JP Morgan Chase 2008 Annual Report Download - page 155

JPMorgan Chase & Co./ 2008 Annual Report 153
Commercial mortgage-backed securities – When relevant market
activity is not present or is limited, the value of commercial mort-
gage-backed securities is estimated considering the value of the col-
lateral and the specific attributes of the securities held by the Firm.
The value of the collateral pool supporting the securities is analyzed
using the same techniques and factors described above for the valu-
ation of commercial mortgage loans, albeit in a more aggregated
manner across the pool. For example, average delinquencies, loan or
geographic concentrations and average debt-service coverage ratios,
among other metrics, may be evaluated. In addition, as each securiti-
zation vehicle distributes cash in a manner or order that is predeter-
mined at the inception of the vehicle, the priority in which each par-
ticular mortgage-backed security is allocated cash flows, and the
level of credit enhancement that is in place to support those cash
flows, are key considerations in deriving the value of commercial
mortgage-backed securities. Finally, the risk premium that investors
demand for securitized products in today’s market is factored into
the valuation. To benchmark its valuations, the Firm utilizes inde-
pendent pricing provided by third-party vendors, and broker quotes,
as applicable. While none of those sources are solely indicative of fair
value, they serve as directional indicators for the appropriateness of
the Firm’s estimates.
The following table presents mortgage-related activities within the available-for-sale securities portfolio.
Unrealized gains/(losses)
included in other
Net gains/(losses) comprehensive income
reported in income – (pretax) –
Exposures as of year ended year ended
(in millions) December 31, 2008 December 31, 2008(a) December 31, 2008
U.S. residential mortgage:
Prime $ 6,027 $ (32) $ (1,769)
Alt-A 868 — (196)
Subprime 194 (89) (32)
Non-U.S. residential 2,075 2 (156)
Commercial mortgage 3,939 — (684)
U.S. government and federal agency obligations:
Mortgage-backed securities $ 6,424 $ 23 $ 165
Collateralized mortgage obligations 558 (5) (4)
U.S. government-sponsored enterprise obligations:
Mortgage-backed securities 110,403 458 1,915
Direct obligations 9,657 11 (54)
(a) Excludes related net interest income.
Exposures in the table above include $140.1 billion of mortgage-
backed securities classified as available-for-sale in the Firm’s
Consolidated Balance Sheets at December 31, 2008. These invest-
ments are primarily used as part of the Firm’s centralized risk man-
agement of structural interest rate risk (the sensitivity of the Firm’s
aggregate balance sheet to changes in interest rates). Changes in
the Firm’s structural interest rate position, as well as changes in the
overall interest rate environment, are continually monitored, result-
ing in periodic repositioning of mortgage-backed securities classi-
fied as available-for-sale. Given that this portfolio is primarily used
to manage interest rate risk, predominantly all of these securities
are backed by either U.S. government agencies, government spon-
sored entities, or they are rated “AAA”.
Investment securities in the available-for-sale portfolio include:
• $6.9 billion of prime and Alt-A securities, principally rated
“AAA”. The fair value of these securities is determined based
upon independent pricing services supported by relevant and
observable market data for similar securities. The Firm classifies
these securities in level 2 of the valuation hierarchy.
• $3.9 billion of commercial mortgage-backed securities, princi-
pally rated “AAA”. The fair value of these securities is deter-
mined using a third party pricing service that uses relevant and
observable market data. The Firm classifies these securities in
level 2 of the valuation hierarchy.
• $127.0 billion of U.S. government agencies or U.S. government-
sponsored enterprise mortgage-backed securities. Where these
securities trade in active markets and there is market-observ-
able pricing, they are classified in level 1 of the valuation hier-
archy. Where the determination of fair value is based on broker
quotes and independent pricing services, supported by relevant
and observable market data, the Firm classifies such securities
in level 2 of the valuation hierarchy.