JP Morgan Chase 2008 Annual Report Download - page 152

Notes to consolidated financial statements
150 JPMorgan Chase & Co./ 2008 Annual Report
Assets and liabilities measured at fair value on a nonrecurring basis
Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, the instruments
are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when
there is evidence of impairment). The following tables present the financial instruments carried on the Consolidated Balance Sheets by caption
and level within the SFAS 157 valuation hierarchy (as described above) as of December 31, 2008 and 2007, for which a nonrecurring change
in fair value has been recorded during the reporting period.
Internal models with Internal models with
Quoted market prices significant observable significant unobservable Total carrying value
in active markets market parameters market parameters in the Consolidated
December 31, 2008 (in millions) (Level 1) (Level 2) (Level 3) Balance Sheets
Loans(a) $ — $ 4,991 $ 3,999 $ 8,990
Other assets — 1,763 291 2,054
Total assets at fair value on a nonrecurring basis $ — $ 6,754 $ 4,290 $ 11,044
Accounts payable and other liabilities(b) $ — $ 212 $ 98 $ 310
Total liabilities at fair value on a nonrecurring basis $ — $ 212 $ 98 $ 310
Internal models with Internal models with
Quoted market prices significant observable significant unobservable Total carrying value
in active markets market parameters market parameters in the Consolidated
December 31, 2007 (in millions) (Level 1) (Level 2) (Level 3) Balance Sheets
Loans(a)(c) $ — $ 2,818 $ 16,196 $ 19,014
Other assets — 267 126 393
Total assets at fair value on a nonrecurring basis $ — $ 3,085 $ 16,322 $ 19,407
Accounts payable and other liabilities(b) $ — $ — $ 103 $ 103
Total liabilities at fair value on a nonrecurring basis $ — $ — $ 103 $ 103
(a) Includes leveraged lending and other loan warehouses held-for-sale.
(b) Represents the fair value adjustment associated with $1.5 billion and $3.2 billion of unfunded held-for-sale lending-related commitments within the leveraged lending portfolio at
December 31, 2008 and 2007, respectively.
(c) Includes $4.5 billion of level 3 held-for-sale loans reclassified to held-for-investment during 2007.
Nonrecurring fair value changes
The following table presents the total change in value of financial
instruments for which a fair value adjustment has been included in
the Consolidated Statements of Income for the years ended
December 31, 2008 and 2007, related to financial instruments held
at December 31, 2008 and 2007.
Year ended December 31, (in millions) 2008 2007
Loans $ (3,887) $ (720)
Other assets (685) (161)
Accounts payable and other liabilities (285) 2
Total nonrecurring fair value gains (losses) $ (4,857) $ (879)
In the above table, loans predominantly include the change in fair
value for IB leveraged lending and warehouse loans carried on the
balance sheet at the lower of cost or fair value; and accounts
payable and other liabilities predominantly include the change in fair
value for unfunded lending-related commitments within the lever-
aged lending portfolio.
Level 3 analysis
Level 3 assets (including assets measured at fair value on a nonre-
curring basis) were 6% of total Firm assets at December 31, 2008.
The following describes significant changes to level 3 assets during
the year.
Level 3 assets increased $46.9 billion in 2008, largely due to the
following:
• Acquisition of $41.5 billion of level 3 assets as a result of the
merger with Bear Stearns.
• Acquisition of $5.9 billion of MSRs related to the Washington
Mutual transaction.
• Purchase of approximately $4.4 billion of reverse mortgages in
the first quarter of 2008, for which there is limited pricing infor-
mation and a lack of market liquidity.
• Transfers of $14.0 billion of AAA-rated CLOs backed by corporate
loans, based upon a significant reduction in new deal issuance
and price transparency; $10.5 billion of mortgage-related assets,
including commercial mortgage-backed securities with a rating
below “AAA”, other noninvestment grade mortgage securities and
certain prime mortgages; and $2.8 billion of auction-rate securi-
ties, in each case due to a significant reduction in market liquidity.
The increases in level 3 assets described above were partially offset by:
• Approximately $20.0 billion of sales and markdowns of residen-
tial mortgage-backed securities, prime residential mortgage loans
and Alt-A residential mortgage loans.
• $11.5 billion of sales and markdowns of leveraged loans, as well
as transfers of similar loans to level 2 due to the increased price
transparency for such assets.