JP Morgan Chase 2010 Annual Report Download - page 184

Notes to consolidated financial statements
184 JPMorgan Chase & Co./2010 Annual Report
the commercial and residential mortgage loans is estimated by
projecting expected cash flows, considering relevant borrower-
specific and market factors, and discounting those cash flows at
a rate reflecting current market liquidity. Loans are partially
hedged by level 2 instruments, including credit default swaps
and interest rate derivatives, which are observable and liquid.
Consolidated Balance Sheets changes
Level 3 assets (including assets measured at fair value on a nonrecur-
ring basis) were 5% of total Firm assets at December 31, 2010.
The following describes significant changes to level 3 assets during
the year.
For the year ended December 31, 2010
Level 3 assets decreased by $15.5 billion during 2010, due to the
following:
• $11.4 billion decrease in derivative receivables, predominantly
driven by changes in credit spreads;
• A net decrease of $3.5 billion due to the adoption of new ac-
counting guidance related to VIEs. As a result of the adoption of
the new guidance, there was a decrease of $5.0 billion in accrued
interest and accounts receivable related to retained securitization
interests in Firm-sponsored credit card securitization trusts that
were eliminated upon consolidation, partially offset by an increase
of $1.5 billion in trading debt and equity instruments;
• $2.8 billion decrease in trading assets – debt and equity instru-
ments, driven by sales, securitizations and transfers of trading
loans to level 2 due to increased price transparency;
• $1.9 billion decrease in MSRs. For a further discussion of the
change, refer to Note 17 on pages 260–263 of this Annual Re-
port;
• $2.2 billion increase in nonrecurring loans held-for-sale, largely
driven by an increase in credit card loans;
• $1.3 billion increase in private equity investments, largely driven
by additional follow-on investments and net gains in the portfolio;
and
• $1.0 billion increase in asset-backed AFS securities, predominantly
driven by purchases of CLOs.
Gains and Losses
Gains and losses included in the tables for 2010, 2009 and 2008
included:
2010
Included in the tables for the year ended December 31, 2010
• $2.3 billion of losses on MSRs; and
• $1.0 billion gain in private equity, largely driven by gains on
investments in the portfolio.
2009
Included in the tables for the year ended December 31, 2009
• $11.4 billion of net losses on derivatives, primarily related to the
tightening of credit spreads;
• Net losses on trading – debt and equity instruments of $671
million, consisting of $2.1 billion of losses, primarily related to
residential and commercial loans and MBS, principally driven by
markdowns and sales, partially offset by gains of $1.4 billion,
reflecting increases in the fair value of other ABS;
• $5.8 billion of gains on MSRs; and
• $1.4 billion of losses related to structured note liabilities, pre-
dominantly due to volatility in the equity markets.
2008
Included in the tables for the year ended December 31, 2008
• Losses on trading-debt and equity instruments of approximately
$12.8 billion, principally from mortgage-related transactions and
auction-rate securities;
• Losses of $6.9 billion on MSRs;
• Losses of approximately $3.9 billion on leveraged loans;
• Net gains of $4.6 billion related to derivatives, principally due to
changes in credit spreads and rate curves;
• Gains of $4.5 billion related to structured notes, principally due to
significant volatility in the fixed income, commodities and equity
markets; and
• Private equity losses of $638 million.
For further information on changes in the fair value of the MSRs, see
Note 17 on pages 260–263 of this Annual Report.
Credit adjustments
When determining the fair value of an instrument, it may be necessary
to record a valuation adjustment to arrive at an exit price under U.S.
GAAP. Valuation adjustments include, but are not limited to, amounts
to reflect counterparty credit quality and the Firm’s own creditworthi-
ness. The market’s view of the Firm’s credit quality is reflected in credit
spreads observed in the credit default swap market. For a detailed
discussion of the valuation adjustments the Firm considers, see the
valuation discussion at the beginning of this Note.
The following table provides the credit adjustments, excluding the
effect of any hedging activity, reflected within the Consolidated
Balance Sheets as of the dates indicated.
December 31, (in millions)
20
10
2009
Derivative receivables balance
$
80,481
$ 80,210
Derivatives CVA
(a)
(4,362) (3,697 )
Derivative payables balance
69,219
60,125
Derivatives DVA (882) (841
)
(d)
Structured notes balance
(b)(c)
53,139 59,064
Structured notes DVA (1,153) (685 )
(d)
(a) Derivatives credit valuation adjustments (“CVA”), gross of hedges, includes
results managed by credit portfolio and other lines of business within IB.
(b) Structured notes are recorded within long-term debt, other borrowed funds or
deposits on the Consolidated Balance Sheets, based on the tenor and legal
form of the note.
(c) Structured notes are measured at fair value based on the Firm’s election
under the fair value option. For further information on these elections, see
Note 4 on pages 187–189 of this Annual Report.
(d) The prior period has been revised.