eTrade 2006 Annual Report Download - page 118

Concurrent with these transfers, CDO V sold total beneficial interests of $300.0 million to investors in the form
of senior notes, subordinated notes and preference shares collateralized by the asset-backed securities. During the
ramp-up period, the Company purchased $70.1 million in asset-backed securities in open market transactions and
transferred them to CDO V. By November 3, 2006, 100% of the pool of underlying securities had been
transferred into CDO V.
The CDO V transaction is similar to the most recent E*TRADE CDO transaction, CDO IV, in that it is a
managed deal whereby the portfolio manager, E*TRADE Global Asset Management, Inc. (“ETGAM”), is
appointed to actively manage the collateral of the CDO. Because CDO V is a managed deal, it is a special
purpose entity and not a qualified special purpose entity. The CDO V transaction was accounted for as a sale in
accordance with SFAS No. 140.
The Company purchased $2.2 million of preference shares in CDO V. Retained interests are subordinate to
the notes sold by CDO V and on an equal standing with the preference shares purchased by other preference
share investors in CDO V. Neither CDO V itself nor the investors in the beneficial interests sold by CDO V have
recourse to the Company.
The Company reviewed CDO V to determine if consolidation was necessary under the requirements of
FIN 46R. The calculation of CDO V’s beneficial interests indicated that the Company was not the recipient of the
majority of the potential benefits or losses of the deal. Therefore, the Company is not the primary beneficiary of
the transaction and is not required to consolidate the CDO.
In prior years, the Company transferred asset-backed securities to E*TRADE ABS CDO IV, Ltd. (“CDO
IV”), E*TRADE ABS CDO III, Ltd. (“CDO III”), E*TRADE ABS CDO II, Ltd. (“CDO II”) and E*TRADE
ABS CDO I, Ltd. (“CDO I”). Asset-backed securities were also transferred to CDO IV and CDO III by an
unrelated financial advisor. Concurrent with these transfers, the respective CDOs sold beneficial interests to
independent investors in the form of senior and subordinated notes and preference shares, collateralized by the
asset-backed securities. Neither the CDOs themselves nor the investors in the beneficial interests sold by the
CDOs have recourse to the Company.
During the third quarter of 2006, the preference shares related to CDO I were written off as the Company
did not expect any future payments on the investment. In addition, during the fourth quarter of 2006, the majority
of preference shareholders elected to call CDO II and the $6.0 million of the Preference Share principal was
returned to the Company.
CDO I, II and III are qualifying special purpose entities as defined in SFAS No. 140, and, as such, are not
required to be consolidated in the Company’s consolidated financial statements. CDO IV is not a qualified
special purpose entity but rather a special purpose entity, as the Company has been appointed by the CDO to
actively manage the collateral of the CDO. The transaction was accounted for as a sale in accordance with SFAS
No. 140. The Company reviewed CDO IV to determine if consolidation was necessary under the requirements of
FIN 46R. The calculation of the CDO’s beneficial interests indicated that ETGAM was not the recipient of the
majority of the potential benefits or losses of the deal and therefore, not the primary beneficiary of the transaction
and not required to consolidate the CDO.
The Company purchased preference shares in each of the CDOs. Retained interests are subordinate to the
notes sold by each CDO and on an equal standing with the preference shares purchased by other preference share
investors in each CDO. The Company also purchased $1.0 million of the BBB subordinated notes in the CDO IV
transaction.
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