eTrade 2008 Annual Report Download - page 39

reviewed the estimated future taxable income for our retail and institutional segments separately and determined
that our net operating losses in 2007 and 2008 were due solely to the credit losses in our institutional segment.
We believe these losses were caused by the crisis in the residential real estate and credit markets which
significantly impacted our asset-backed securities and home equity loan portfolios in 2007 and continued to
generate credit losses in 2008. We estimate that these credit losses will continue in future periods; however, we
ceased the business activities which we believe are the root cause of these losses. Therefore, while we do expect
credit losses to continue in future periods, we do expect these amounts to decline when compared to our credit
losses in 2007 and 2008. Our retail segment generated substantial book taxable income for each of the last six
years and we estimate that it will continue to generate taxable income in future periods at a level sufficient
enough to generate taxable income for the Company as a whole. We consider this to be significant, objective
evidence that we will be able to realize our deferred tax assets in the future.
Our analysis of the need for a valuation allowance recognizes that we are in a cumulative book taxable loss
position as of the three-year period ended December 31, 2008, which is considered significant, objective
evidence that we may not be able to realize some portion of our deferred tax assets in the future. However, we
believe we are able to rely on our forecasts of future taxable income and overcome the uncertainty created by the
cumulative loss position.
The crisis in the residential real estate and credit markets has created significant volatility in our results of
operations. This volatility is isolated almost entirely to our institutional segment. Our forecasts for this segment
include assumptions regarding our estimate of future expected credit losses, which we believe to be the most
variable component of our forecasts of future taxable income. We believe this variability could create a book loss in
our overall results for an individual reporting period while not significantly impacting our overall estimate of
taxable income over the period in which we expect to realize our deferred tax assets. Conversely, we believe our
retail segment will continue to produce a stable stream of income which we believe we can reliably estimate in both
individual reporting periods as well as over the period in which we estimate we will realize our deferred tax assets.
In evaluating the need for a valuation allowance, we estimated future taxable income based on management
approved forecasts. This process required significant judgment by management about matters that are by nature
uncertain. If future events differ significantly from our current forecasts, a valuation allowance may need to be
established, which would have a material adverse effect on our results of operations, financial condition and our
regulatory capital position at E*TRADE Bank. In addition, a significant portion of the net deferred tax asset
relates to a $2.3 billion federal tax loss carryforward, the utilization of which may be further limited in the event
of certain material changes in the ownership of the Company. We will continue to monitor and update our
assumptions and forecasts of future taxable income and assess the need for a valuation allowance.
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