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Von Aldo

Some Analysts Not Pleased with Schwab for Fighting YieldPlus Class Action

Yesterday, I wrote a short about how pleased I was that Schwab decided to litigate a class action suit over its YieldPlus Fund---instead of laying down and letting the tort bar plunge for filthy lucre. Well, not everybody was as pleased as me. FBR Capital Markets this morning downgraded Schwab to market perform--while upgrading its earning estimates. Better to go with TD Ameritrade or E*Trade Financial shares, FBR says.

Here is a brief snippet from this morning's research note issued by FBR:

SCHW - Not Talking to Chuck, for Now; Lowering to Market Perform

"We downgrade SCHW to Market Perform from Outperform, and maintain our

$17 price target following the company's announcement that it is

terminating its previous settlement agreement related to its YieldPlus

fund. We believe the near-term positive catalysts for Schwab are more

limited now that the YieldPlus overhang has returned, potentially

resulting in a more meaningful earnings hit and impeding management's

capital flexibility. Also, the recent pullback in rates will create

higher fee waivers and further NIM compression going forward, while

management's recent decision to extend duration on its balance sheet

to support the NIM in the near term means that if/when rates do

eventually rise, the benefits will be delayed. At this point, we see

more attractive risk/reward in AMTD and ETFC shares."

The research note adds:

"Separate from the class action suit, we are aware of 68

arbitration cases that have gone before FINRA regarding YieldPlus.

Our analysis suggests Schwab was found liable or chose to settle

in 41 (60%) of the cases. In total, investors claimed $7.3 million

of damages and FINRA awarded claims and fees of $2.0 million, or

27% of the initial claim amount. However, 13 of the cases were

settled with terms held confidential. Excluding these cases, we

calculate that Schwab paid an average of 62% of the initial claim

amount on the cases in which the company was found liable. Given

the estimated $4.0 billion of principal losses experienced by

shareholders, coupled with the evidence that the majority of

arbitration cases found the company liable to some degree, we

believe the potential for a material charge exists. At a minimum,

this uncertainty will likely preclude the company from using its

capital to fund buybacks, accelerate the bank balance sheet

growth, or fund acquisitions."

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