eTrade 2011 Annual Report Download - page 13

Loss of customers and assets could destabilize the Company or result in lower revenues in future periods.
During November 2007, well-publicized concerns about E*TRADE 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 our retail franchise, 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
unable to sustain or, if necessary, rebuild our franchise, in future periods our revenues will be lower and our
losses will be greater than we have experienced.
We have a large amount of debt.
We have issued a substantial amount of high-yield debt, with restrictive financial and other covenants and
our expected annual interest cash outlay is approximately $165 million. Our ratio of debt (our corporate debt) to
equity (expressed as a percentage) was 30% at December 31, 2011. The degree to which we are leveraged could
have important consequences, including: 1) a substantial portion of our cash flow from operations is dedicated to
the payment of principal and interest on our indebtedness, thereby reducing the funds available for other
purposes; 2) our ability to obtain additional financing for working capital, capital expenditures, acquisitions and
other corporate needs is significantly limited; and 3) our substantial leverage may place us at a competitive
disadvantage, hinder our ability to adjust rapidly to changing market conditions and make us more vulnerable in
the event of a further downturn in general economic conditions or our business. In addition, a significant
reduction in revenues could have a material adverse effect on our ability to meet our debt obligations.
In June 2011, we granted a security interest to the holders of the 2017 Notes and the 2019 Notes pursuant to
the terms of the applicable indentures. Under the applicable indentures, the security interest is limited to $300
million of property and assets owned by certain unregulated subsidiaries. The security interest granted was
secured by collateral significantly less in value than $300 million. Also in June 2011, certain of our subsidiaries
issued guarantees on each outstanding series of senior notes and 2019 Notes. E*TRADE Bank and E*TRADE
Securities LLC, among others, did not issue such guarantees.
We conduct all of our operations through subsidiaries and have no revenue sources other than dividends from
our subsidiaries, which are subject to advance regulatory approval in the case of our most significant
subsidiaries.
We depend on dividends, distributions and other payments from our subsidiaries to fund payments on our
obligations, including our debt obligations. Regulatory and other legal restrictions limit our ability to transfer
funds to or from our subsidiaries. In addition, many of our subsidiaries are subject to laws and regulations that
authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in
certain circumstances. These laws and regulations may hinder our ability to access funds that we may need to
make payments on our obligations, including our debt obligations. The majority of our capital is invested in our
banking subsidiary E*TRADE Bank, which may not pay dividends to us without approval from the OCC and the
Federal Reserve. Our primary brokerage subsidiaries, E*TRADE Securities LLC and E*TRADE Clearing LLC,
are both subsidiaries of E*TRADE Bank; therefore, the OCC, together with the Federal Reserve, controls our
ability to receive dividend payments from our brokerage business as well. Furthermore, even if we receive the
approval of the OCC and the Federal Reserve to receive dividend payments from our brokerage business, in the
event of our bankruptcy or liquidation or E*TRADE Bank’s receivership, we would not be entitled to receive any
cash or other property or assets from our subsidiaries (including E*TRADE Bank, E*TRADE Clearing LLC and
E*TRADE Securities LLC) until those subsidiaries pay in full their respective creditors, including customers of
those subsidiaries and, as applicable, the FDIC and the Securities Investor Protection Corporation.
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