JP Morgan Chase 2010 Annual Report Download - page 183

JPMorgan Chase & Co./2010 Annual Report 183
Fair value hierarchy
December 31, 200
9
(in millions)
Level 1
Level 2
Level 3
Total fair value
Loans retained
(a)
$ — $ 4,544 $ 1,137 $ 5,681
Loans held-for-sale
(b)
— 601 1,029 1,630
Total loans
— 5,145 2,166 7,311
Other real estate owned — 307 387 694
Other assets
—
—
184
184
Total other assets
— 307 571 878
Total assets at fair value on a no
nrecurring basis
$ — $ 5,452 $ 2,737 $ 8,189
Accounts payable and other liabilities
(c)
$ — $ 87 $ 39 $ 126
Total liabilities at fair value on a nonrecurring basis
$ — $ 87 $ 39 $ 126
(a) Reflects mortgage, home equity and other loans where the carrying value is based on the fair value of the underlying collateral.
(b) Predominantly includes credit card loans at December 31, 2010. Predominantly includes leveraged lending loans at December 31, 2009. Loans held-for-sale are carried
on the Consolidated Balance Sheets at the lower of cost or fair value.
(c) Represents, at December 31, 2010 and 2009, fair value adjustments associated with $517 million and $648 million, respectively, of unfunded held-for-sale lending-
related commitments within the leveraged lending portfolio.
(d) In the year ended December 31, 2010, transfers between levels 1, 2 and 3 were not significant.
The method used to estimate the fair value of impaired collateral-
dependent loans, and other loans where the carrying value is
based on the fair value of the underlying collateral (e.g., residential
mortgage loans charged off in accordance with regulatory guid-
ance), depends on the type of collateral (e.g., securities, real
estate, nonfinancial assets) underlying the loan. Fair value of the
collateral is estimated based on quoted market prices, broker
quotes or independent appraisals, or by using a DCF model. For
further information, see Note 15 on pages 239–243 of this Annual
Report.
Nonrecurring fair value changes
The following table presents the total change in value of assets
and liabilities for which a fair value adjustment has been included
in the Consolidated Statements of Income for the years ended
December 31, 2010, 2009 and 2008, related to financial instru-
ments held at those dates.
Year ended Dece
m
ber 31,
(in millions) 2010 2009 2008
Loans retained
$
(3,413)
$ (3,550) $ (1,159)
Loans held-for-sale
29
(389) (2,728)
Total loans
(3,
384
)
(3,939) (3,887)
Other assets 25 (104) (685)
Accounts payable and
other liabilities 6 31 (285)
Total nonrecurring fair
value gains/(losses) $ (3,353) $ (4,012) $ (4,857)
In the above table, loans predominantly include: (1) mortgage, home
equity, and other loans where changes in the carrying value are
based on the fair value of the underlying collateral; and (2) the
change in fair value for leveraged lending loans carried on the Con-
solidated Balance Sheets at the lower of cost or fair value. Accounts
payable and other liabilities predominantly include the change in fair
value for unfunded lending-related commitments within the lever-
aged lending portfolio.
Level 3 analysis
Level 3 assets at December 31, 2010, predominantly include deriva-
tive receivables, mortgage servicing rights (“MSRs”), collateralized
loan obligations (“CLOs”) held within the available-for-sale securities
portfolio, trading loans, asset-backed trading securities and private
equity investments.
• Derivative receivables included $35.3 billion of interest rate,
credit, foreign exchange, equity and commodity contracts classi-
fied within level 3 at December 31, 2010. Included within this
balance was $11.6 billion of structured credit derivatives with
corporate debt underlying. In assessing the Firm’s risk exposure to
structured credit derivatives, the Firm believes consideration
should also be given to derivative liabilities with similar, and
therefore offsetting, risk profiles. At December 31, 2010, $5.6
billion of level 3 derivative liabilities had risk characteristics similar
to those of the derivative receivable assets classified in level 3.
• Mortgage servicing rights represent the fair value of future cash
flows for performing specified mortgage servicing activities for
others (predominantly with respect to residential mortgage loans).
For a further description of the MSR asset, interest rate risk man-
agement and the valuation methodology used for MSRs, including
valuation assumptions and sensitivities, see Note 17 on pages
260–263 of this Annual Report.
• CLOs totaling $13.5 billion were securities backed by corporate
loans held in the Firm’s AFS securities portfolio. Substantially all of
these securities are rated “AAA,” “AA” and “A” and had an av-
erage credit enhancement of 30%. Credit enhancement in CLOs is
primarily in the form of subordination, which is a form of struc-
tural credit enhancement where realized losses associated with
assets held by an issuing vehicle are allocated to issued tranches
considering their relative seniority. For further discussion, see Note
12 on pages 214–218 of this Annual Report.
• Trading loans totaling $13.1 billion included $4.4 billion of nona-
gency residential mortgage whole loans and commercial mort-
gage loans held in IB for which there is limited price transparency;
and $4.0 billion of reverse mortgages for which the principal risk
sensitivities are mortality risk and home prices. The fair value of