eTrade 2008 Annual Report Download - page 54

fund. The following table details our cash held in the Fund at the date the Fund was reported as “breaking the
buck” and at December 31, 2008 (dollars in thousands):
Variance
December 31,
2008
September 15,
2008
December 31, 2008 vs.
September 15, 2008
Corporate cash $ 45,273 $230,326 $(185,053)
Bank subsidiaries 82,645 420,456 (337,811)
Brokerage subsidiaries 18,390 93,559 (75,169)
Total cash held in the Fund $146,308 $744,341 $(598,033)
On October 31, 2008 and December 3, 2008, the Fund made a distribution to its investors of approximately
$26 billion and $14 billion, respectively. We received $377.7 million and $209.2 million, respectively, in
connection with these distributions. On December 3, 2008, the Reserve indicated that they are required to distribute
the remaining assets of the Fund ratably among the holders of outstanding shares, irrespective of whether the
investor made a redemption request before or after the Fund “breaking the buck.” The statement indicated,
assuming a pro-rata distribution, the net asset value per share would be $0.985. As a result of that statement, we no
longer believe it is probable that we will receive the full amount of our remaining position in the Fund; therefore, we
recorded an impairment charge of $11.2 million(1) related to this investment. The impairment charge of $3.5 million
related to our corporate cash was included in gain (loss) on sales of investments, net line item. The impairment
charge of $7.7 million related to our banking and brokerage subsidiaries is included in gain (loss) on loans and
securities, net line item. The remaining amount of $146.3 million, net of the $11.2 million impairment charge, that
we invested in the Fund is included as a receivable in the other assets line item.
On February 26, 2009, the Reserve announced that it had adopted a Plan of Liquidation for the orderly
liquidation of the assets of the Fund. Under the terms of the plan, which is subject to the supervision of the SEC,
the Reserve will continue to make interim distributions up to $0.9172 per share. The Reserve indicated in this
announcement that they were taking this approach in order to provide liquidity to investors without prejudicing
the legal rights and remedies of any shareholder’s claims. This announcement does not change our belief that we
will receive the full amount of our remaining position upon the ultimate distribution of the fund; however, we
cannot state with certainty that we will not ultimately incur additional loss on our remaining position. In addition,
we believe it will take a significant amount of time to eventually receive these funds.
Liquidity Available from Subsidiaries
Liquidity available to the Company from its subsidiaries, other than Converging Arrows, Inc. (“Converging
Arrows”) and E*TRADE Mauritius, a wholly-owned subsidiary of Converging Arrows, is limited by regulatory
requirements.
Any loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various
quantitative, arm’s length, collateralization and other requirements. At December 31, 2008, E*TRADE Bank had
approximately $714.7 million of risk-based capital above the “well capitalized” level. In the current credit
environment, we plan to keep this significant amount of excess risk-based capital at E*TRADE Bank in order to
enhance our ability to absorb credit losses while still maintaining “well capitalized” status. 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.
The Company’s broker/dealer subsidiaries are subject to capital requirements determined by their respective
regulators. At December 31, 2008 and 2007, all of our brokerage subsidiaries met their minimum net capital
requirements. The Company’s broker-dealer subsidiaries had excess net capital of $717.6(2) million at
December 31, 2008. While we cannot assure that we would obtain regulatory approval to withdraw any of this
excess net capital, $619.4 million is available for dividend while still maintaining a capital level above regulatory
“early warning” guidelines.
(1) The impairment charge was calculated based on the Company’s investment balance as of September 15, 2008 (the day the Fund “broke
the buck”), which totaled $744.3 million.
(2) The excess net capital of the broker dealer subsidiaries included $620.7 million of excess net capital at E*TRADE Clearing, which is a
subsidiary of E*TRADE Bank and is also included in the excess risk-based capital of E*TRADE Bank.
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