eTrade 2010 Annual Report Download - page 12

We could experience significant losses on other securities held on the balance sheet.
At December 31, 2010, we held $490.3 million in amortized cost of non-agency collateralized mortgage
obligations (“CMO”) on our consolidated balance sheet. We incurred net impairment charges of $37.7 million
during 2010, which was a result of the deterioration in the expected credit performance of the underlying loans in
the securities. If the credit quality of these securities further deteriorates, we may incur additional impairment
charges which would have an adverse effect on our regulatory capital position and our results of operations in
future periods.
Loss of customers and assets could destabilize the Company or result in lower revenues in future periods.
During November 2007, well-publicized concerns about E*TRADE Bank’s holdings of asset-backed
securities led to widespread concerns about our continued viability. From the beginning of this crisis through
December 31, 2007, when the situation stabilized, customers withdrew approximately $5.6 billion of net cash and
approximately $12.2 billion of net assets from our bank and brokerage businesses. Many of the accounts that
were closed belonged to sophisticated and active customers with large cash and securities balances. While we
were able to stabilize our retail franchise in 2008, 2009 and 2010, concerns about our viability may recur, which
could lead to destabilization and asset and customer attrition. If such destabilization should occur, there can be no
assurance that we will be able to successfully rebuild our franchise by reclaiming customers and growing assets.
If we are unable to sustain or, if necessary, rebuild our franchise, in future periods our revenues will be lower and
our losses will be greater than we have experienced.
We have a large amount of debt.
We have issued a substantial amount of high-yield debt, with restrictive financial and other covenants.
Following the completion of the Debt Exchange in 2009, in which $1.7 billion aggregate principal amount of
interest-bearing corporate debt was exchanged for an equal principal amount of non-interest-bearing convertible
debentures, our expected annual interest cash outlay decreased to approximately $166 million. Our ratio of debt
(our corporate debt) to equity (expressed as a percentage) was 53% at December 31, 2010. The degree to which
we are leveraged could have important consequences, including: 1) a substantial portion of our cash flow from
operations is dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds
available for other purposes; 2) our ability to obtain additional financing for working capital, capital
expenditures, acquisitions and other corporate needs is significantly limited; and 3) our substantial leverage may
place us at a competitive disadvantage, hinder our ability to adjust rapidly to changing market conditions and
make us more vulnerable in the event of a further downturn in general economic conditions or our business. In
addition, a significant reduction in revenues could have a material adverse effect on our ability to meet our
obligations under our debt securities.
We depend on payments from our subsidiaries.
We depend on dividends, distributions and other payments from our subsidiaries to fund payments on our
obligations, including our debt obligations. Regulatory and other legal restrictions limit our ability to transfer
funds to or from our subsidiaries. In addition, many of our subsidiaries are subject to laws and regulations that
authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in
certain circumstances. These laws and regulations may hinder our ability to access funds that we may need to
make payments on our obligations. The majority of our capital is invested in our banking subsidiary E*TRADE
Bank, which may not pay dividends to us without approval from the OTS. Our primary brokerage subsidiaries,
E*TRADE Securities LLC and E*TRADE Clearing LLC, are both subsidiaries of E*TRADE Bank; therefore, as
our primary banking regulator and as a result of the memoranda of understanding with the OTS under which we
continue to operate, the OTS controls our ability to receive dividend payments from our brokerage business as
well. Furthermore, even if we receive the approval of the OTS to receive dividend payments from our brokerage
business, in the event of our bankruptcy or liquidation or E*TRADE Bank’s receivership, we would not be
entitled to receive any cash or other property or assets from our subsidiaries (including E*TRADE Bank,
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