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Table of Contents
Index to Financial Statements
NOTE 11—ASSET SECURITIZATION
Collateralized Debt Obligations
In August 2003, the Bank and ETGAM transferred $321.7 million and $78.4 million, respectively, of asset-backed securities to
E*TRADE ABS CDO II, Ltd (“CDO II”). Concurrently, CDO II sold beneficial interests in the form of senior and subordinated notes and
preference shares collateralized by CDO II’s asset-backed securities to investors for cash of $400.9 million. The Company recognized a
nominal loss on the initial sale of the asset-backed securities. Neither CDO II nor the investors in beneficial interests sold by CDO II have
consolidated in the Company’s financial statements. ETGAM purchased $6.0 million, the fair value at date of purchase, of preference shares of
CDO II from independent third parties.
In September 2002, ETGAM executed a similar securitization in which an unrelated financial advisor and ETGAM transferred $251.7
million of asset-backed securities to E*TRADE ABS CDO I, Ltd (“CDO I”). All securities issued by this trust were sold to unrelated third
parties, except $8.6 million of preference shares purchased by ETGAM from an independent third party.
ETGAM’s retained interests are subordinate to the notes sold by CDO I and CDO II and on an equal standing with the preference shares
purchased by other preference share investors in CDO I and CDO II. At December 31, 2003, Moody’s and Fitch rated the CDO I and CDO II
preference shares as follows:
The carrying value of ETGAM’s retained interest in both CDO I and CDO II is subject to future volatility in credit, interest rate and
prepayment risk. The investment in the preference shares is classified as a trading security in the Company’s investment portfolio. Therefore,
changes in the market value of these securities are recorded in gain on sales of loans held-for-sale and securities, net in the consolidated
statements of operations. The following table presents a sensitivity analysis of ETGAM’s retained interests in CDO I and CDO II at December
31, 2003 (dollars in thousands):
74
Moody’
s
Fitch
CDO I
Baa3
BBB
-
CDO II
Ba2
BBB
-
CDO I
CDO II
Fair value of retained preference shares
$
7,301
$
6,441
Weighted
-
average remaining life (years)
3.59
4.03
Weighted
-
average prepayment speed
10.00
%
10.00
%
Impact of 10% adverse change
$
(163
)
$
(109
)
Impact of 20% adverse change
$
(319
)
$
(213
)
Weighted
-
average discount rate
16.00
%
16.00
%
Impact of 10% adverse change
$
(398
)
$
(395
)
Impact of 20% adverse change
$
(759
)
$
(754
)
Weighted
-
average expected credit losses
1.66
%
0.49
%
Impact of 10% adverse change
$
(121
)
$
(36
)
Impact of 20% adverse change
$
(233
)
$
(68
)
Actual credit losses to date
$
—
$
—
For the year ended December 31, 2003(1)
Actual interest payments received
$
2,414
$
279
(1)
No actual principal payments have been received to date.