eTrade 2007 Annual Report Download - page 93

Mortgage- and asset-backed securities that both have an unrealized loss and are rated below “AA” by at
least half of the agencies that rate the securities, as well as interest-only securities that have unrealized losses, are
evaluated for impairment in accordance with Emerging Issues Task Force (“EITF”) 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets
(“EITF 99-20”). Accordingly, when the present value of a security’s anticipated cash flows declines below the
last periodic estimate, the Company recognizes an impairment charge in the gain (loss) on loans and securities,
net line item in the consolidated statement of income (loss).
Asset Securitization and Retained Interests—An asset securitization involves the transfer of financial assets
to another entity in exchange for cash and/or beneficial interests in the assets transferred. Asset transfers in which
the Company surrenders control over the financial assets are accounted for as sales to the extent that
consideration, other than beneficial interests in the transferred assets, is received in the exchange in accordance
with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The carrying amount of the assets transferred is allocated between the assets sold in these transactions
and the retained beneficial interests, based on their relative fair values at the date of the transfer. The Company
records gains or losses for the difference between the allocated carrying amount of the assets sold and the net
cash proceeds received. These gains or losses are recorded in the gain (loss) on loans and securities, net line item
in the consolidated statement of income (loss). Fair value is determined based on quoted market prices, if
available. Generally, quoted market prices are not available for beneficial interests; therefore, the Company
estimates the fair value based on the present value of the associated expected future cash flows. In determining
the present value of the associated expected future cash flows, management is required to make estimates and
assumptions. Key estimates and assumptions include future default rates, credit losses, discount rates,
prepayment speeds and collateral repayment rates. Retained beneficial interests are accounted for in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and EITF 99-20 and are
included in the available-for-sale mortgage-backed and investment securities and trading securities in the
consolidated balance sheet.
Loans Held-for-Sale—Loans held-for-sale consist of mortgages acquired and loans originated by the
Company that are intended for sale in the secondary market. These loans are carried at the lower of cost or
estimated fair value, as determined on an aggregate basis, based on quoted market price for loans with similar
characteristics. Net unrealized losses are recognized in a valuation allowance by charges to income. Premiums
and discounts on loans held-for-sale are deferred and recognized as part of gain (loss) on sales of loans
held-for-sale, which is reported in the gain (loss) on loans and securities, net line item in the consolidated
statement of income (loss), and are not accreted or amortized.
Margin Receivables—Margin receivables represent credit extended to customers and non-customers to
finance their purchases of securities by borrowing against securities they currently own. Receivables from
non-customers represent credit extended to principal officers and directors of the Company to finance their
purchase of securities by borrowing against securities owned by them. Margin receivables to the Company’s
principal officers totaled less than $1.0 million and $6.3 million as of December 31, 2007 and 2006, respectively.
Securities owned by customers and non-customers are held as collateral for amounts due on the margin
receivables, the value of which is not reflected in the consolidated balance sheet. In many cases, the Company is
permitted to sell or re-pledge these securities held as collateral and use the securities to enter into securities
lending transactions, to collateralize borrowings or for delivery to counterparties to cover customer short
positions. At December 31, 2007, the fair value of securities that the Company received as collateral in
connection with margin receivables and stock borrowing activities, where the Company is permitted to sell or
re-pledge the securities, was approximately $9.6 billion. Of this amount, $3.3 billion had been pledged or sold at
December 31, 2007 in connection with securities loans, bank borrowings and deposits with clearing
organizations.
Loans Receivable, Net—Loans receivable, net consists of real estate and consumer loans that management
has the intent and ability to hold for the foreseeable future or until maturity. These loans are carried at amortized
90