JP Morgan Chase 2009 Annual Report Download - page 170

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 168
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, 2009, 2008 and 2007, related to financial instru-
ments held at these dates.
Year ended December 31,
(in millions) 2009 2008 2007
Loans retained $ (3,550) $ (1,159) $ (218
)
Loans held-for-sale (389) (2,728) (502)
Total loans (3,939) (3,887) (720)
Other assets (104) (685) (161)
Accounts payable and
other liabilities 31 (285) 2
Total nonrecurring fair
value gains/(losses) $ (4,012) $ (4,857) $ (879)
In the above table, loans predominantly include: (1) write-downs of
delinquent mortgage and home equity loans where impairment is
based on the fair value of the underlying collateral; and (2) the
change in fair value for leveraged lending loans carried on the
Consolidated Balance Sheets at the lower of cost or fair value.
Accounts payable and other liabilities predominantly include the
change in fair value for unfunded lending-related commitments
within the leveraged 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 both December 31,
2009 and 2008. Level 3 assets were $130.4 billion at December
31, 2009, reflecting a decrease of $7.3 billion in 2009, due to the
following:
• A net decrease of $6.3 billion in gross derivative receivables,
predominantly driven by the tightening of credit spreads. Offset-
ting a portion of the decrease were net transfers into level 3 dur-
ing the year, most notably a transfer into level 3 of $41.3 billion
of structured credit derivative receivables, and a transfer out of
level 3 of $17.7 billion of single-name CDS on ABS. The fair
value of the receivables transferred into level 3 during the year
was $22.1 billion at December 31, 2009. The fair value of struc-
tured credit derivative payables with a similar underlying risk
profile to the previously noted receivables, that are also classified
in level 3, was $12.5 billion at December 31, 2009. These de-
rivatives payables offset the receivables, as they are modeled
and valued the same way with the same parameters and inputs
as the assets.
• A net decrease of $3.5 billion in loans, predominantly driven by
sales of leveraged loans and transfers of similar loans to level 2,
due to increased price transparency for such assets. Leveraged
loans are typically classified as held-for-sale and measured at the
lower of cost or fair value and, therefore, included in the nonre-
curring fair value assets.
• A net decrease of $6.3 billion in trading assets – debt and equity
instruments, primarily in loans and residential- and commercial-
MBS, principally driven by sales and markdowns, and by sales and
unwinds of structured transactions with hedge funds. The declines
were partially offset by a transfer from level 2 to level 3 of certain
structured notes reflecting lower liquidity and less pricing ob-
servability, and also increases in the fair value of other ABS.
• A net increase of $6.1 billion in MSRs, due to increases in the
fair value of the asset, related primarily to market interest rate
and other changes affecting the Firm's estimate of future pre-
payments, as well as sales in RFS of originated loans for which
servicing rights were retained. These increases were offset par-
tially by servicing portfolio runoff.
• A net increase of $1.9 billion in accrued interest and accounts
receivable related to increases in subordinated retained interests
from the Firm’s credit card securitization activities.
Gains and Losses
Gains and losses included in the tables for 2009 and 2008 included:
2009
• $11.4 billion of net losses on derivatives, primarily related to the
tightening of credit spreads.
• Net losses on trading–debt and equity instruments of $671
million, consisting of $2.1 billion of losses, primarily related to
residential and commercial loans and MBS, principally driven by
markdowns and sales, partially offset by gains of $1.4 billion,
reflecting increases in the fair value of other ABS. (For a further
discussion of the gains and losses on mortgage-related expo-
sures, inclusive of risk management activities, see the “Mort-
gage-related exposures carried at fair value” discussion below.)
• $5.8 billion of gains on MSRs.
• $1.4 billion of losses related to structured note liabilities, pre-
dominantly due to volatility in the equity markets.
2008
• Losses on trading-debt and equity instruments of approximately
$12.8 billion, principally from mortgage-related transactions and
auction-rate securities.
• Losses of $6.9 billion on MSRs.
• Losses of approximately $3.9 billion on leveraged loans.
• Net gains of $4.6 billion related to derivatives, principally due to
changes in credit spreads and rate curves.
• Gains of $4.5 billion related to structured notes, principally due
to significant volatility in the fixed income, commodities and eq-
uity markets.
• Private equity losses of $638 million.
For further information on changes in the fair value of the MSRs,
see Note 17 on pages 223–224 of this Annual Report.