eTrade 2009 Annual Report Download - page 61

On February 26, 2009, The Reserve announced that it had adopted a Plan of Liquidation for the orderly
liquidation of the assets of the Fund. Under the terms of the plan, which is subject to the supervision of the SEC,
The Reserve will continue to make interim distributions up to $0.9172 per share. The Reserve indicated in this
announcement that it was taking this approach in order to provide liquidity to investors without prejudicing the
legal right and remedies of any shareholder’s claims. As of December 31, 2009, we had received a total of $684.1
million in cash distributions made by the Fund. In the fourth quarter of 2008, we recorded an impairment charge
of $11.2 million, which represented our estimate of the amount we would lose in a pro-rata distribution.
On January 29, 2010, we received a final distribution from The Reserve Fund for $49.8 million. This
distribution will result in a gain of $0.8 million in the first quarter of 2010 as the pro-rata final distribution was
greater than what we originally estimated we would receive.
Liquidity Available from Subsidiaries
Liquidity available to the Company from its subsidiaries, other than Converging Arrows, Inc., is limited by
regulatory requirements. In addition, E*TRADE Bank may not pay dividends to the parent company without
approval from the OTS and any loans by E*TRADE Bank to the parent company and its other non-bank
subsidiaries are subject to various quantitative, arm’s length, collateralization and other requirements.
We maintain capital in excess of regulatory minimums at our regulated subsidiaries, the most significant of
which is E*TRADE Bank. As of December 31, 2009, we held $899.1 million of risk-based total capital at
E*TRADE Bank in excess of the regulatory minimum level required to be considered “well capitalized.” In the
current credit environment, we plan to maintain excess risk-based total capital at E*TRADE Bank in order to
enhance our ability to absorb credit losses while still maintaining “well capitalized” status. However, events
beyond management’s control, such as a continued deterioration in residential real estate and credit markets,
could adversely affect future earnings and E*TRADE Bank’s ability to meet its future capital requirements.
The Company’s broker-dealer subsidiaries are subject to capital requirements determined by their respective
regulators. At December 31, 2009 and 2008, all of our brokerage subsidiaries met their minimum net capital
requirements. Our broker-dealer subsidiaries had excess net capital of $558.3 million(1) at December 31, 2009, a
decline of $159.3 million from December 31, 2008. This decline was due to dividends paid by broker-dealer
subsidiaries during the year ended December 31, 2009. While we cannot assure that we would obtain regulatory
approval again in the future to withdraw any of this excess net capital, $432.4 million is available for dividend
while still maintaining a capital level above regulatory “early warning” guidelines.
Other Sources of Liquidity
We also maintain $375 million in uncommitted financing to meet margin lending needs. At December 31,
2009, there were no outstanding balances and the full $375 million was available.
We rely on borrowed funds, such as FHLB advances and securities sold under agreements to repurchase, to
provide liquidity for the Bank. Our ability to borrow these funds is dependent upon the continued availability of
funding in the wholesale borrowings market. At December 31, 2009, the Bank had approximately $5.2 billion in
additional collateralized borrowing capacity with the FHLB. We will also have the ability to generate liquidity in
the form of additional deposits by raising the yield on our customer deposit accounts.
We have the option to make the interest payments on our 12
1
⁄ 2 % Notes in the form of either cash or
additional 12
1
⁄ 2 % Notes through May 2010. During the second quarter of 2008, we elected to make our first
interest payment of approximately $121 million in cash. During 2008 and 2009, we elected to make our second,
(1) The excess net capital of the broker-dealer subsidiaries at December 31, 2009 included $398.7 million and $92.3 million of excess net
capital at E*TRADE Clearing LLC and E*TRADE Securities LLC, respectively, which are subsidiaries of E*TRADE Bank and are also
included in the excess risk-based capital of E*TRADE Bank.
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