eTrade 2007 Annual Report Download - page 64

Classification and Valuation of Certain Investments
Description
We generally classify our investments in debt instruments (including corporate, government and municipal
bonds), mortgage-backed securities, asset-backed securities and marketable equity securities as either
available-for-sale or trading. We have not classified any investments as held-to-maturity. The classification of an
investment determines its accounting treatment. Both unrealized and realized gains and losses on trading
securities held by our banking subsidiaries are recognized in gain on sales of loans and securities, net. Securities
held by our brokerage subsidiaries are for market-making purposes and gains and losses are recorded as principal
transactions revenue. Unrealized gains and losses on available-for-sale securities are included in accumulated
other comprehensive income. Declines in fair value that we believe to be other-than-temporary are included in
gain on sales of loans and securities, net for our banking investments and gain on sales and impairment of
investments for our brokerage (other than those held for market-making purposes) and corporate investments.
We have investments in certain publicly-traded and privately-held companies, which we evaluate for other-than-
temporary declines in market value. For the years ended December 31, 2007, 2006 and 2005, we recognized
$168.7 million, $2.8 million and $40.3 million, respectively, of losses from other-than-temporary declines in
market value related to our investments.
Judgments
When possible, the fair value of securities is determined by obtaining quoted market prices. For illiquid
securities, fair value is estimated by obtaining market price quotes on similar liquid securities and adjusting the
price to reflect differences. For securities where market quotes and similar securities are not available, we use
discounted cash flows. We also make estimates about the fair value of investments and the timing for recognizing
losses based on market conditions and other factors. Other-than-temporary impairment is recorded based on
management judgment. Management evaluates securities based on market conditions and all available
information about the issuer or underlying collateral. This information is used to determine if impairment is
other-than-temporary. The determination that impairment is other-than-temporary is judgmental. Based on the
facts and circumstances, companies could have different conclusions regarding when securities are other-than-
temporarily impaired. Impairment of mortgage-backed or asset-backed securities is recognized when
management estimates the fair value of a security is less than its amortized cost and if the current present value of
estimated cash flows has decreased since the last periodic estimate. If the security meets both criterion, we write
the security down to fair value in the current period. Similarly, preferred stock is considered to be impaired and
written down to fair value in the current period when in a continued loss position for a prolonged period of time
and that loss position is deemed to be significant by management. We assess securities for impairment at each
reported balance sheet date.
Effects if Actual Results Differ
Earnings could be influenced by the timing of management’s decisions to recognize a security as other-than-
temporarily impaired. Our estimates are based on the best available information. Over time additional
information may become available and may influence future write-downs. If all securities with fair values lower
than amortized book were written-down, we would record a loss of $501.2 million. Management believes that its
estimates of other-than-temporary impairment are supportable and reasonable. See Note 6—Available-For-Sale
Mortgage-Backed and Investment Securities to the consolidated financial statements for additional information
regarding securities.
Valuation and Accounting for Financial Derivatives
Description
The Bank’s principal assets are residential mortgages and mortgage-backed securities, which typically pay a
fixed interest rate over an extended period of time. However, the principal sources of funds for the Bank are
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