Giving Up on Federal Help, E*Trade Turns to Self-Help

CFO Bruce Nolop discusses how the online brokerage firm recapitalized itself without aid from the Troubled Asset Relief Program.

The debt exchange spawned a $968 million third-quarter pretax, noncash loss and knocked $65 million out of shareholders’ equity. At the same time, the company cut its annual corporate interest payments from about $360 million to about $160 million and pushed all its debt maturities out until 2013. Besides the debt exchange, the company raised $765 million in common stock issuance, including a $147 million at-the-market offering (an offering of stock directly into the market at other than fixed prices).

Despite those moves, which Nolop enthusiastically calls an effort in “self-help,” he and CEO Layton had been trying to shake the phrase “troubled company” from descriptions of E*Trade for at least a year and a half. (Layton left at the end of 2009 in a previously announced retirement; the company’s lead independent director, Robert Druskin, became chairman and interim CEO.)

In some quarters, E*Trade is still regarded as struggling. But the finance chief believes the company has “beat the odds” with its recapitalization and change in strategy. Indeed, he views the period from May to August 2009, when the financing was completed, as one of the most satisfying in a 30-year finance career that includes 18 years in investment banking with Wasserstein Perella, Goldman Sachs, and Morgan Stanley. In a wide-ranging interview with CFO in December, Nolop talked about the shocks of the financial crisis, the frustrations of applying for TARP money, and much else. An edited version of the conversation follows.

When you started working for E*Trade, what kind of job did you think you were getting into?
My feeling was that the basic brokerage business was a tremendous franchise with outstanding upside potential, and that the company just needed to get past the crisis in the mortgage-loan portfolio to realize that potential. I thought that the worst of the crisis was behind the company and it was going to be upside from then on. What happened was that the Lehman bankruptcy and the subsequent turmoil in our mortgage portfolio hit. We had another wave of defaults and delinquencies and issues. So what I thought had been crisis past was a crisis present.

And then, one month after I started, they came out with the TARP program, and we thought, Hallelujah: here is a source of inexpensive capital that can really help us get through this. We applied immediately for the TARP, and we had very strong support from a regulator, the [Office of Thrift Supervision]. We thought that this would be a relatively straightforward process. Little did we know how long and uncertain the process would be.

What was the process like?
There was a continual need to come up with financial plans and revise them, and to update our submission to the OTS. In turn, the submission went to the Treasury with the new projections and the new capital plan. And we had to work very closely with Citadel Investments, which owned a good part of our equity but more important owned about 70% of our outstanding debt.


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