SunTrust 2008 Annual Report Download - page 50

Trading Assets and Liabilities
Trading assets include loans, investment securities and derivatives that relate to capital markets trading activities by acting as
broker/dealer on behalf of our clients, investment securities, and derivatives that are periodically acquired for corporate
balance sheet management purposes. All trading assets and liabilities are carried at fair value as required under U.S. GAAP,
or due to our election under SFAS No. 159 to carry certain assets at fair value. Trading accounts profits/(losses) and
commissions on the Consolidated Statements of Income are primarily comprised of gains and losses on trading assets and
liabilities. For additional information regarding trading account profits/(losses) and commissions, refer to “Noninterest
Income” within this MD&A. Additionally, see Note 20, “Fair Value Election and Measurement,” to the Consolidated
Financial Statements for additional information regarding financial instruments carried at fair value.
We utilize trading assets such as fixed rate agency MBS and derivatives, primarily interest rate swaps, for balance sheet
management purposes that are intended to provide an economic hedge to a portion of the changes in fair value of our
publicly-traded debt that is measured at fair value pursuant to our election of the fair value option. As of December 31, 2008,
the amount of trading securities outstanding for this purpose was approximately $166.1 million of fixed rate corporate bonds
in financial services companies.
Derivative assets and liabilities increased during 2008 by $2.7 billion and $1.1 billion, respectively. This increase was driven
by the movements in fair values of interest rate based derivatives as both current and projected future interest rates declined
significantly during the fourth quarter of 2008. The higher increase in derivative assets relative to derivative liabilities during
the year is due to gains in fair value from derivative positions that we use as risk management tools. See Note 17, “Derivative
Financial Instruments”, to the Consolidated Financial Statements for additional information regarding risk management
strategies involving derivatives.
Certain ABS were purchased during the fourth quarter of 2007 from affiliates and certain ARS were purchased primarily in
the fourth quarter of 2008. The securities acquired during the fourth quarter of 2007 included SIVs that are collateralized by
various domestic and foreign assets, residential MBS, including Alt-A and subprime collateral, collateralized debt
obligations (“CDO”), and commercial loans, as well as super-senior interests retained from Company-sponsored
securitizations. During 2008, we recognized approximately $255.9 million in net market valuation losses related to these
ABS. Through sales, maturities and write downs, we reduced our exposure to these distressed assets by approximately $3.2
billion since the acquisition of these in the fourth quarter of 2007, making the exposure at December 31, 2008 approximately
$250.0 million. During the year, we sold over $1.5 billion in securities and received over $870 million in payments related to
securities acquired during the fourth quarter of 2007.
We continue to actively evaluate our holdings of these securities with the objective of opportunistically lowering our
exposure to them. In addition, we expect paydowns to continue on many of the residential MBS; however, more than half of
the remaining acquired portfolio consists of SIVs undergoing enforcement proceedings, and therefore any significant
reduction in the portfolio will largely depend on the status of those proceedings. While further losses are possible, our
experience during the year reinforces our belief that we have appropriately written these assets down to fair value as of
December 31, 2008. The estimated market value of these securities is based on market information, where available, along
with significant, unobservable third party data. As a result of the high degree of judgment and estimates used to value these
illiquid securities, the market values could vary significantly in future periods. See “Difficult to Value Financial Assets”
included in this MD&A for more information.
The amount of ARS recorded in trading assets at fair value totaled $133.1 million at December 31, 2008. The majority of
these ARS are preferred equity securities, and the remaining securities consist of ABS backed by trust preferred bank debt or
student loans.
In September 2008, we purchased, at amortized cost plus accrued interest, a Lehman Brothers security from the RidgeWorth
Prime Quality Money Market Fund (the “Fund”). The Fund received a cash payment for the accrued interest along with a $70
million note that we issued. RidgeWorth, one of our wholly-owned subsidiaries, is the investment adviser to the Fund. The
Lehman Brothers security went into default when Lehman Brothers filed for bankruptcy in September 2008. We took this
action in response to the unprecedented market events during the third quarter and to protect investors in the Fund from
losses associated with this specific security. When purchased by the Fund, the Lehman Brothers security was rated A-1/P-1
and was a Tier 1 eligible security. Lehman Brothers is currently in liquidation and the ultimate timing and form of repayment
on the security is not known at this time. During 2008, we recorded a pre-tax market valuation loss of $63.8 million as a
result of the purchase. We evaluated this transaction under the applicable accounting guidance and concluded that we were
not the primary beneficiary and therefore consolidation of the Fund was not appropriate.
In September 2008, the Federal Reserve Bank of Boston (the “Fed”) instituted the ABCP MMMF Liquidity Facility program
(the “Program”) that allows eligible depository institutions, bank holding companies and affiliated broker/dealers to purchase
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