JP Morgan Chase 2009 Annual Report Download - page 199

JPMorgan Chase & Co./2009 Annual Report 197
Other-than-temporary impairment
In April 2009, the FASB amended the other-than-temporary im-
pairment (“OTTI”) model for debt securities. The impairment model
for equity securities was not affected. Under the new guidance,
OTTI losses must be recognized in earnings if an investor has the
intent to sell the debt security, or if it is more likely than not that
the investor will be required to sell the debt security before recovery
of its amortized cost basis. However, even if an investor does not
expect to sell a debt security, it must evaluate expected cash flows
to be received and determine if a credit loss exists. In the event of a
credit loss, only the amount of impairment associated with the
credit loss is recognized in income. Amounts relating to factors
other than credit losses are recorded in OCI. The guidance also
requires additional disclosures regarding the calculation of credit
losses, as well as factors considered in reaching a conclusion that
an investment is not other-than-temporarily impaired. JPMorgan
Chase early adopted the new guidance effective for the period
ending March 31, 2009. The Firm did not record a transition ad-
justment for securities held at March 31, 2009, which were previ-
ously considered other-than-temporarily impaired, as the Firm
intended to sell the securities for which it had previously recognized
other-than-temporary impairments.
AFS securities in unrealized loss positions are analyzed as part of
the Firm’s ongoing assessment of OTTI. When the Firm intends to
sell AFS securities, it recognizes an impairment loss equal to the full
difference between the amortized cost basis and the fair value of
those securities.
When the Firm does not intend to sell AFS equity or debt securities
in an unrealized loss position, potential OTTI is considered using a
variety of factors, including the length of time and extent to which
the market value has been less than cost; adverse conditions spe-
cifically related to the industry, geographic area or financial condi-
tion of the issuer or underlying collateral of a security; payment
structure of the security; changes to the rating of the security by a
rating agency; the volatility of the fair value changes; and changes
in fair value of the security after the balance sheet date. For debt
securities, the Firm estimates cash flows over the remaining lives of
the underlying collateral to assess whether credit losses exist and,
where applicable for purchased or retained beneficial interests in
securitized assets, to determine if any adverse changes in cash
flows have occurred. The Firm’s cash flow estimates take into
account expectations of relevant market and economic data as of
the end of the reporting period – including, for example, for securi-
ties issued in a securitization, underlying loan-level data, and
structural features of the securitization, such as subordination,
excess spread, overcollateralization or other forms of credit en-
hancement. The Firm compares the losses projected for the underly-
ing collateral (“pool losses”) against the level of credit
enhancement in the securitization structure to determine whether
these features are sufficient to absorb the pool losses, or whether a
credit loss on the AFS debt security exists. The Firm also performs
other analyses to support its cash flow projections, such as first-loss
analyses or stress scenarios. For debt securities, the Firm considers
a decline in fair value to be other-than-temporary when the Firm
does not expect to recover the entire amortized cost basis of the
security. The Firm also considers an OTTI to have occurred when
there is an adverse change in cash flows to beneficial interests in
securitizations that are rated below “AA” at acquisition, or that
can be contractually prepaid or otherwise settled in such a way that
the Firm would not recover substantially all of its recorded invest-
ment. For equity securities, the Firm considers the above factors, as
well as the Firm’s intent and ability to retain its investment for a
period of time sufficient to allow for any anticipated recovery in
market value, and whether evidence exists to support a realizable
value equal to or greater than the carrying value. The Firm consid-
ers a decline in fair value of AFS equity securities to be other-than-
temporary if it is probable that the Firm will not recover its amor-
tized cost basis.
The following table presents credit losses that are included in the
securities gains and losses table above.
Year ended December 31, (in millions) 2009
Debt securities the Firm does not intend to sell that
have credit losses
Total losses(a) $ (946)
Losses recorded in/(reclassified from) other comprehensive
income 368
Credit losses recognized in income(b)(c) $ (578)
(a) For initial other-than-temporary impairments, represents the excess of the
amortized cost over the fair value of AFS debt securities. For subsequent im-
pairments of the same security, represents additional declines in fair value
subsequent to the previously recorded other-than-temporary impairment(s),
if applicable.
(b) Represents the credit loss component of certain prime and subprime mort-
gage-backed securities and obligations of U.S. states and municipalities that
the Firm does not intend to sell. Subsequent credit losses may be recorded
on securities without a corresponding further decline in fair value if there has
been a decline in expected cash flows.
(c) Excluded from this table are OTTI losses of $7 million that were recognized
in income in 2009, related to subprime mortgage-backed debt securities the
Firm intended to sell. These securities were sold in 2009, resulting in the
recognition of a recovery of $1 million.
Changes in the credit loss component of credit-impaired
debt securities
The following table presents a rollforward of the credit loss compo-
nent of OTTI losses that were recognized in income in 2009, related
to debt securities that the Firm does not intend to sell.
Year ended December 31, (in millions) 2009
Balance, beginning of period $ —
Additions:
Newly credit-impaired securities 578
Increase in losses on previously credit-impaired
securities reclassified from other comprehensive income —
Balance, end of period $ 578
During 2009, the Firm continued to increase the size of its AFS
securities portfolio. Unrealized losses have decreased since Decem-
ber 31, 2008, due primarily to overall market spread and market
liquidity improvements, which resulted in increased pricing across
asset classes. As of December 31, 2009, the Firm does not intend
to sell the securities with a loss position in AOCI, and it is not likely
that the Firm will be required to sell these securities before recovery
of their amortized cost basis. Except for the securities reported in
the table above for which credit losses have been recognized in