3 billion portfolio of asset-backed securities, including bonds backed by first- and second-lien home loans. E*Trade also withdrew its earning forecast, which had already been lowered several times during the year.

E*Trade executives say they expect most of their mortgage portfolio to hold up fine. But analysts have questioned the claim. E*Trade has had to once more reconsider its investments, because credit ratings agencies like Standard & Poor''''s and Moody''''s have downgraded tens of billions in mortgage securities in recent months. Analysts expect more downgrades, because even more homeowners are likely to default on loans as house prices fall, and it becomes harder to refinance loans.

But some analysts say the $1 billion write-down E*Trade says it can comfortably take is too small an estimate. In a recent filing, the company said it held $16.6 billion in mortgage-backed securities for sale at the end of September, up from $13.9 billion in December. It also held $32.4 billion in loans receivables, up from $26.4 billion.

The company''''s mortgage business dwarfs its securities business, the say, and it may need to raise several billion dollars in fresh capital to shore up its financial position. Merrill Lynch, Citigroup and UBS have already written off sizable portions of their holdings in mortgages made to home loan borrowers with inadequate or sub-prime credit.

Analysts at Goldman Sachs and Deutsche Bank have estimated that aggregate credit losses could total up to $400 billion, which would be much larger than the savings and loans crisis of the late 1980s and early 1990s.

Citigroup''''s Bhatia estimates that E*Trade could lose up to $5 billion if it tried to sell its mortgage portfolio today. It is hard to value mortgage securities, because few bonds have traded hands since the credit crisis began in late July.

Buyers are willing to pay much less than sellers are asking. High and rising default rates have created the potential for steep losses in the coming year. Those who hold the ill-fated securities say investors are being irrational. They point to financial models which predict that most bondholders will be repaid.