eTrade 2007 Annual Report Download - page 112
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If the Company’s nonperforming loans at December 31, 2007 had been performing in accordance with their
terms, the Company would have recorded additional interest income of approximately $19.9 million, $1.9 million
and $0.8 million for the years ended December 31, 2007, 2006 and 2005, respectively. During 2007, we
recognized $18.4 million in interest on loans that were in nonperforming status at December 31, 2007. At
December 31, 2007 and 2006, there were no commitments to lend additional funds to any of these borrowers.
During the first quarter of 2007, the Company entered into a credit default swap (“CDS”) on $4.0 billion of
its first-lien residential real estate loan portfolio through a synthetic securitization structure. A CDS provides, for
a fee, an assumption by a third party of a portion of the credit risk related to the underlying loans. The CDS the
Company entered into provides protection for losses in excess of 10 basis points, but not to exceed approximately
75 basis points. In addition, the Company’s regulatory risk-weighted assets were reduced as a result of this
transaction because it transferred a portion of the Company’s credit risk to an unaffiliated third party.
NOTE 8—ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
ACTIVITIES
The Company enters into derivative transactions to protect against the risk of market price or interest rate
movements on the value of certain assets, liabilities and future cash flows. The Company is also required to
recognize certain contracts and commitments as derivatives when the characteristics of those contracts and
commitments meet the definition of a derivative as promulgated by SFAS No. 133, as amended.
Fair Value Hedges
Overview of Fair Value Hedges
The Company uses a combination of interest rate swaps, forward-starting swaps and purchased options on
swaps to offset its exposure to changes in value of certain fixed-rate assets and liabilities. Changes in the fair
value of the derivatives and the related hedged items are recognized currently in earnings. To the extent that the
hedge is ineffective, the changes in the fair values will not offset and the difference, or hedge ineffectiveness, is
reflected in other expense excluding interest in the consolidated statement of income (loss).
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