eTrade 2008 Annual Report Download - page 52

contingency 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. While the liquidity risk associated with our customer deposits remains at historically high
levels, we believe the current level of risk is substantially lower than it was during the fourth quarter of 2007.
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 of 2007. The Company raised $2.5 billion in cash from Citadel, the
majority of which was used to provide capital to the institutional segment. While this segment continues to have
exposure to the crisis in the residential real estate and credit markets, our retail segment remains profitable and
continues to generate capital through retained earnings.
We maintain capital in excess of regulatory minimums at our regulated subsidiaries, the most significant of
which is E*TRADE Bank. As of December 31, 2008, we held $714.7 million of risk-based capital at E*TRADE
Bank in excess of the regulatory minimum level required to be considered “well capitalized.”
We raised additional capital in 2008 by issuing shares of common stock in exchange for existing corporate
debt, primarily our senior notes, commonly referred to as “3(a)9 exchanges.” We completed several 3(a)9
exchanges in the first half of 2008, which resulted in a retirement of $120.8 million of existing corporate debt.
We did not complete any of these transactions during the second half of 2008 as the relative prices of our
common stock and corporate debt made it unattractive to do so.
In addition, we raised approximately $750 million in cash through non-core asset sales, including the sale of
our Canadian brokerage business and our equity shares in Investsmart(1).
We believe the combination of the capital generated in the transactions detailed above, the excess capital
held at E*TRADE Bank and the capital that continues to be generated in our retail segment will be sufficient to
meet our capital needs for at least the next twelve months.
During the fourth quarter of 2008, we applied to the U.S. Treasury for funding under the TARP Capital
Purchase Program. Our application remains under active consideration and we cannot predict when a final
decision will be reached. We estimate this program could provide up to approximately $800 million in new
preferred equity, at rates substantially discounted to current market rates. If our application is approved, it would
likely be conditional upon additional capital raising activities by us, including possible transactions with existing
security holders. Our ability to issue preferred equity under the TARP program would be dependent upon
receiving approval from certain of our bond holders and possibly our shareholders. While we do not believe we
need this capital to fund our operations, it does have the potential to significantly improve the capital position of
both E*TRADE Bank and the parent company, which would enhance our ability to maintain the balance sheet at
its current level.
(1) The equity shares of Investsmart were sold by our wholly-owned subsidiary, E*TRADE Mauritius.
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