Sallie Mae 2009 Annual Report Download - page 209

16. Fair Value Measurements (Continued)
markets require significant adjustments and judgment in determining fair value that cannot be corroborated
with market transactions. When determining the fair value of derivatives, the Company takes into account
counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing
exposure net of collateral held. The net exposures for each counterparty are adjusted based on market
information available for the specific counterparty, including spreads from credit default swaps. Additionally,
when the counterparty has exposure to the Company related to SLM Corporation derivatives, the Company
fully collateralizes the exposure, minimizing the adjustment necessary to the derivative valuations for the
Company’s credit risk. While trusts that contain derivatives are not required to post collateral to counterparties,
the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s
exposure to the trusts. It is the Company’s policy to compare its derivative fair values to those received by its
counterparties in order to validate the model’s outputs. The carrying value of borrowings designated as the
hedged item in an ASC 815 fair value hedge are adjusted for changes in fair value due to benchmark interest
rates and foreign-currency exchange rates. These valuations are determined through standard bond pricing
models and option models (when applicable) using the stated terms of the borrowings, and observable yield
curves, foreign currency exchange rates, and volatilities.
During 2008 and 2009, the bid/ask spread widened significantly for derivatives indexed to certain interest
rate indices as a result of market inactivity. As such, significant adjustments for the bid/ask spread and
unobservable inputs were used in the fair value calculation resulting in these instruments being classified as
level 3 in the fair value hierarchy. Additionally, significant unobservable inputs were used to model the
amortizing notional of some swaps tied to securitized asset balances and, as such, these derivatives have been
classified as level 3 in the fair value hierarchy. These swaps were transferred into level 3 during the first
quarter of 2009 due to a change in the assumption regarding successful remarketing and significant
unobservable inputs used to model notional amortizations.
Residual Interests
The Residual Interests are carried at fair value in the financial statements. No active market exists for
student loan Residual Interests; as such, the fair value is calculated using discounted cash flow models and
option models. Observable inputs from active markets are used where available, including yield curves and
volatilities. Significant unobservable inputs such as prepayment speeds, default rates, certain bonds’ costs of
funds and discount rates are used in determining the fair value and require significant judgment. These
unobservable inputs are internally determined based upon analysis of historical data and expected industry
trends. On a quarterly basis the Company back tests its prepayment speed, default rates and costs of funds
assumptions by comparing those assumptions to actuals experienced. Additionally, the Company uses non-
binding broker quotes and industry analyst reports which show changes in the indicative prices of the asset-
backed securities tranches immediately senior to the Residual Interest as an indication of potential changes in
the discount rate used to value the Residual Interests. Market transactions are not available to validate the
models’ results. An analysis of the impact of changes to significant inputs is addressed further in Note 8,
“Student Loan Securitization.”
F-82
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)