E*Trade-Telebanc merger in trouble with regulators.

E*Trade Group Inc. said its $1.1 billion merger with Telebanc Financial Corp. is in jeopardy because U.S. regulators assert its biggest shareholder, Japan_s Softbank Corp., would effectively control Internet banker Telebanc through its business links to E*Trade. The objections by the federal Office of Thrift Supervision were contained in a merger prospectus filed late Monday. The objections stem from rules barring control of more than 25 percent of a U.S. thrift by a foreign company. Softbank owns 26 percent of E*Trade, the No. 2 Internet broker, and the two have a joint ventures and other ties. «Softbank America has filed with the (OTS) seeking to rebut the regulatory presumption of control,» the prospectus said. «The OTS staff has indicated, however, that the existence of a joint venture between E*Trade and Softbank in Japan, along with several instances in which ETrade has an investment in or contractual relationship with a company that is also a Softbank investee, may lead the Office of Thrift Supervision to deny the rebuttal of control.» The OTS is unlikely to rule on the merger by year-end, according to the prospectus, so either party can abandon the transaction, aside from a $54 million payment Telebanc would owe E*Trade. The two companies first announced their plan June 1. E*Trade firm sought to buy Telebanc to add banking services to its array of online financial offerings as it battles for new accounts with firms like Charles Schwab Corp. and Merrill Lynch & Co. Tokyo-based Softbank sells PC software and owns stakes in Yahoo Inc., Ziff-Davis Inc., MessageMedia Inc. and CyberCash Inc., among other Internet commerce companies. It also makes venture capital investments in private firms. Softbank has told E*Trade «that it is not willing to become a savings and loan holding company,» the firm said in the prospectus. «As a result, if the OTS does not accept a rebuttal of control from Softbank America, regulatory approval of the merger would not be obtainable and the merger could not be completed.»