JP Morgan Chase 2010 Annual Report Download - page 217

JPMorgan Chase & Co./2010 Annual Report 217
Other-than-temporary impairment
The following table presents credit losses that are included in the
securities gains and losses table above.
Year ended December 31, (in millions)
2010
2009
Debt securities the Firm doe
s not
intend to sell that have credit losses
Total
other
-
than
-
temporary
impairment
losses(a) $ (94)
$ (946
)
Losses recorded in/(reclassified from) other
comprehensive income (6) 368
Credit losses recognized in income
(b)(c)
$ (100)
$ (578
)
(a) For initial OTTI, represents the excess of the amortized cost over the fair value of
AFS debt securities. For subsequent OTTI of the same security, represents addi-
tional declines in fair value subsequent to the previously recorded OTTI, if appli-
cable.
(b) Represents the credit loss component of certain prime mortgage-backed
securities and obligations of U.S. states and municipalities for 2010, and cer-
tain prime and subprime mortgage-backed securities and obligations of U.S.
states and municipalities for 2009 that the Firm does not intend to sell. Sub-
sequent 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 in-
tended 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 for the years ended
December 31, 2010 and 2009, of the credit loss component of
OTTI losses that were recognized in income related to debt securi-
ties that the Firm does not intend to sell.
Year ended December 31, (in millions)
2010
2009
Balance, beginning of period
$
578
$ —
Additions:
Newly credit-impaired securities
—
578
Increase in losses on previously credit
-
impaired
securities 94 —
Losses r
eclassified from ot
her
comprehensive
income on previously credit-impaired securities 6 —
Reductions:
Sales of credit-impaired securities
(31)
—
Impact of new
accounting
guidance related
to VIEs (15) —
Balance, end of period
$
632
$ 578
Gross unrealized losses
Gross unrealized losses have generally decreased since December 31,
2009, due primarily to market spread improvement and increased
liquidity, driving asset prices higher. However, gross unrealized losses
on certain securities have increased, including on certain corporate
debt securities, which are primarily government-guaranteed positions
that experienced credit spread widening. As of December 31, 2010,
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 income, the Firm believes that the securities with
an unrealized loss in AOCI are not other-than-temporarily impaired as
of December 31, 2010.
Following is a description of the Firm’s principal security invest-
ments with the most significant unrealized losses as of December
31, 2010, and the key assumptions used in the Firm’s estimate of
the present value of the cash flows most likely to be collected from
these investments.
Mortgage-backed securities – Prime and Alt-A nonagency
As of December 31, 2010, gross unrealized losses related to prime
and Alt-A residential mortgage-backed securities issued by private
issuers were $250 million, all of which have been in an unrealized
loss position for 12 months or more. Approximately 70% of the
total portfolio (by amortized cost) are currently rated below invest-
ment-grade; the Firm has recorded other-than-temporary impair-
ment losses on 55% of the below investment-grade positions. In
analyzing prime and Alt-A residential mortgage-backed securities
for potential credit losses, the Firm utilizes a methodology that
focuses on loan-level detail to estimate future cash flows, which are
then allocated to the various tranches of the securities. The loan-
level analysis primarily considers current home value, loan-to-value
(“LTV”) ratio, loan type and geographical location of the underlying
property to forecast prepayment, home price, default rate and loss
severity. The forecasted weighted average underlying default rate
on the positions was 21% and the related weighted average loss
severity was 50%. Based on this analysis, an OTTI loss of $6 million
was recognized in 2010 related to securities that experienced
increased delinquency rates associated with specific collateral types
and origination dates. Overall losses have decreased since Decem-
ber 31, 2009, with the recovery in security prices resulting from
increased demand for higher-yielding asset classes and a decelera-
tion in the pace of home price declines due in part to the U.S.
government programs to facilitate financing and to spur home
purchases. The unrealized loss of $250 million is considered tempo-
rary, based on management’s assessment that the estimated future
cash flows together with the credit enhancement levels for those
securities remain sufficient to support the Firm’s investment. The
credit enhancements associated with the below investment-grade
and investment-grade positions are 9% and 24%, respectively.
Asset-backed securities – Collateralized loan obligations
As of December 31, 2010, gross unrealized losses related to CLOs
were $210 million, of which $200 million related to securities that
were in an unrealized loss position for 12 months or more. Overall
losses have decreased since December 31, 2009, mainly as a result
of lower default forecasts and spread tightening across various
asset classes. Substantially all of these securities are rated “AAA,”
“AA” and “A” and have an average credit enhancement of 30%.
Credit enhancement in CLOs is primarily in the form of subordina-
tion, which is a form of structural credit enhancement where real-
ized losses associated with assets held by an issuing vehicle are
allocated to issued tranches considering their relative seniority. The
key assumptions considered in analyzing potential credit losses
were underlying loan and debt security defaults and loss severity.
Based on current default trends, the Firm assumed collateral default
rates of 2.1% for 2010 and 5% thereafter. Further, loss severities
were assumed to be 48% for loans and 78% for debt securities.
Losses on collateral were estimated to occur approximately 18
months after default.