eTrade 2009 Annual Report Download - page 139

The following table summarizes the effect of interest rate contracts designated and qualifying as hedging
instruments in fair value hedges and related hedged items on the consolidated statement of loss in accordance
with the Company’s adoption of the amended disclosure requirements on January 1, 2009 (dollars in thousands):
Year Ended December 31, 2009
Hedging
Instrument
Hedged
Item
Gains (losses) included in earnings:
Interest rate contracts:
Corporate debt $(7,874) $7,874
Brokered certificates of deposit (8) 8
Total fair value hedges $(7,882) $7,882
There was no fair value hedge ineffectiveness for the year ended December 31, 2009. There was $2.0
million of fair value hedge ineffectiveness income and $4.7 million of fair value hedge ineffectiveness expense
for the years ended December 31, 2008 and 2007, respectively. The fair value hedge ineffectiveness is reflected
in the gains (losses) on loans and securities, net line item.
Liability to Lehman Brothers
Prior to Lehman Brothers’ declaration of bankruptcy in September 2008, E*TRADE Bank was a
counterparty to interest rate derivative contracts with a subsidiary of Lehman Brothers. The declaration of
bankruptcy by Lehman Brothers triggered an event of default and early termination under E*TRADE Bank’s
International Swap Dealers Association Master Agreement. As of the date of the event of default, E*TRADE
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. E*TRADE Bank
currently is negotiating with Lehman Brothers in an attempt to resolve the parties’ respective obligations.
Credit Risk
Impact on Fair Value Measurements
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 $146.1 million of its
mortgage-backed and investment securities as collateral related to its derivative contracts in net liability positions
to counterparties as of December 31, 2009.
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, 2009, the consideration of counterparty credit
risk did not result in an adjustment to the valuation of the Company’s derivative instruments.
Impact on Liquidity
In the normal course of business, collateral requirements contained in the Company’s derivative instruments
are enforced by the Company and its counterparties. Upon enforcement of the collateral requirements, the amount
of collateral requested is typically based on the net fair value of all derivative instruments with the counterparty; that
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