eTrade 2007 Annual Report Download - page 62

In addition, we are reviewing our purchased home equity loan portfolio in order to identify loans to be
repurchased by the originator. More specifically, home equity loans that become 30 days delinquent are reviewed
for early payment defaults, violations of transaction representations and warranties, or material misrepresentation
on the part of the seller. Any loans identified with these deficiencies are submitted to the original seller for
repurchase. Historically, the majority of these repurchase requests were honored by the original seller; however,
beginning in the third quarter of 2007 our repurchase rate declined substantially.
Securities
We focus primarily on security type and credit rating to monitor credit risk in our securities portfolios. We
believe asset-backed securities represent our highest concentration of credit risk. The table below details the
average credit ratings by type of asset as of December 31, 2007 and 2006 (dollars in thousands):
December 31, 2007
AA or
Higher A BBB
Below
Investment
Grade Non-Rated Total
Mortgage-backed securities $10,896,343 $ 469 $ — $ — $ — $10,896,812
Asset-backed securities — — — 64 58 122
Corporate bonds, municipal bonds
and preferred stock 1,271,105 8,342 — — — 1,279,447
Total $12,167,448 $ 8,811 $ — $ 64 $ 58 $12,176,381
December 31, 2006
AA or
Higher A BBB
Below
Investment
Grade Non-Rated Total
Mortgage-backed securities $10,531,264 $ 3,771 $ 10,370 $ 4,800 $ 2,667 $10,552,872
Asset-backed securities 948,309 780,639 452,992 22,966 34,159 2,239,065
Corporate bonds, municipal bonds
and preferred stock 1,412,150 63,061 30,632 — — 1,505,843
Total $12,891,723 $847,471 $493,994 $27,766 $36,826 $14,297,780
During the year ended December 31, 2007, we sold substantially all of our asset-backed securities portfolio
in connection with the Citadel transaction on November 29, 2007. This sale was the primary reason for the
decline in available-for-sale securities rated below “AA”.
Operational Risk Management
Operational risk is the risk of loss resulting from fraud, inadequate controls or the failure of the internal
control process, third party vendor issues, processing issues and external events. Operational risks exist in most
areas of the Company from advertising to customer service. While we make every effort to protect against
failures in the internal controls system, no system is completely fail proof.
The failure of a third party vendor to adequately meet its responsibilities could result in financial losses and
reputation risks. The Vendor Risk Management group monitors our vendor relationships. Third party vendor
arrangements are overseen by the Vendor Risk Management group. The vendor risk identification process
includes evaluating contracts, renewal options and vendor performance. To ensure the financial soundness of
providers, we conduct financial reviews of our large providers. In addition, onsite operational audits are
conducted annually for significant providers.
Fraud losses result from unauthorized use of customer and corporate funds and resources. We monitor
customer transactions and attempt to identify fraudulent transactions. However, new techniques are constantly
being developed by perpetrators to commit fraud.
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