JP Morgan Chase 2008 Annual Report Download - page 123

JPMorgan Chase & Co./ 2008 Annual Report 121
exchange rates and credit curves. In addition to market information,
models also incorporate transaction details, such as maturity. Finally,
management judgment must be applied to assess the appropriate
level of valuation adjustments to reflect counterparty credit quality,
the Firm's creditworthiness, constraints on liquidity and unobservable
parameters, where relevant. The judgments made are typically affect-
ed by the type of product and its specific contractual terms and the
level of liquidity for the product or within the market as a whole.
Assets carried at fair value
The table that follows includes the Firm’s assets carried at fair value and the portion of such assets that are classified within level 3 of the valua-
tion hierarchy.
December 31, 2008 2007
(in billions) Total at fair value Level 3 total Total at fair value Level 3 total
Trading debt and equity securities(a) $ 347.4 $ 41.4 $ 414.3 $ 24.1
Derivative receivables – gross 2,741.7 53.0 909.8 20.2
Netting adjustment (2,579.1) — (832.7) —
Derivative receivables – net 162.6 53.0(e) 77.1 20.2(e)
AFS Securities 205.9 12.4 85.4 0.1
Loans 7.7 2.7 8.7 8.4
MSRs 9.4 9.4 8.6 8.6
Private equity investments 6.9 6.4 7.2 6.8
Other(b) 46.5 5.0 34.2 3.1
Total assets carried at fair value
on a recurring basis 786.4 130.3 635.5 71.3
Total assets carried at fair value
on a nonrecurring basis(c) 11.0 4.3 14.9 11.8
Total assets carried at fair value $ 797.4 $ 134.6(f) $ 650.4 $ 83.1
Less: level 3 assets for which the Firm does not
bear economic exposure(d) 21.2
Total level 3 assets for which the Firm bears
economic exposure $ 113.4
Total Firm assets $ 2,175.1 $ 1,562.1
Level 3 assets as a percentage of total Firm assets 6% 5%
Level 3 assets for which the Firm bears economic exposure
as a percentage of total Firm assets 5
Level 3 assets as a percentage of total Firm assets at fair value 17 13
Level 3 assets for which the Firm bears economic exposure
as a percentage of total assets at fair value 14
(a) Includes physical commodities carried at the lower of cost or fair value.
(b) Includes certain securities purchased under resale agreements, certain securities borrowed and certain other investments.
(c) Predominantly consists of debt financing and other loan warehouses held-for-sale and other assets.
(d) Balances for which the Firm did not bear economic exposure at December 31, 2007, were not significant.
(e) The Firm does not allocate the FIN 39 netting adjustment across the levels of the fair value hierarchy. As such, the level 3 derivative receivables balance included in the level 3 total
balance is reported gross of any netting adjustments.
(f) Included in the table above are $95.1 billion of level 3 assets, consisting of recurring and nonrecurring assets, carried by IB at December 31, 2008. This includes $21.2 billion of assets
for which the Firm serves as an intermediary between two parties and does not bear economic exposure.
Valuation
For instruments classified within level 3 of the hierarchy, judgments
may be significant. In arriving at an estimate of fair value for an
instrument within level 3, management must first determine the
appropriate model to use. Second, due to the lack of observability of
significant inputs, management must assess all relevant empirical
data in deriving valuation inputs including but not limited to yield
curves, interest rates, volatilities, equity or debt prices, foreign