Capital One 2008 Annual Report Download - page 145

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127
Level 3 Instruments Only
Year ended
December 31, 2008
Securities
Available for
Sale
Mortgage
Servicing
Rights(1)
Derivative
Receivables(2)
Retained
Interests in
Securitizations(3)
Derivative
Payables(2)
Balance, January 1, 2008............................................
.
$ 217,428 $ 247,589 $ 8,962 $ 1,295,498 $ 8,631
Total realized and unrealized gains (losses):
Included in earnings...................................
.
18 (72,516) 33,442 (187,934) 34,072
Included in other comprehensive income ..
.
(696,601) (57,259)
Purchases, issuances and settlements ..................
.
180,631 (24,529) 17,491 420,080 17,969
Transfers into Level 3(4) .......................................
.
2,678,785
Balance, December 31, 2008.......................................
.
$ 2,380,261 $ 150,544 $ 59,895 $ 1,470,385 $ 60,672
Change in unrealized gains (losses) included in
earnings related to financial instruments held at
December 31, 2008 ..................................................
.
$  $ (72,516) $ 33,442 $ (41,055) $ 34,072
(1) Gains (losses) related to Level 3 mortgage servicing rights are reported in mortgage servicing and other income, which is a
component of non-interest income.
(2) An end of quarter convention is used to measure derivative activity, resulting in end of quarter values being reflected as
purchases, issuances and settlements for derivatives having a zero fair value at inception. Gains (losses) related to Level 3
derivative receivables and derivative payables are reported in other non-interest income, which is a component of non-interest
income.
(3) An end of quarter convention is used to reflect activity in retained interests in securitizations, resulting in all transactions and
assumption changes being reflected as if they occurred on the last day of the quarter. Gains (losses) related to Level 3 retained
interests in securitizations are reported in servicing and securitizations income, which is a component of non-interest income.
(4) Level 3 assets increased $2.7 billion for the year ended December 31, 2008, due primarily to the reclassification of AAA rated
non-agency mortgage backed securities backed by prime jumbo collateral. The ongoing capital markets dislocation has
decreased new issuance and secondary trading volumes for many fixed income markets. This lower level of activity makes it
increasingly difficult to find consistent pricing of many fixed income securities. The pricing of our prime jumbo non-agency
mortgage-backed securities continued to exhibit a variation that was outside of our Level 2 assets policy tolerances.
Consequently, we reassigned additional securities to Level 3.
The amount of Level 3 securities will likely continue to be a function of market conditions. An increase in dislocation and
corresponding decrease in new issuance and trading volumes could result in the reclassification of additional securities to Level
3. If market conditions improve and pricing transparency and consistency increase, assets currently classified as Level 3 could
be reclassified to Level 2.