VideoTalk about the challenges of a new job. The day Bruce Nolop joined E*Trade Financial as the online brokerage and banking firm's CFO — September 12, 2008 — was also the day before the weekend leading up to what many people regard as the epicenter of the financial crisis: the declaration of bankruptcy by Lehman Brothers.
On that Friday, Nolop, previously finance chief at Pitney Bowes, thought that E*Trade's brokerage business had enough upside potential to counteract the burgeoning problems in the mortgage-loan investments of the company's banking operations. True, the company had announced in July 2008 that it had incurred a $94.6 million net loss and recorded a $319 million provision for loan losses in the second quarter. Still, Donald Layton, who would be Nolop's new boss, could report that the "somewhat higher than expected" losses in E*Trade's credit portfolio were "still manageable" and that the growth in the loan delinquencies experienced by the bank that quarter "continued to moderate."
What's more, Nolop was joining a company whose daily average revenue trades would jump from 172,000 in the second quarter of 2008 to 184,000 and 221,000 in the following two quarters. Volatile markets, after all, breed revenues in the online brokerage business.
But less than two months later, Lehman went belly-up. E*Trade, one of the first companies to be affected by the ensuing crisis, saw its mortgage portfolio slammed by a wave of loan defaults and delinquencies. "What I thought had been crisis past was a crisis present," says Nolop.
- "What I thought had been crisis past was a crisis present." — E*Trade Financial CFO Bruce Nolop
To fill its widening cash and capital holes, the firm applied for help under the Capital Purchase Program of the Troubled Asset Relief Program, which was enacted in October 2008. Nolop and his colleagues waited while other financial institutions were approved for TARP money — and waited some more. As of the second quarter of 2009, in fact, the company continued to view TARP funding as a possible component of its capital planning program.
But in November, having received no response from regulators, the company's management withdrew its application. Months before that, however, it had chosen to reverse course, according to Nolop. For one thing, while E*Trade remains a relatively large bank, with $45 billion in assets, it was already moving to deemphasize its banking business. Indeed, it had halted the issuance of new mortgages early in 2008 and is still in run-off mode. "We are a brokerage business that uses a bank as a vehicle to invest its cash," says Nolop. "We are not in the banking business per se."
Still, although E*Trade's brokerage business continued to perform well, that was more than offset by big loan-loss provisions on its balance sheet. As a result, it recapitalized itself in the third quarter of this year, completing a deal with shareholders including Citadel Investment Group, the company's biggest investor, to exchange $1.7 billion of E*Trade's corporate debt for debentures that could be converted into stock.
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.
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