Barclays 2008 Annual Report Download - page 113

1
Business review
Barclays PLC Annual Report 2008 111
A3. Alt-A
As at As at Marks at Marks at
31.12.08 31.12.07 31.12.08 31.12.07
£m £m
AAA securities 1,847 3,553 43% 87%
Other Alt-A securities 1,265 208 9% 75%
Whole Loans 776 909 67% 97%
Residuals 225 6% 66%
Derivative exposure with underlying Alt-A collateral 398 221 100% 100%
Total 4,288 4,916
Alt-A securities, whole loans and residuals are measured at fair value through profit and loss. Alt-A securities held in conduits and a collateralised debt
obligation (CDO) are categorised as available for sale and are recognised in equity.
Net exposure to the Alt-A market was £4,288m (31st December 2007: £4,916m), through a combination of whole loans, securities and residuals,
including those held in consolidated conduits. There were gross losses of £1,983m in the year and net sales, paydowns and other movements of £181m.
Weaker Sterling resulted in an increase in exposure of £1,190m. Exposures at 31st December 2008 included assets acquired from Lehman Brothers North
American businesses of £300m in AAA securities and £324m in other Alt-A securities.
Securities included £491m held by consolidated conduits and £89m held in a CDO on which impairment charges of £65m and £58m respectively have
been recorded.
At 31st December 2008, 75% of the Alt-A whole loan exposure was performing, and the average loan to value ratio at origination was 81%.
Other exposures with underlying Alt-A collateral include counterparty derivative exposures to vehicles which hold Alt-A collateral. Derivative exposures
with underlying Alt-A collateral of £398m (31st December 2007: £221m) relate to US Dollar denominated interest rate swaps. The increase in the balance
principally relates to the decline in interest rates globally and the 37% depreciation of Sterling relative to the US Dollar, especially in the second half of
2008. The majority of this exposure was the most senior obligation of the vehicle.
A4. US Residential Mortgage Backed Securities Exposure Wrapped by Monoline Insurers
The deterioration in the US residential mortgage market has resulted in exposure to monoline insurers and other financial guarantors that provide credit
protection.
The table below shows RMBS assets where we held protection from monoline insurers at 31st December 2008. These are measured at fair value through
profit and loss. Declines in fair value of the underlying assets are reflected in increases in the value of potential claims against monoline insurers.
Such declines have resulted in net exposure to monoline insurers under these contracts increasing to £1,639m by 31st December 2008 (2007: £730m).
Claims would become due in the event of default of the underlying assets and losses would only be realised if both the underlying asset and monoline
defaulted. At 31st December 2008 while 81% of the underlying assets were non-investment grade, 97% are wrapped by monolines with investment
grade ratings.
There is some uncertainty whether all of the monoline insurers would be able to meet all liabilities if such claims were to arise: certain monoline insurers
have been subject to downgrades in 2008. Consequently, a fair value loss of £412m has been recognised in the year. There have been no claims due
under these contracts as none of the underlying assets were in default at 31st December 2008.
The fair value is determined by a credit valuation adjustment calculation which incorporates stressed cash flow shortfall projections, current market
valuations, stressed Probability of Default (PDs) and a range of Loss Given Default (LGD) assumptions. The cash flow shortfall projections are stressed to
ensure that we consider the potential for further market deterioration and resultant additional cash flow shortfall in underlying collateral. Monoline ratings
are based on external ratings analysis and where appropriate significant internal analysis conducted by the independent Credit Risk function. In addition,
we reflect the potential for further deterioration of monolines by using stressed PDs which results in all monolines having an implied sub-investment
grade rating. LGDs range from 45% to 100% depending on the monoline.
Exposure by Credit Rating of Monoline Insurer
As at 31.12.08
Fair Value Credit
of Underlying Fair Value Valuation Net
Notional Asset Exposure Adjustment Exposure
£m £m £m £m £m
AAA/AA –––––
A/BBB 2,567 492 2,075 (473) 1,602
Non-investment grade 74 8 66 (29) 37
Total 2,641 500 2,141 (502) 1,639
As at 31.12.07
AAA/AA 2,807 2,036 771 (41) 730