E-Trade's New CEO Has a Plan in Place After His Predecessor's Era of Excess

By Michael Hiltzik

March 10, 2003 12 AM PT

Mitchell Caplan wants you to know that he is not the anti-Christos.

“I’m Mitch Caplan, I am who I am, I have my own history,” says the chief executive of Menlo Park-based E-Trade Group Inc.

That may be, but it’s notable that he has a conservative compensation package and a demure, if upbeat, view of his company’s future -- all qualities that Caplan clearly hopes distinguish him from his immediate predecessor, Christos Cotsakos.

Cotsakos was forced to give up the job in late January when his salary and bonus -- indeed, his very lifestyle -- became a public embarrassment for a company that was trying to keep a modestly low profile as the firefight over corporate governance raged around it.

The scale of Cotsakos’ perks -- he flew a company-owned plane back and forth to London, where he was working on a Ph.D. in economics; secured a retirement package worth seven figures annually; and received millions in forgiven corporate loans -- is just one of the memories that the online financial services company is now trying to bury.

Even after Cotsakos returned $23 million of his pay package to the company, his compensation was still the highest in the brokerage business, exceeding that of the CEOs of Schwab, Goldman Sachs, J.P. Morgan Chase and Merrill Lynch combined -- and this was not a case where, as Babe Ruth said about himself vis-a-vis Calvin Coolidge, he had a better year than they did.

Caplan’s own star rose as Cotsakos’ reputation was sinking. He joined the company in 2000 when E-Trade acquired Telebanc Financial Corp., a small online bank that Caplan ran. He then worked as E-Trade’s chief financial products officer while Cotsakos presided over such crucial corporate activities as arranging its sponsorship of the U2 halftime show at the 2002 Super Bowl.

Today, Caplan is busily downplaying the revenue streams that fed E-Trade’s growth during the Internet bubble, most of which revolved around generating vast numbers of stock trades. Instead, he’s talking up a future based on cross-selling mortgages and auto loans to the company’s brokerage account holders and positioning E-Trade as an electronic financial supermarket.

Forty percent of E-Trade’s bank deposit accounts belong to its brokerage customers, he says. Similarly, E-Trade brokerage customers were responsible for a quarter of the company’s volume of new mortgage loans last year.

The goal is to reach a sort of Nirvana in which the business cycles of bank and brokerage balance each other out.

As interest rates rise from their historical trough and mortgage originations fall off, the hope is that investors will rediscover the charms of equity investing and drive brokerage commissions higher. “The bank should be the entity that delivers stable recurring revenue sources, and the upside is all around the brokerage business,” Caplan says. “That was the vision. That’s why I merged Telebanc into E-Trade.”

If this sounds something like a prescription from Dr. Phil, keep in mind that E-Trade has a lot at stake in the story that it is transforming itself. More than Cotsakos’ management style tied the company to the dot-com bubble. There was its very business model, which all but defined the day-trading habits of the market peak. Like its rivals in the online brokerage business, Ameritrade and Datek (which merged last year), E-Trade lived on transaction volume. During the first quarter of 2000, transactions in the company’s client accounts peaked at more than 300,000 a day.

The situation resembled an addiction to crack, for hooked as it was on volume, E-Trade lost money throughout the boom; it recorded only four quarters in the black in the three years from 1999 through 2001.

Meanwhile, the company spent lavishly on “branding” campaigns in print and on TV (its $5-million commercial buy, featuring one ad with a dancing chimp and another that bragged of its having just “wasted $2 million” on screen, dominated the dot-com Super Bowl of 2000).

The whole industry was blinded by what Caplan calls “the trifecta: The Internet as a distribution channel was fascinating to the marketplace at large; brokerage was incredibly interesting; and the third piece was the greatest bull market in history.”

“We were a very young company,” he adds. “We wanted to gain share and go from 50,000 customers to millions.” And so it did: By the end of 2001 E-Trade’s customer base had reached 3.5 million.

Still, for all Caplan’s talk of developing synergies between the banking and brokerage sides, there are signs that E-Trade has not quite gotten the dancing chimp off its back. The brokerage is still by far the dominant partner, accounting for more than two-thirds of revenue.

Caplan portrays the brokerage as currently a profitable entity that no longer depends on high trading volume to make money. Thanks to assiduous cost cutting on infrastructure, its break-even point is down to about 65,000 transactions a day, he says; every 10,000 trades over that threshold adds 4 cents a share to the bottom line.

Yet the company recently launched a sales pitch aimed directly at the day-trader types who were once its stereotypical clients: flat half-price commissions of $9.99 a trade and guaranteed nine-second executions for customers who maintain quarterly trading volumes averaging about two transactions a week.

This may be a response to some troubling statistics. Through the third quarter of last year, Jefferies & Co. brokerage analyst Justin Hughes observed in a recent report, E-Trade lost market share in the discount brokerage business. Hughes acknowledged the company’s great potential for cross-selling products to a customer base that now numbers 4.2 million, but he further noted that its average accounts per household has scarcely budged from the 1.34 figure of a year ago.

At the same time, the need to spend heavily on advertising and marketing in the dismal environment for financial services makes new customers an expensive commodity. As a result, E-Trade’s marketing costs per new account more than doubled to $1,200 in the final quarter of 2002, compared with the same period a year earlier -- and Caplan has told Wall Street he may increase the marketing budget by 20% this year.

Caplan’s position is that the Cotsakos affair is behind E-Trade now that the man himself is gone. But he is clearly nervous about questions lingering in the investment community regarding whether the matter hinted at deeper management problems at E-Trade.

He insists the company is clean. “We clearly had an issue with compensation,” Caplan says. “That took on a life of its own and became an issue of corporate governance. But the corporate governance question had absolutely nothing to do with operational issues. We’re probably significantly more operationally sound than at any time in our history.”

All that has to happen is for the economy to cash the checks E-Trade has been writing.

Michael Hiltzik can be reached at [email protected].