eTrade 2007 Annual Report Download - page 51

plans and successfully met our liquidity needs during this extraordinary period. We believe that our ability to
meet liquidity needs during this time validates the effectiveness of the liquidity policies and contingency plans.
Capital is generated primarily through our business operations and our capital market activities. During the
second half of 2007, our institutional segment incurred a significant amount of losses as a result of its exposure to
the crisis in the residential real estate and credit markets. Consequently, this segment required a significant
capital infusion during the fourth quarter. The Company raised $2.5 billion in cash from the Citadel Investment,
the majority of which was used to provide capital to the intuitional segment. While this segment continues to
have exposure to the crisis in the residential real estate and credit markets, we believe that the proceeds from the
Citadel Investment as well as capital generated in our retail segment will be sufficient to meet our capital needs
for at least the next twelve months.
Changes in Cash and Equivalents
In 2007, the consolidated cash and equivalents balance increased to $1.8 billion for the period ended
December 31, 2007. Cash and equivalents at E*TRADE Financial Corporation, on a standalone holding company
basis, increased $112.1 million to $251.7 million due primarily to an increase in cash provided by operating
activities of $448.8 million and by financing activities of $1.4 billion offset by a decrease in net cash used in
investing activities of $1.8 billion. Additionally, Converging Arrows, Inc. (“Converging Arrows”), a subsidiary
of the parent company, had $60.1 million of cash and investment securities available as a source of liquidity for
the parent company.
Corporate Debt
Our current senior debt ratings are Ba3 by Moody’s Investor Service, B (watch neg) by Standard & Poor’s
and BB by Dominion Bond Rating Service (“DBRS”). The Company’s long-term deposit ratings are Ba2 by
Moody’s Investor Service, BB- (watch neg) by Standard & Poor’s and BB (high) by DBRS. A significant change
in these ratings may impact the rate and availability of future borrowings.
Liquidity Available from Subsidiaries
Liquidity available to the Company from its subsidiaries, other than Converging Arrows, is limited by
regulatory requirements. At December 31, 2007, Converging Arrows had $60.1 million of cash and investment
securities available as a source of liquidity for the parent company. Converging Arrows is not restricted in its
dealings with the parent company and may transfer funds to the parent company without regulatory approval. In
addition to Converging Arrows, brokerage and banking subsidiaries may provide liquidity to the parent;
however, they are restricted by regulatory guidelines.
E*TRADE Bank is prohibited by regulations from lending to the parent company. At December 31, 2007,
E*TRADE Bank had approximately $435.1 million of capital above the “well capitalized” level. In the current
credit environment, we plan to increase the excess capital at E*TRADE Bank in order to increase our ability to
absorb credit losses while still maintaining “well capitalized” status. Therefore, we do not expect to dividend this
excess capital to the parent during the foreseeable future. E*TRADE Bank is also required by Office of Thrift
Supervision (“OTS”) regulations to maintain tangible capital of at least 1.50% of tangible assets. E*TRADE
Bank satisfied this requirement at December 31, 2007 and 2006. However, events beyond management’s control,
such as a continued deterioration in residential real estate and credit markets, could adversely affect future
earnings and E*TRADE Bank’s ability to meet its future capital requirements.
Brokerage subsidiaries are required to maintain net capital equal to the greater of $250,000 or 2% of
aggregate debit balances arising from customer transactions. At December 31, 2007 and 2006, all of our
significant brokerage subsidiaries met their minimum net capital requirements. The Company’s broker-dealer
subsidiaries had excess net capital of $730.8 million at December 31, 2007, of which $509.6 million is available
for dividend while still maintaining a capital level above regulatory “early warning” guidelines.
Off-Balance Sheet Arrangements
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet
the needs of our clients and to reduce our own exposure to interest rate risk. These arrangements include firm
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