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.

What was your worst moment in the process?
It would be getting a call from the OTS on a Friday night saying that we needed a new plan by Monday morning. We had to spend the weekend negotiating the terms and coming up with the new financial model by that time. And then, submitting the plan and not hearing anything for weeks. And never once having a direct dialogue with Treasury about the projections.

Ultimately, you did not get a loan from TARP.
We were never turned down, but we were never accepted. To this day we have never received an explanation. People have a number of theories, but we never had any formal communication from the government saying that we would not get TARP, or an explanation of why they didn’t give it to us.

What theories do you have about why the regulators acted the way they did?
I’d prefer not to speculate.

What factors helped you stay afloat during the crisis?
One godsend was that the crisis was actually very good for the brokerage business. That was because it produced a lot of volatility in the market, a lot of trading activity, and a lot of people questioning their advice from their traditional broker and wanting to take more direct control of their finances. We had a burst of new accounts and trading activity, and more cash than ever.

The other godsend was when the government changed the Federal Deposit Insurance Corp.’s [maximum protection of bank accounts] from $100,000 to $250,000. Ninety-four percent of our customer deposits were now fully government insured. We no longer had to worry about customers pulling out their cash, because they could feel confident that their money was good, even if we had financial difficulties.

Did you ever find yourself critically short of cash?
We never had a liquidity issue. We had more than enough cash to cover any losses.

How much cash did you have at the height of the crisis?
We would have excess cash on our balance sheet of as much as $5 billion to $7 billion. But the issue wasn’t cash, it was capital. We had to have enough capital to meet the regulatory requirements. And the secret was the earnings from the brokerage plus the gain on the sale of a Canadian subsidiary and an Indian subsidiary that produced the capital for the bank to offset the losses.

Through the Lehman [crisis] we had excess capital, but as time went on we were using capital beyond what we were generating. Our excess was being reduced, and we knew we needed more capital.

How did you respond?
At a certain point we said that we needed to raise this capital ourselves and not count on TARP. That was around May or June of 2009. It was a huge, huge decision. The term we used was “self-help.” First we said, Let’s start selling stock in the market. We did it through a “dribble-out [at-the-market] offering,” which means that you sell stock every day in the open market. We just filed the prospectus and started selling stock. And one thing about E*Trade, we [already had] such high volume in our stock that the market could handle that volume.


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