eTrade 2008 Annual Report Download - page 9

ITEM 1A. RISK FACTORS
Risks Relating to the Nature and Operation of Our Business
We have incurred significant losses and cannot assure that we will be profitable
We incurred a net loss of $511.8 million, or $1.00 loss per share, for the year ended December 31, 2008, due
primarily to losses in our home equity portfolio. Although we have taken a significant number of steps to reduce
our credit exposure, we likely will continue to suffer significant credit losses in 2009 and 2010. In late 2007, we
experienced a substantial diminution of customer assets and accounts as a result of customer concerns regarding
our credit related exposures. While we were able to stabilize and return our retail franchise to growth during
2008, it could take a significant amount of time to fully mitigate the credit issues in our loan portfolio and return
to profitability.
We will continue to experience losses in our mortgage loan portfolio
At December 31, 2008, the principal balance of our home equity loan portfolio was $10.0 billion. During
2008, the allowance for loan losses in this portfolio increased by $374.7 million to $833.8 million, primarily due
to a rapid deterioration in performance in the second half of 2007 and continuing into 2008. While losses on the
one-to-four family loan portfolio are much smaller in scope than the losses on the home equity loan portfolio,
and may be offset somewhat by the value of the real estate held upon foreclosure, the allowance for loan losses in
this portfolio increased by $166.3 million to $185.1 million during 2008. As the crisis in the residential real
estate and credit markets continues, we expect credit losses to continue at historically high levels. There can be
no assurance that our provision for loan losses will be adequate if the residential real estate and credit markets
continue to deteriorate beyond our expectations. We may be required under such circumstances to further
increase our provision for loan losses, which could have an adverse effect on our regulatory capital position and
our results of operations in future periods.
We could experience significant losses on other securities held on the balance sheet of E*TRADE Bank
At December 31, 2008, we held $920.5 million in amortized cost of collateralized mortgage obligations
(“CMO”) on the consolidated balance sheet. While the majority of this portfolio remains AAA-rated, we incurred
impairment charges of $95.0 million during 2008, which was a result of the deterioration in the expected credit
performance of the underlying loans in the securities. In the event that these securities have a further decline in
credit quality, this could result in additional impairment charges which would have an adverse effect on our
regulatory capital position and our results of operations in future periods.
Losses of customers and assets could destabilize the Company or result in lower revenues in future periods
During November 2007, well-publicized concerns about the Bank’s holdings of asset-backed securities led
to widespread concerns about our continued viability. From the beginning of this crisis through December 31,
2007 when the situation stabilized, customers withdrew approximately $5.6 billion of net cash and approximately
$12.2 billion of net assets from our bank and brokerage businesses. Many of the accounts that were closed
belonged to sophisticated and active customers with large cash and securities balances. While we were able to
stabilize and return our retail franchise to growth in 2008, concerns about our viability may recur, which could
lead to destabilization and asset and customer attrition. If such destabilization should occur, there can be no
assurance that we will be able to successfully rebuild our franchise by reclaiming customers and growing assets.
If we are not successful, our revenues and earnings in future periods will be lower than we have experienced
historically.
We have a large amount of debt
We have issued a substantial amount of high-yield debt, with restrictive financial covenants, in connection
with the Citadel Limited Partnership (“Citadel”) transaction in which we issued a total of approximately $2.1
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