JP Morgan Chase 2009 Annual Report Download - page 173

JPMorgan Chase & Co./2009 Annual Report 171
Credit adjustments
When determining the fair value of an instrument, it may be
necessary to record a valuation adjustment to arrive at an exit
price under U.S. GAAP. Valuation adjustments include, but are
not limited to, amounts to reflect counterparty credit quality and
the Firm’s own creditworthiness. The market’s view of the Firm’s
credit quality is reflected in credit spreads observed in the CDS
market. For a detailed discussion of the valuation adjustments
the Firm considers, see the valuation discussion at the beginning
of this Note.
The following table provides the credit adjustments, excluding the
effect of any hedging activity, as reflected within the Consolidated
Balance Sheets of the Firm as of the dates indicated.
December 31,
(in millions)
2009 2008
Derivative receivables balance $ 80,210 $ 162,626
Derivatives CVA(a) (3,697) (9,566 )
Derivative payables balance 60,125 121,604
Derivatives DVA (629) (1,389 )
Structured notes balance(b)(c) 59,064 67,340
Structured notes DVA (840) (2,413
)
(a) Derivatives CVA, gross of hedges, includes results managed by credit portfo-
lio and other lines of business within IB.
(b) Structured notes are recorded within long-term debt, other borrowed funds,
or deposits on the Consolidated Balance Sheets, based on the tenor and le-
gal form of the note.
(c) Structured notes are carried at fair value based on the Firm’s election under
the fair value option. For further information on these elections, see Note 4
on pages 173–175 of this Annual Report
The following table provides the impact of credit adjustments on
earnings in the respective periods, excluding the effect of any
hedging activity.
Year ended December 31,
(in millions) 2009 2008 2007
Credit adjustments:
Derivatives CVA(a) $ 5,869 $ (7,561) $ (803)
Derivatives DVA (760) 789
514
Structured notes DVA(b) (1,573) 1,211
806
(a) Derivatives CVA, gross of hedges, includes results managed by credit portfo-
lio and other lines of business within IB.
(b) Structured notes are carried at fair value based on the Firm’s election under
the fair value option. For further information on these elections, see Note 4
on pages 173–175 of this Annual Report.
Fair value measurement transition
In connection with the initial adoption of FASB guidance on fair
value measurement, the Firm recorded the following on January 1,
2007:
• a cumulative effect increase to retained earnings of $287 mil-
lion, primarily related to the release of profit previously deferred
in accordance with previous FASB guidance for certain deriva-
tive contracts;
• an increase to pretax income of $166 million ($103 million
after-tax) related to the incorporation of the Firm’s creditwor-
thiness in the valuation of liabilities recorded at fair value; and
• an increase to pretax income of $464 million ($288 million
after-tax) related to valuations of nonpublic private equity in-
vestments.
Additional disclosures about the fair value of financial
instruments (including financial instruments not carried at
fair value)
U.S. GAAP requires disclosure of the estimated fair value of certain
financial instruments, and the methods and significant assump-
tions used to estimate their fair value. Financial instruments within
the scope of these disclosure requirements are included in the
following table; other financial instruments and all nonfinancial
instruments are excluded from the scope. Accordingly, the fair
value disclosures required provide only a partial estimate of the fair
value of JPMorgan Chase. For example, the Firm has developed
long-term relationships with its customers through its deposit base
and credit card accounts, commonly referred to as core deposit
intangibles and credit card relationships. In the opinion of man-
agement, these items, in the aggregate, add significant value to
JPMorgan Chase, but their fair value is not disclosed in this Note.
Financial instruments for which carrying value approximates
fair value
Certain financial instruments that are not carried at fair value on
the Consolidated Balance Sheets are carried at amounts that
approximate fair value, due to their short-term nature and gen-
erally negligible credit risk. These instruments include: cash and
due from banks; deposits with banks, federal funds sold, securi-
ties purchased under resale agreements and securities borrowed
with short-dated maturities; short-term receivables and accrued
interest receivable; commercial paper; federal funds purchased,
and securities loaned or sold under repurchase agreements with
short-dated maturities; other borrowed funds (excluding ad-
vances from Federal Home Loan Banks); accounts payable; and
accrued liabilities. In addition, U.S. GAAP requires that the fair
value of deposit liabilities with no stated maturity (i.e., demand,
savings and certain money market deposits) be equal to their
carrying value; recognition of the inherent funding value of these
instruments is not allowed.