JP Morgan Chase 2008 Annual Report Download - page 159

JPMorgan Chase & Co./ 2008 Annual Report 157
Changes in fair value under the fair value option election
The following table presents the changes in fair value included in the Consolidated Statements of Income for the years ended December 31,
2008 and 2007, for items for which the fair value election was made. The profit and loss information presented below only includes the financial
instruments that were elected to be measured at fair value; related risk management instruments, which are required to be measured at fair
value, are not included in the table.
• Long-term debt: Changes in value attributable to instrument-spe-
cific credit risk were derived principally from observable changes
in the Firm’s credit spread. The gain for 2008 and 2007 was
attributable to the widening of the Firm’s credit spread.
• Resale and repurchase agreements, securities borrowed agree-
ments and securities lending agreements: Generally, for these
types of agreements, there is a requirement that collateral be
maintained with a market value equal to or in excess of the prin-
cipal amount loaned; as a result, there would be no adjustment
or an immaterial adjustment for instrument-specific credit risk
related to these agreements.
2008 2007
Principal Other Total changes in Principal Other Total changes in
December 31, (in millions) transactions(c) income(c) fair value recorded transactions(c) income(c) fair value recorded
Federal funds sold and securities purchased under
resale agreements $ 1,139 $ —$ 1,139 $ 580 $ — $ 580
Securities borrowed 29 —29 —— —
Trading assets:
Debt and equity instruments, excluding loans (870) (58)(d) (928) 421 (1)(d) 420
Loans reported as trading assets:
Changes in instrument-specific credit risk (9,802) (283)(d) (10,085) (517) (157)(d) (674)
Other changes in fair value 696 1,178(d) 1,874 188 1,033(d) 1,221
Loans:
Changes in instrument-specific credit risk (1,991) —(1,991) 102 — 102
Other changes in fair value (42) —(42) 40 — 40
Other assets — (660)(e) (660) —30
(e) 30
Deposits(a) (132) —(132) (906) — (906)
Federal funds purchased and securities loaned or
sold under repurchase agreements (127) —(127) (78) — (78)
Other borrowed funds
(a) 1,888 —1,888 (412) — (412)
Trading liabilities 35 —35 (17) — (17)
Accounts payable and other liabilities — — — (460) — (460)
Beneficial interests issued by consolidated VIEs 355 —355 (228) — (228)
Long-term debt:
Changes in instrument-specific credit risk(a) 1,174 —1,174 771 — 771
Other changes in fair value(b) 16,202 —16,202 (2,985) — (2,985)
(a) Total changes in instrument-specific credit risk related to structured notes were $1.2 billion and $806 million for the years ended December 31, 2008 and 2007, respectively, which
includes adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt.
(b) Structured notes are debt instruments with embedded derivatives that are tailored to meet a client’s need for derivative risk in funded form. The embedded derivative is the primary
driver of risk. The 2008 gain included in “Other changes in fair value” results from a significant decline in the value of certain structured notes where the embedded derivative is prin-
cipally linked to either equity indices or commodity prices, both of which declined sharply during the second half of 2008. Although the risk associated with the structured notes is
actively managed, the balance reported in this table does not include the income statement impact of such risk management instruments.
(c) Included in the amounts are gains and losses related to certain financial instruments previously carried at fair value by the Firm, such as structured liabilities elected pursuant to SFAS
155 and loans purchased as part of the Investment Bank’s trading activities.
(d) Reported in mortgage fees and related income.
(e) Reported in other income.
Determination of instrument-specific credit risk for items
for which a fair value election was made
The following describes how the gains and losses included in earn-
ings during 2008 and 2007, which were attributable to changes in
instrument-specific credit risk, were determined.
• Loans and lending-related commitments: For floating-rate instru-
ments, all changes in value are attributed to instrument-specific
credit risk. For fixed-rate instruments, an allocation of the
changes in value for the period is made between those changes
in value that are interest rate-related and changes in value that
are credit-related. Allocations are generally based upon an analy-
sis of borrower-specific credit spread and recovery information,
where available, or benchmarking to similar entities or industries.