JP Morgan Chase 2008 Annual Report Download - page 153

JPMorgan Chase & Co./ 2008 Annual Report 151
• $3.5 billion of transfers of bridge loans to level 2 due to
increased price transparency for such assets.
Gains and Losses
Gains and losses in the tables above for 2008 include:
• Losses on trading debt and equity instruments of approximately
$12.8 billion, principally from mortgage-related transactions and
auction-rate securities.
• A $6.9 billion decline in the fair value of the MSR asset.
• Losses of approximately $3.9 billion on leveraged loans.
Leveraged loans are typically classified as held-for-sale and meas-
ured at the lower of cost or fair value and therefore included in
the nonrecurring fair value assets.
• Gains of $4.5 billion related to structured notes, principally due
to significant volatility in the equity markets.
• Net gains of $4.6 billion related to derivatives, principally due to
changes in credit spreads and rate curves.
The Firm risk manages level 3 financial instruments using securities
and derivative positions classified within level 1 or 2 of the valuation
hierarchy; the effect of these risk management activities is not
reflected in the level 3 gains and losses included in the tables above.
For further information on changes in the fair value of the MSRs, see
Note 18 on pages 199–200 of this Annual Report.
Credit adjustments
When determining the fair value of an instrument, it may be neces-
sary to record a valuation adjustment to arrive at an exit price in
accordance with SFAS 157. Valuation adjustments include, but are
not limited to, amounts to reflect counterparty credit quality and the
Firm’s own creditworthiness. For a detailed discussion of the valua-
tion adjustments the Firm considers, see the valuation discussion at
the beginning of this Note.
The following table provides the credit adjustments, gross of hedges
where risk is actively managed, as reflected within the Consolidated
Balance Sheets of the Firm as of the dates indicated.
Year ended December 31, (in millions) 2008 2007
Derivatives receivables balance $ 162,626 $ 77,136
Derivatives CVA(a) (9,566) (1,265)
Derivatives payable balance 121,604 68,705
Derivatives DVA 1,389 518
Structured notes balance 67,340 87,622
Structured notes DVA(b) 2,413 896
(a) Derivative CVA, gross of hedges, includes results managed by Credit Portfolio and
other lines of business within IB.
(b) Structured notes are carried at fair value based upon the Firm’s election under
SFAS 159. For further information on these elections, see Note 5 on page 156 of
this Annual Report.
The following table provides the impact of credit adjustments, gross of
hedges where risk is actively managed , on earnings in the respective
periods.
Year ended December 31, (in millions) 2008 2007
Credit adjustments:
Derivatives CVA(a) $ (7,561) $ (803)
Derivatives DVA 789 514
Structured Notes DVA(b) 1,211 806
(a) Derivative CVA, gross of hedges, includes results managed by Credit Portfolio and
other lines of business within IB.
(b) Structured notes are carried at fair value based upon the Firm’s election under SFAS
159. For further information on these elections, see Note 5 on page 156 of this
Annual Report.
The market’s view of the Firm’s credit quality is reflected in credit
spreads observed in the credit default swap market. These credit
spreads are affected by a number of factors, such as the performance
of the assets the Firm holds. Consequently, significant deterioration in
the value of sizable exposures held by the Firm are likely to result in
wider credit default swap spreads. This will lead to an increase in the
Firm’s credit adjustment (i.e., DVA) for liabilities carried at fair value.
Mortgage-related exposures carried at fair value
As noted above, certain of the Firm’s wholesale and consumer loans
are carried at fair value including mortgage-related loans. Since the
second half of 2007, liquidity in certain sectors of the mortgage mar-
kets has decreased, thereby limiting the price transparency of certain
mortgage-related instruments. The table below summarizes the Firm’s
mortgage-related exposures that are carried at fair value through earn-
ings or at the lower of cost or fair value; the table excludes securities
held in the available-for-sale portfolio.
Exposure as of
December 31, 2008
Net gains/(losses)(e)
Net of risk reported in income –
management year ended
(in millions) Gross activities(d) December 31, 2008
U.S. Residential
Mortgage:(a)(b)(c)
Prime $ 11,221 $ 5,044
Alt-A 3,934 3,917
15,155 8,961 $ (1,468)
Subprime 941 (28) (369)
Non-U.S.
Residential 1,591 951 (292)
Commercial
Mortgage:
Securities 2,836 1,438 (792)
Loans 4,338 2,179 (752)
(a) Included exposures in IB and Retail Financial Services segments.
(b) Excluded from the table above are certain mortgage-related assets that are carried at
fair value and recorded in trading assets, such as: (i) U.S. government agency and U.S.
government-sponsored enterprise securities that are liquid and of high credit quality
of $58.9 billion at December 31, 2008; and (ii) reverse mortgages of $4.3 billion at
December 31, 2008, for which the principal risk is mortality risk. Also excluded are
mortgage servicing rights, which are reported in Note 18 on pages 199–200 of this
Annual Report.
(c) Also excluded from the table above are certain mortgage-related financing transac-
tions, which are collateralized by mortgage-related assets, of $5.7 billion at December
31, 2008. These financing transactions are excluded from the table as they are
accounted for on an accrual basis of accounting. For financings deemed to be
impaired, impairment is measured and recognized based upon the fair value of the
collateral. Of these financing transactions, $1.2 billion at December 31, 2008, was
considered impaired.
(d) The amounts presented reflect the effects of derivatives utilized to risk manage the
gross exposures arising from cash-based instruments and are presented on a bond or
loan equivalent (notional) basis. Derivatives are excluded from the gross exposure as
they are principally used for risk management purposes.
(e) Net gains and losses include all revenue related to the positions (i.e., interest income,
changes in fair value of the assets, changes in fair value of the related risk manage-
ment positions, and interest expense related to the liabilities funding the positions).