When E*Trade Financial Corp. (Nasdaq: ETFC) had its meltdown, I considered buying but I was too chicken. I mean, can you really blame me? When it got caught up in the financial crisis, the term "falling knife" never felt so accurate. A 52-week range between $2.08 and $25.79 is a pretty scary thing; to see what I mean in graphic format, feast your eyes on the chart.

Lately, though, I've been warming up to the idea ever so slightly of taking a shot on E*Trade. I can't say I possess strong conviction yet, but I'm not necessarily afraid of owning financial stocks. In fact, as an example, I own Newcastle Investment (NYSE: NCT), an idea that Sheldon Liber talked about recently, one that has a pretty frightening yield. E*Trade is a significant name in the online-brokerage industry, and its brand is valuable. When I saw the company falling off a cliff last year, my instinct to buy started to kick in, insisting that it isn't going to go the way of the dodo. Plus, takeover theories began, further fueling my fascination. In the end, I took no action.

Now, though, the stock has bounced nicely off its lows. And it reported January data yesterday that had a couple of good data points. Daily average revenue trades are up 18.8% for the month-to-month timeframe, and they increased 21.5% year-over-year. End-of-period retail accounts were flat month-to-month, and were up 6.2% year-over-year. Total retail client assets did decrease, however -- year-over-year, they declined over 12%. And, hey, for whatever this is worth, its Super Bowl "Talking Baby" ads apparently were a hit.

At any rate, I'm a bit more sanguine on E*Trade's stock potential. I may not buy just yet, but the closer it gets to $6 or $7 a stub, the better the chance it has, in my mind, of going to double digits again. Sure, Schwab (NASDAQ: SCHW) and TD Ameritrade (NASDAQ: AMTD) are the safer broker bets, but I can't help looking at E*Trade.

Last week, Citadel Investment Group, a Chicago hedge fund, bought E*Trade Financial (NASDAQ: ETFC)'s collateralized debt obligation (CDO) portfolio for 27 cents on the dollar according to The Wall Street Journal [subscription required]. If this price was applied to the Level 3 assets of nine of the largest banks, it would wipe out the capital of three of them.

It's important to point out, before presenting this analysis, that the 27 cents on the dollar price that Citadel paid applied only to E-Trade's CDOs. It may represent a worst case scenario price for these banks. Furthermore, the Level 3 assets of these nine banks include other illiquid securities besides their CDOs. Finally, the calculations I'll show are based on the most recent Level 3 assets and equity of these banks as of last month.

Having said that, here are the three banks whose capital would be wiped out if that 27 cents on the dollar valuation was applied to their Level 3 assets and written off from their most recent capital levels:

E*Trade Financial Corp. (NASDAQ: ETFC) imploded today after the company warned of worse-than-expected earnings and a Citigroup (NYSE: C) analyst said that the company might have to file for bankruptcy protection.

Shares of the company, which has cut earnings forecasts four times this year, plunged to levels not seen since 2003. E*Trade, which lost $58.5 million, or 14 cents a share, in the period ending September 30, expects 2007 profit of between 75 cents and 90 cents, a range big enough to drive a tractor-trailer through. Shares of the New York-based company have plunged 53%.

In a note to clients, analyst Prashant Bhatia said that poor management has "put the viability of the franchise at risk" and that "bankruptcy risk cannot be ruled out," according to Bloomberg News. He cut his rating on the stock to "sell" from "neutral."

U.S. stock futures are shooting up, indicating a strong start for today's session as absent M&A talks and speculations once again hit center stage. Investors are also increasingly expecting the Federal Reserve will cut rates soon. However, it seems that Fed Chairman Bernanke aims to avoid an emergency rate cut and continue with his strategy of increasing liquidity.

Yesterday, stocks ended mixed, with the Dow industrials losing 30 points while the Nasdaq Composite rising 12 points and the S&P 500 gaining 1.5 points amid constant expectations and speculations regarding the Fed's policy. Fed and Treasury officials gave statements that could be interpreted both ways. The Fed meets again on September 18, and while many would prefer a rate cut sooner than that, most expect the Fed to move then.

But what really is moving the market this morning is M&A talks and speculations, specifically a report from the Wall Street Journal saying that E-Trade (NASDAQ: ETFC) and TD Ameritrade (NASDAQ: AMTD) are talking merger.

State-owned Dubai World also agreed to pay $5 billion for a 9.5% stake in MGM Mirage (NYSE: MGM) -- that's 14 million shares at $84 each, a 13% premium over yesterday's closing price.

Still in deals, the parent company of the New York Mercantile Exchange, NYMEX Holdings (NYSE: NMX) disclosed it's held talks to be purchased, and said it wanted a "meaningful premium."

Economic data is light today with the weekly jobless claims report out at 8:30 a.m.

Overseas, European and Asian stocks mostly gained on speculation the Federal Reserve will cut interest rates.

In other corporate news:

Toll Brothers Inc. (NYSE: TOL) reported its fiscal third-quarter profits which tumbled 85% to $26.5 million, or 16 cents a share. Excluding write-downs, earnings were 70 cents a share for the quarter. Analysts, on average, predicted a loss of 2 cents a share for the quarter. TOL shares are up 4.3% in premarket trading (7:26 a.m.).