First Data 2008 Annual Report Download - page 41

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
15% of the remaining capacity. The Company is monitoring the financial stability of other financial institutions that have made commitments under the
revolving credit facility and its derivative counterparties. Certain of these financial institutions are receiving support from the federal government in light of
current financial conditions. Although these financial institutions remain highly-rated (in the A category or higher), their ability to satisfy their commitments
may be dependent on receiving continued support from the federal government.
As of December 31, 2008, the Company held $492.2 million ($553.1 million par value) of student loan auction rate securities ("SLARS") which are
long-term debt instruments, issued by student loan trusts, with variable interest rates that historically reset through a periodic Dutch auction process but do not
include a put-back option. Beginning in mid-February 2008 and due largely to uncertainty in the global credit and capital markets, investment banks and
broker dealers became less willing to support SLARS and other auction rate securities auctions. As a result, multiple auctions failed, including the auctions for
the SLARS still held by the Company. A failed auction does not represent a default by the issuer of the underlying security. As of December 31, 2008, the
majority of the SLARS held by the Company were rated "AAA" or the equivalent and all had collateral substantially guaranteed by the U.S. government and
continued to pay interest in accordance with the terms of their respective security agreements. Due to the lack of observable market activity for the SLARS
held by the Company as of December 31, 2008, the Company with the assistance of a third party valuation firm, upon which the Company in part relied, made
certain assumptions, primarily relating to estimating both the weighted average life for the securities held by the Company and the impact of the current lack
of liquidity on the fair value. At December 31, 2008, the securities were valued based on a probability weighted discounted cash flow analysis. Each of the
securities' key terms including date of issuance, date of maturity, auction intervals, scheduled auction dates, maximum auction rate, as well as underlying
collateral, ratings and guarantees or insurance were considered. The Company recorded an other than temporary impairment loss of $48.0 million in the
"Investment income, net" line of the Consolidated Statements of Operations and an unrealized loss of $13.3 million in "Other comprehensive income." As of
December 31, 2008, the Company believes the fair value of the SLARS is materially accurate.
The Company held money market funds issued by the Reserve Primary Fund, of which, $36 million, $6 million and $12 million were classified within
the "Settlement Assets," "Cash and Cash Equivalents" and "Other Current Assets" lines of the Consolidated Balance Sheet, respectively, as of December 31,
2008. The Company valued the securities based on a delayed settlement confirmation and concluded that the impairment was other than temporary.
Unrealized losses of $6.0 million and $3.0 million were recognized in the "Investment income, net" and "Other income (expense)" lines of the Consolidated
Statements of Operations, respectively.
The Company recognized, in the "Investment income, net" line of the Consolidated Statements of Operations, $6.3 million of unrealized losses
associated with preferred shares in Federal Home Loan Mortgage Corporation ("Freddie Mac") deemed to be other than temporarily impaired.
As a result of the current economic conditions in the U.S. and around the world, large banks are consolidating. The Company has long-term contracts
with a number of these banks and uncertainty exists around the longevity of these contracts due to the consolidations. Although the contracts have termination
fee provisions, uncertainty surrounding the circumstances of the consolidations could potentially lead to asset impairments. One such bank consolidation in
2008 resulted in the receivership of Washington Mutual Bank ("WAMU Bank") and the subsequent acquisition of Washington Mutual Bank fsb and the
operations of WAMU Bank (collectively "Washington Mutual"), one of the Company's largest debit customers, by JPMorgan Chase. The Company received
notice from JPMorgan Chase in the first quarter of 2009 that JPMorgan Chase intends to terminate services under certain Washington Mutual agreements with
the Company prior to expiration of their existing terms. The Company anticipates that it will cease providing services under these Washington Mutual
agreements
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