eTrade 2008 Annual Report Download - page 128

Derivatives used as economic hedges but not designated in a hedging relationship for accounting purposes are
included in derivative assets or derivative liabilities. The mark and interest income or expense on the net hedged
position is recognized in gain (loss) on loans and securities, net.
Liability to Lehman Brothers
Prior to Lehman Brothers’ declaration of bankruptcy in September 2008, the Bank was a counterparty to
interest rate derivative contracts with a subsidiary of Lehman Brothers. Lehman Brothers’ declaration of
bankruptcy triggered an event of default and early termination under the Bank’s International Swap Dealers
Association Master Agreement. As of the date of the event of default, the Bank’s net amount due to the Lehman
Brothers subsidiary was approximately $101 million, the majority of which was collateralized by securities held
by or on behalf of the Lehman Brothers subsidiary. The Bank is currently pursuing a settlement of the obligation,
including a return of the collateral and payment of cash for the net amount owed to Lehman Brothers.
Credit Risk
Credit risk is an element of the recurring fair value measurements for certain assets and liabilities, including
derivative instruments. Credit risk is managed by limiting activity to approved counterparties and setting
aggregate exposure limits for each approved counterparty. The Company also monitors collateral requirements
on derivative instruments through credit support agreements, which reduce risk by permitting the netting of
transactions with the same counterparty upon occurrence of certain events. The Company considered the impact
of credit risk on the fair value measurement for derivative instruments, particularly those in net liability positions
to counterparties, to be mitigated by the enforcement of credit support agreements, and the collateral
requirements therein. The Company pledged approximately $441.4 million of its mortgage-backed securities as
collateral related to its derivative contracts.
The Company’s credit risk analysis for derivative instruments also considered whether the cost to mitigate
the credit loss exposure on derivative instruments in net asset positions would have resulted in material
adjustments to the valuations. During the year ended December 31, 2008, the consideration of counterparty credit
risk did not result in an adjustment to the valuation of its derivative financial instruments.
While the Company does not expect that any counterparty will fail to perform, the maximum exposure
associated with each counterparty to interest rate swaps and purchased interest rate options at December 31, 2008
was $23.8 million, net of derivative liabilities. The exposure was concentrated in two counterparties (Credit
Suisse First Boston and Royal Bank of Scotland).
NOTE 10—PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (dollars in thousands):
December 31,
2008 2007
Software $ 493,588 $ 464,384
Equipment and transportation(1) 174,871 216,853
Leasehold improvements 111,112 115,199
Buildings 71,927 71,927
Furniture and fixtures 31,223 33,333
Land 3,722 3,853
Total property and equipment, gross 886,443 905,549
Less accumulated depreciation and amortization (567,221) (550,116)
Total property and equipment, net $ 319,222 $ 355,433
(1) As of December 31, 2007, equipment and transportation included $47.4 million of aircraft that met the criteria and were accounted for as
being held-for-sale in accordance with SFAS No. 144. The net book value of the aircraft was $30.9 million at December 31, 2007. The
aircraft was sold during the year ended December 31, 2008, resulting in a pre-tax gain of $23.7 million.
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