eTrade 2008 Annual Report Download - page 116

Level 3 Assets and Liabilities
Level 3 assets and liabilities include instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or estimation. As of December 31, 2008, 23% and 1% of
the Company’s total assets and total liabilities, respectively, represented instruments measured at fair value on a
recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 as of December
31, 2008 represented less than 1% of the Company’s total assets and total liabilities.
In general, level classification transfers in and out of Level 3 during the year ended December 31, 2008
were driven by changes in price transparency in the CMO market throughout the year. The Company’s transfers
in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis. Level 3 assets as of
December 31, 2008 include $3.9 million of CMOs classified as Level 2 on January 1, 2008. While the
Company’s fair value estimates of Level 3 instruments as of December 31, 2008 utilized observable inputs where
available, the valuation included significant management judgment in determining the relevance and reliability of
market information considered and the financial instruments were therefore classified as Level 3. The Company
recorded a $118.8 million loss in other comprehensive loss during the year ended December 31, 2008 on CMOs
classified as Level 3 as of December 31, 2008. The Company recorded a $1.0 million loss in other
comprehensive loss during the year ended December 31, 2008 related to CMOs classified as Level 2 on January
1, 2008 and Level 3 as of December 31, 2008. Of the $95.0 million impairment recorded for the year ended
December 31, 2008 related to the CMO portfolio, $93.6 million related to CMOs classified as Level 3 as of
January 1, 2008 and December 31, 2008.
Nonrecurring Fair Value Measurements
The Company also measures certain other financial assets at fair value on a nonrecurring basis in
accordance with GAAP. As of December 31, 2008, loans, net included impaired loans with a current value of
approximately $360 million that were measured at fair value on a nonrecurring basis. The majority of the fair
value measurements of these loans were based on estimates of the current property value. The Company
classified these fair value measurements as Level 3 of the fair value hierarchy as the valuations included Level 3
inputs that were significant to the estimate of fair value. The adjustments to fair value of these loans resulted in a
loss of $132.2 million for the year ended December 31, 2008.
Disclosures about Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of the estimated
fair value of financial instruments. The following disclosure of the estimated fair value of financial instruments, not
otherwise disclosed above pursuant to SFAS No. 157, is made by the Company in accordance with SFAS No. 157.
Different market assumptions and estimation methodologies could significantly affect estimated fair value amounts.
The fair value of financial instruments, not otherwise disclosed above pursuant to SFAS No. 157, whose
estimated fair value approximates carrying value is summarized as follows:
•Cash and equivalents, cash and investments required to be segregated, margin receivables and
customer payables—Fair value is estimated to be carrying value.
•Investment in FHLB stock—FHLB stock is carried at cost, which is considered to be a reasonable
estimate of fair value.
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