An Early Christmas Present for E*Trade Shareholders?

Online broker, trade thyself.

Gift That is what E*Trade shareholders seem to be telling the company, whose stock has lost 80% of its value this year amid the deepening mortgage crisis. The stock has risen 22% today, helped along by a CNBC report that the online broker is in talks to sell part or all of itself. Add that to a 12% gain on Wednesday and stock has risen more than a third since Tuesday. (It is currently at $5.29, up 94 cents.)

Given what was reported in this Wall Street Journal story last week, it is little surprise that such talks are going on. But the stock action has to set off alarm bells about the possibility that a deal is close.

What we are hearing from people close to E*Trade is that the company’s board is considering a number of options, including a full-blown sale to someone like TD Ameritrade Holding, but nothing has been decided yet. It is possible that in a week or so, E*Trade could decide on a course of action to bolster itself in the wake of the announcement Nov. 9 that it would have steep declines in the value of its mortgage-security portfolio.

As the Journal story discussed, other options include a cash infusion similar to the one another mortgage lender, Countrywide Financial, got from Bank of America back in August. (CNBC raised the possibility of a $500 million sale of convertible preferred shares.) A sale of part of E*Trade, which comprises a bank and an online brokerage, is also a possibility.

A couple factors suggest that the relative likelihood of a takeover may be increasing. Bank of America’s paper loss on its $2 billion investment in Countrywide is rapidly approaching $1 billion. That could cause anyone contemplating a similar path with E*Trade to think twice. If the process continues to drag out, that may also be an indication that a full sale is in the cards, given that a cash infusion should be easier and quicker to arrange.