E*Trade (NYSE:ETFC) made its bed of nails. Now it has to lie on it.

The discount broker is paying the price for its exposure to the battered mortgage market. Last night's third-quarter report found the company posting a loss of $0.14 per share as a result of a $0.30-per-share mortgage writedown.

One can add that back to arrive at a profit of $0.16 per share, but don't assume the showing stacks up favorably against Wall Street's expectation of $0.10 a share. Analysts knew all about the charge, hosing down estimates from as high as $0.42 a share just last month.

Net revenue fell to $321.2 million for the period, weighed down by a $197.1 million net loss on the sale of loans and securities. Yes, that bite does come out of a broker's net revenue figure.

The pity here is that the retail brokerage side of E*Trade is doing great. If you pull yourself away from the devalued loans you will find a company in which:

  • Total accounts rose by 6%.
  • Client assets rose by 18%.
  • Daily average revenue trades rose by 44%.

In other words, E*Trade didn't just grow its account base. The typical client entrusted E*Trade with more assets and conducted far more trades than at this point last year.

That's the same kind of vibe that investors got from Charles Schwab (NASDAQ:SCHW) earlier this week. It's the same favorable momentum that you will likely see when TD AMERITRADE (NASDAQ:AMTD) reports next week.

So how badly is E*Trade being burdened by its decision to bankroll home loans? Let's see how all three of the leading discount brokers are doing this year.

10/17/07

YTD
Gain/(Loss)

E*Trade

$12.47

(44%)

TD AMERITRADE

$19.08

18%

Charles Schwab

$22.43

23%

Ouch! I'm not suggesting that E*Trade should get a free pass for its free-falling mortgages. Companies like E*Trade and H&R Block (NYSE:HRB) that reached out of their core strengths to originate mortgages have to take their lumps.

However, I would much rather use this space to discuss the resilience of the discount brokerage industry. It's impressive. The market was worried a year ago that blue-chip bankers like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) would leave a mark by offering commission-free trading to their large retail banking accounts.

If we go by the stock brokerage reports out of Schwab and E*Trade, we can see the discounters are doing just fine in this environment. That's comforting, but why should I bring up comfort when the market prefers to see E*Trade grimace as it balances precariously on a bed of nails?

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.