eTrade 2007 Annual Report Download - page 11

We are subject to investigations and lawsuits as a result of our losses from mortgage loans and asset-backed
securities
In 2007, we recognized an increased provision expense totaling $640 million and asset losses and
impairments of $2.45 billion, including the sale of our ABS portfolio to Citadel. As a result, various plaintiffs
have filed five class actions and four derivative lawsuits, alleging disclosure violations regarding our home
equity, mortgage and securities portfolios. In addition, the SEC initiated an informal inquiry into matters related
to our loan and securities portfolios. The defense of these matters will entail considerable cost and will be time-
consuming for our management. Unfavorable outcomes in any of these matters could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
Many of our competitors have greater financial, technical, marketing and other resources
The financial services industry is highly competitive, with multiple industry participants competing for the
same customers. Many of our competitors have longer operating histories and greater resources than we do and
offer a wider range of financial products and services. The impact of competitors with greater name recognition,
market acceptance and larger customer bases could adversely affect our revenue growth and customer retention.
Our competitors may also be able to respond more quickly to new or changing opportunities and demands and
withstand changing market conditions better than we can. Competitors may conduct extensive promotional
activities, offering better terms, lower prices and/or different products and services or combination of products
and services that could attract current E*TRADE customers and potentially result in price wars within the
industry. Some of our competitors may also benefit from established relationships among themselves or with
third parties enhancing their products and services.
Downturns or disruptions in the securities markets could reduce trade volumes and margin borrowing and
increase our dependence on our more active customers who receive lower pricing
Online investing services to the retail customer, including trading and margin lending, account for a
significant portion of our revenues. A downturn in or disruption to the securities markets may lead to changes in
volume and price levels of securities and futures transactions which may, in turn, result in lower trading volumes
and margin lending. In particular, a decrease in trading activity within our lower activity accounts would
significantly impact revenues and increase dependence on more active trading customers who receive more
favorable pricing based on their trade volume. A decrease in trading activity or securities prices would also
typically be expected to result in a decrease in margin borrowing, which would reduce the revenue that we
generate from interest charged on margin borrowing. More broadly, any reduction in overall transaction volumes
would likely result in lower revenues and may harm our operating results because many of our overhead costs are
fixed.
We depend on payments from our 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 may limit our ability to
transfer funds to or from our subsidiaries. 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.
We rely heavily on technology, and technology can be subject to interruption and instability
We rely on technology, particularly the Internet, to conduct much of our activity. Our technology operations
are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks,
unauthorized access and other similar events. Disruptions to or instability of our technology or external
technology that allows our customers to use our products and services could harm our business and our
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