JP Morgan Chase 2009 Annual Report Download - page 176

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 174
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,
2009, 2008 and 2007, for items for which the fair value option was elected. Profit and loss information for related risk management instru-
ments, which are required to be measured at fair value, are not included in the table.
2009
2008 2007
December 31, (in millions)
Principal
transactions
Other
income
Total changes
in fair value
recorded
Principal
transactions
Other
income
Total changes
in fair value
recorded
Principal
transactions
Other
income
Total changes
in fair value
recorded
Federal funds sold and securities
purchased under resale agreements
$ (553) $ — $ (553) $ 1,139 $ — $ 1,139 $ 580 $ — $ 580
Securities borrowed 82 — 82 29 — 29 — — —
Trading assets:
Debt and equity instruments,
excluding loans 619 25(c) 644 (870) (58)(c) (928) 421 (1)(c) 420
Loans reported as trading assets:
Changes in instrument-
specific credit risk (300)
(177)(c) (477) (9,802) (283)(c) (10,085) (517) (157)(c) (674)
Other changes in fair value 1,132 3,119(c) 4,251 696 1,178(c) 1,874 188 1,033(c) 1,221
Loans:
Changes in instrument-specific
credit risk (78)
— (78) (1,991) — (1,991) 102 — 102
Other changes in fair value (343)
— (343) (42) — (42) 40 — 40
Other assets — (731)(d) (731) — (660)(d)
(660) — 30(d) 30
Deposits(a) (766) — (766) (132) — (132) (906) — (906)
Federal funds purchased and securities
loaned or sold under repurchase
agreements 116 — 116 (127) — (127) (78)
— (78)
Other borrowed funds(a) (1,277) — (1,277) 1,888 — 1,888 (412) — (412)
Trading liabilities (3)
— (3) 35 — 35 (17)
— (17)
Accounts payable and other liabilities 64 — 64 — — — (460)
— (460)
Beneficial interests issued by
consolidated VIEs (351)
— (351) 355 — 355 (228) — (228)
Long-term debt:
Changes in instrument-specific
credit risk(a) (1,543)
— (1,543) 1,174 — 1,174 771 — 771
Other changes in fair value(b) (2,393)
— (2,393) 16,202 — 16,202 (2,985)
— (2,985)
(a) Total changes in instrument-specific credit risk related to structured notes were $(1.6) billion, $1.2 billion and $806 million for the years ended December 31, 2009, 2008 and
2007, respectively. These totals include 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 principally linked to either equity indices or commodity prices, both of which declined sharply during the third quarter of 2008. Although the risk associated with
the structured notes is actively managed, the gains reported in this table do not include the income statement impact of such risk management instruments.
(c) Reported in mortgage fees and related income.
(d) 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 earnings
during 2009, 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 on an analysis of bor-
rower-specific credit spread and recovery information, where
available, or benchmarking to similar entities or industries.
• Long-term debt: Changes in value attributable to instrument-
specific credit risk were derived principally from observable
changes in 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.