JP Morgan Chase 2010 Annual Report Download - page 188

Notes to consolidated financial statements
188 JPMorgan Chase & Co./2010 Annual Report
Changes in fair value under the fair value option election
The following table presents the changes in fair value included in the Consolidated Statements of Income for the years ended December 31,
2010, 2009 and 2008, for items for which the fair value election was made. The profit and loss information presented below only includes the
financial instruments that were elected to be measured at fair value; related risk management instruments, which are required to be measured
at fair value, are not included in the table.
2010
2009 2008
Principal
transactions
Other
income
Total changes
in fair value
recorded
Principal
transactions
Other
income
To
tal changes
in fair value
recorded
Principal
transactions
Other
income
Total changes
in fair value
recorded December 31, (in millions)
Federal funds sold and securities
purchased under resale agreements $ 173 $ — $ 173 $ (553) $ — $ (553) $ 1,139 $ — $ 1,139
Securities borrowed 31 — 31 82 — 82 29 — 29
Trading assets:
Debt and equity instr
u
ments,
excluding loans 556 (2)(c) 554 619 25(c) 644 (870) (58)(c) (928)
Loans reported as trading assets:
Changes in instrument
-
specific credit risk 1,279 (6)(c) 1,273 (300) (177)(c) (477) (9,802) (283)(c) (10,085)
Other changes in fair value (312)
4,449
(c)
4,137 1,132 3,119
(c)
4,251 696 1,178
(c)
1,874
Loans:
Changes in instr
u
ment
-
specific
credit risk 95 — 95 (78) — (78) (1,991) — (1,991)
Other changes in fair value 90 — 90 (343) — (343) (42)
— (42)
Other assets — (263)
(d)
(263) — (731)
(d)
(731) — (660)
(d)
(660)
Deposits(a) (564) — (564) (770) — (770) (132)
— (132)
Federal funds purchased and secur
i
ties
loaned or sold under repurchase
agreements (29)
— (29) 116 — 116 (127)
— (127)
Other borrowed funds
(a)
123 — 123 (1,287) — (1,287) 1,888 — 1,888
Trading liabilities (23)
— (23) (3) — (3) 35 — 35
Beneficial interests issued by
consolidated VIEs (12) — (12) (351) — (351) 355 — 355
Other liabilities (9)
8
(d)
(1) 64 — 64 — — —
Long-term debt:
Changes in instrument
-
specific
credit risk(a) 400 — 400 (1,704) — (1,704) 1,174 — 1,174
Other changes in fair value
(b)
1,297 — 1,297 (2,393) — (2,393) 16,202 — 16,202
(a) Total changes in instrument-specific credit risk related to structured notes were $468 million, $(1.7) billion and $1.2 billion for the years ended December 31, 2010, 2009 and
2008, respectively. These totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt. The 2009 prior period
has been revised.
(b) Structured notes are debt instruments with embedded derivatives that are tailored to meet a client’s need for derivative risk in funded form. The embedded derivative is the
primary driver of risk. The 2008 gain included in “Other changes in fair value” results from a significant decline in the value of certain structured notes where the embedded
derivative is principally linked to either equity indices or commodity prices, both of which declined sharply during the third quarter of 2008. Although the risk associated with
the structured notes is actively managed, the gains reported in this table do not include the income statement impact of such risk management instruments.
(c) Reported in mortgage fees and related income.
(d) Reported in other income.
Determination of instrument-specific credit risk for items
for which a fair value election was made
The following describes how the gains and losses included in earnings
during 2010, 2009 and 2008, which were attributable to changes in
instrument-specific credit risk, were determined.
• Loans and lending-related commitments: For floating-rate instru-
ments, all changes in value are attributed to instrument-specific
credit risk. For fixed-rate instruments, an allocation of the changes
in value for the period is made between those changes in value
that are interest rate-related and changes in value that are credit-
related. Allocations are generally based on an analysis of bor-
rower-specific credit spread and recovery information, where
available, or benchmarking to similar entities or industries.
• Long-term debt: Changes in value attributable to instrument-
specific credit risk were derived principally from observable
changes in the Firm’s credit spread.
• Resale and repurchase agreements, securities borrowed agree-
ments and securities lending agreements: Generally, for these
types of agreements, there is a requirement that collateral be
maintained with a market value equal to or in excess of the prin-
cipal amount loaned; as a result, there would be no adjustment or
an immaterial adjustment for instrument-specific credit risk related
to these agreements.