MoneyGram 2009 Annual Report Download - page 56

Table of Contents
99 percent of our investment portfolio is composed of cash, cash equivalents and securities issued by, or collateralized by securities
issued by, United States government agencies at December 31, 2009:
Percent of
Fair Investment
(Amounts in thousands) Value Portfolio
Cash, time deposits and certificates of deposit held at large financial institutions $ 1,671,335 40.8%
Money markets collateralized by U.S. government agencies 1,933,764 47.1%
Securities issued by or collateralized by U.S. government agencies 276,545 6.7%
Cash held at international banks 171,725 4.2%
Other investments 49,039 1.2%
Total investment portfolio $ 4,102,408 100.0%
Our credit risk primarily relates to the concentration of our investment portfolio in financial institutions and United States government
agencies. We primarily hold assets at major financial institutions and manage the risk of concentration at these financial institutions by
regularly monitoring their credit ratings. While the credit market crisis and recession have affected all financial institutions, those holding
our assets are well capitalized and, to date, there have been no significant concerns as to their ability to honor all obligations related to our
holdings. The concentration in United States government agencies includes agencies placed under conservatorship by the United States
government in 2008 and extended unlimited lines of credit from the United States Treasury. The implicit guarantee of the United States
government and its actions to date support our belief that the United States government will honor the obligations of its agencies if the
agencies are unable to do so themselves.
Derivative Financial Instruments — Credit risk related to our derivative financial instruments relates to the risk that we are unable to
collect amounts owed to us by the counterparties to our derivative agreements. With the termination of our interest rate swaps in the
second quarter of 2008, our derivative financial instruments are used solely to manage exposures to fluctuations in foreign currency
exchange rates. If the counterparties to any of our derivative financial instruments were to default in payments or experience credit rating
downgrades, the value of the derivative financial instruments would decline and adversely impact our operating income. We manage
credit risk related to derivative financial instruments by entering into agreements with only major financial institutions and regularly
monitoring the credit ratings of these financial institutions. We also only enter into agreements with financial institutions that are
experienced in the foreign currency upon which the agreement is based.
Interest Rate Risk
Interest rate risk represents the risk that our operating results are negatively impacted and our investment portfolio declines in value due
to changes in interest rates. Given the nature of the realigned investment portfolio, including the high credit rating of financial institutions
holding or issuing our cash and cash equivalents and the implicit guarantee of the United States government backing our money markets
and majority of available-for-sale investments, we believe there is a low risk that the value of these securities would decline such that we
would have a material adverse change in our stockholders' equity. At December 31, 2009, the Company's "Other asset-backed securities"
are priced on average at four cents on the dollar for a total fair value of $22.1 million. While the Company does believe its "Other asset-
backed securities" are at a high risk of further decline, the recapitalization completed on March 25, 2008 included funds to cover all
losses on these securities, as well as the trading investments. Accordingly, any resulting adverse movement in our stockholders' equity or
assets in excess of payment service obligations from further declines in investments would not result in regulatory or contractual
compliance exceptions. At December 31, 2009, the combined fair value of the trading investment and related put option was
$27.0 million as compared to the $29.4 million par value of the trading investment. The remaining auction rate security with related put
option was called at par on February 12, 2010.
Our operating results are primarily impacted by interest rate risk through our net investment margin, which is investment revenue less
commissions expense and interest expense. As the money transfer business is not materially affected by investment revenue and pays
commissions that are not tied to an interest rate index, interest rate risk has the most impact on our money order and official check
businesses. After the portfolio realignment, we are invested
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