UPS 2008 Annual Report Download - page 71

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The gross realized gains on sales of marketable securities totaled $19, $23, and $12 million in 2008, 2007,
and 2006, respectively. The gross realized losses totaled $10, $9, and $21 million in 2008, 2007, and 2006,
respectively. Impairment losses recognized on marketable securities and short-term investments totaled $23
million during 2008 (discussed further below), with no such losses recognized in 2007 or 2006.
At December 31, 2008, we held $287 million in principal value of investments in auction rate securities.
Some of these investments take the form of debt securities, and are structured as direct obligations of local
governments or agencies (classified as “U.S. State and local municipal securities”). Other auction rate security
investments are structured as obligations of asset-backed trusts (classified as “Asset-backed debt securities”),
generally all of which are collateralized by student loans and are guaranteed by the U.S. Government or through
private insurance. The remaining auction rate securities take the form of preferred stock, and are collateralized by
securities issued directly by large corporations. Substantially all of our investments in auction rate securities
maintain ratings of A / A1 or higher by Standard and Poor’s and Moody’s, respectively.
During the first quarter of 2008, market auctions, including auctions for substantially all of our auction rate
securities portfolio, began to fail due to insufficient buyers. As a result of the persistent failed auctions, and the
uncertainty of when these investments could successfully be liquidated at par, we have classified all of our
investments in auction rate securities to non-current marketable securities (which are reported in “Other
Non-Current Assets” on the consolidated balance sheet), as noted in the table above, as of December 31, 2008.
The securities for which auctions have failed will continue to accrue interest and be auctioned at each respective
reset date until the auction succeeds, the issuer redeems the securities, or the securities mature.
Historically, the par value of the auction rate securities approximated fair value due to the frequent resetting
of the interest rate. While we will continue to earn interest on these investments in failed auction rate securities
(often at the maximum contractual interest rate), the estimated fair value of the auction rate securities no longer
approximates par value due to the lack of liquidity. We estimated the fair value of these securities after
considering several factors, including the credit quality of the securities, the rate of interest received since the
failed auctions began, the yields of securities similar to the underlying auction rate securities, and the input of
broker-dealers in these securities. As a result, we recorded an after-tax unrealized loss of approximately $47
million on these securities as of December 31, 2008 in other comprehensive income ($71 million pre-tax),
reflecting the decline in the estimated fair value of these securities.
During the third quarter of 2008, we recorded impairment losses on two auction rate securities that were
collateralized by preferred stock issued by the Federal National Mortgage Association (“FNMA”) and the
Federal Home Loan Mortgage Corporation (“FHLMC”). The impairment followed actions by the U.S. Treasury
Department and the Federal Housing Finance Agency with respect to FNMA and FHLMC. Additionally, we
recorded impairment losses on a municipal auction rate security and on holdings of several medium term notes
issued by Lehman Brothers Inc., which declared bankruptcy during the third quarter. We do not hold any other
securities issued by these entities. The total of these credit-related impairment losses during the year was $23
million, which was recorded in “investment income” on the income statement.
For the remaining auction rate securities and other debt securities, we have concluded that no additional
other-than-temporary impairment losses existed as of December 31, 2008. In making this determination, we
considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the
investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that
we will be unable to collect amounts due according to the contractual terms of the security, the credit rating of
the security, and our ability and intent to hold these investments until the anticipated recovery in market value
occurs.
60