eTrade 2006 Annual Report Download - page 119

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The following table summarizes the asset-backed securities transferred to each CDO at closing, the amount
of the cash proceeds, the preference shares purchased by the Company and the current rating for those preference
shares (dollars in millions):
Asset-Backed Securities Transferred to CDO
Preference Shares
Purchased
by E*TRADE
CDO Transaction Date E*TRADE
Independent
Investment Advisor
Transferred
After
Closing Total Proceeds
Rating at
12/31/06
Amount Moody’s S&P
CDO V August 2006 $ 96.8 $133.1 $70.1 $ 300.0 $ 300.0 $2.2 N/A N/A
CDO IV December 2005 37.0 238.6 24.4 300.0 300.0 1.4 N/A B
CDO III December 2004 124.0 175.5 — 299.5 304.4 5.0 Ba1 BB+
CDO I September 2002 50.2 200.0 — 250.2 251.7 —(1) N/A(1) N/A(1)
Total $308.0 $747.2 $94.5 $1,149.7 $1,156.1 $8.6
(1) During the third quarter of 2006, the preference shares related to CDO I were written off as the Company did not expect any future
payments on the investment.
The carrying values of the Company’s retained interests in the CDOs are 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 and securities, net in the consolidated statements of income. The following table presents a
sensitivity analysis of the Company’s retained interests in the CDOs at December 31, 2006 (dollars in thousands):
CDO III CDO IV CDO V
Fair value of retained preference shares(1)(2) $4,927 $1,365 $2,318
Weighted-average remaining life (years) 2.27 3.86 3.67
Weighted-average prepayment speed 10% 10% 10%
Impact of 10% adverse change $ (24) $ (12) $ (5)
Impact of 20% adverse change $ (48) $ (24) $ (9)
Weighted-average discount rate 15% 15% 16%
Impact of 10% adverse change $ (157) $ (75) $ (123)
Impact of 20% adverse change $ (305) $ (144) $ (235)
Weighted-average expected credit losses 0.28% 0.34% 0.34%
Impact of 10% adverse change $ (23) $ (10) $ (9)
Impact of 20% adverse change $ (45) $ (20) $ (19)
Actual credit losses to date $ — $ — $ —
For the year ended December 31, 2006
Actual interest payments received $ 775 $ 209 $ —
(1) Based on calculated discounted expected future cash flows, premised on weighted-average life, prepayment speed, discount rate and
expected credit losses shown in this table.
(2) During the third quarter of 2006, the preference shares related to CDO I were written off as the Company did not expect any future
payments on the investment.
The sensitivities and estimates shown in the preceding table are hypothetical and should be used with the
understanding that actual future performance and results can vary significantly. As the sensitivity analysis table
shows, 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. Changes in one factor may result in changes in another factor (for
example, increases in market interest rates could result in lower prepayments and increased credit losses), which
could magnify or counteract the sensitivities.
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