eTrade 2002 Annual Report Download - page 140

Table of Contents
Index to Financial Statements
did not recognize any gain or loss from the initial sale of the asset-backed securities. ETGAM purchased, and therefore retained $8.6 million of
preference shares of CDO I. As of December 31, 2002, the preference shares were rated Baa3 by the rating agency Moody’ s and BBB- by the
rating agency Fitch. ETGAM’ s retained interest is subordinate to the notes sold by CDO I and on an equal standing with the preference shares
purchased by other preference share investors in CDO I.
ETGAM entered into a management agreement to provide certain collateral management services for CDOI. As compensation for its services
ETGAM receives a management fee based on the quarterly amount of assets managed (as defined). For fiscal 2002, ETGAM earned
management fees under this agreement of $0.2million.
The original value of ETGAM’ s preference shares of CDO I was determined based on discounted expected future cash flows, which included
the following assumptions: expected credit losses, 0.35%; weighted-average life, 3.93 years; prepayment speed, 16%; and discount rate, 18%.
The carrying value of ETGAM’ s retained interest is subject to future volatility in credit, interest rate and prepayment risk. The investment in the
preference shares is classified as a trading security. Therefore changes in the market value of this security are recorded in gain on sales of loans
held-for-sale and securities, net in the consolidated statements of operations.
The table below presents a sensitivity analysis for the $9.0 million of retained interests at December31, 2002 and actual credit losses to date
(dollars in thousands):
Fair value of preference shares $ 9,000
Weighted-average remaining life (years) 3.93
Weighted-average prepayment speed 16.00 %
Impact of 10% adverse change $ (68 )
Impact of 20% adverse change $ (143 )
Weighted-average discount rate 18.00 %
Impact of 10% adverse change $ (426 )
Impact of 20% adverse change $ (818 )
Weighted-average credit losses 0.35 %
Impact of 10% adverse change $ (210 )
Impact of 20% adverse change $ (418 )
Actual credit losses to date $ —
Actual interest payments received through December 31, 2002 $ 678
Actual principal payments received through December 31, 2002 $ —
The sensitivities and estimates above are hypothetical and should be used with the understanding that actual future performance and results can
vary significantly. As the amounts indicate, changes in the fair value based on a 10% variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in
a particular assumption on the fair value of the preference shares is calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities.
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