JP Morgan Chase 2012 Annual Report Download - page 186

Notes to consolidated financial statements
196 JPMorgan Chase & Co./2012 Annual Report
Superstorm Sandy
On October 29, 2012, the mid-Atlantic and Northeast
regions of the U.S. were affected by Superstorm Sandy,
which caused major flooding and wind damage and resulted
in major disruptions to individuals and businesses and
significant damage to homes and communities in the
affected regions. Superstorm Sandy did not have a material
impact on the 2012 financial results of the Firm.
Subsequent events
Mortgage foreclosure settlement agreement with the
Office of the Comptroller of the Currency and the Board of
Governors of the Federal Reserve System
On January 7, 2013, the Firm announced that it and a
number of other financial institutions entered into a
settlement agreement with the Office of the Comptroller of
the Currency and the Board of Governors of the Federal
Reserve System providing for the termination of the
independent foreclosure review programs (the
“Independent Foreclosure Review”). Under this settlement,
the Firm will make a cash payment of $753 million into a
settlement fund for distribution to qualified borrowers. The
Firm has also committed an additional $1.2 billion to
foreclosure prevention actions, which will be fulfilled
through credits given to the Firm for modifications, short
sales and other specified types of borrower relief.
Foreclosure prevention actions that earn credit under the
Independent Foreclosure Review settlement are in addition
to actions taken by the Firm to earn credit under the global
settlement entered into by the Firm with state and federal
agencies. The estimated impact of the foreclosure
prevention actions required under the Independent
Foreclosure Review settlement have been considered in the
Firm’s allowance for loan losses. The Firm recognized a
pretax charge of approximately $700 million in the fourth
quarter of 2012 related to the Independent Foreclosure
Review settlement.
Note 3 – Fair value measurement
JPMorgan Chase carries a portion of its assets and liabilities
at fair value. These assets and liabilities are predominantly
carried at fair value on a recurring basis (i.e., assets and
liabilities that are measured and reported at fair value on
the Firm’s Consolidated Balance Sheets). Certain assets (e.g.
certain mortgage, home equity and other loans, where the
carrying value is based on the fair value of the underlying
collateral), liabilities and unfunded lending-related
commitments are measured at fair value on a nonrecurring
basis; that is, they are not measured at fair value on an
ongoing basis but are subject to fair value adjustments only
in certain circumstances (for example, when there is
evidence of impairment).
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date. Fair value is based on quoted market
prices, where available. If listed prices or quotes are not
available, fair value is based on models that consider
relevant transaction characteristics (such as maturity) and
use as inputs observable or unobservable market
parameters, including but not limited to yield curves,
interest rates, volatilities, equity or debt prices, foreign
exchange rates and credit curves. Valuation adjustments
may be made to ensure that financial instruments are
recorded at fair value, as described below.
Imprecision in estimating unobservable market inputs or
other factors can affect the amount of gain or loss recorded
for a particular position. Furthermore, while the Firm
believes its valuation methods are appropriate and
consistent with those of other market participants, the
methods and assumptions used reflect management
judgment and may vary across the Firm’s businesses and
portfolios.
The Firm uses various methodologies and assumptions in
the determination of fair value. The use of different
methodologies or assumptions to those used by the Firm
could result in a different estimate of fair value at the
reporting date.
Valuation process
Risk-taking functions are responsible for providing fair value
estimates for assets and liabilities carried on the
Consolidated Balance Sheets at fair value. The Firm’s
valuation control function, which is part of the Firm’s
Finance function and independent of the risk-taking
functions, is responsible for verifying these estimates and
determining any fair value adjustments that may be
required to ensure that the Firm’s positions are recorded at
fair value. In addition, the Firm has a firm-wide Valuation
Governance Forum (“VGF”) comprising senior finance and
risk executives to oversee the management of risks arising
from valuation activities conducted across the Firm. The
VGF is chaired by the firm-wide head of the valuation
control function, and also includes sub-forums for the CIB,
MB, and certain corporate functions including Treasury and
CIO.
The valuation control function verifies fair value estimates
leveraging independently derived prices, valuation inputs
and other market data, where available. Where independent
prices or inputs are not available, additional review is
performed by the valuation control function to ensure the
reasonableness of estimates that cannot be verified to
external independent data, and may include: evaluating the
limited market activity including client unwinds;
benchmarking of valuation inputs to those for similar
instruments; decomposing the valuation of structured
instruments into individual components; comparing
expected to actual cash flows; reviewing profit and loss
trends; and reviewing trends in collateral valuation. In
addition there are additional levels of management review
for more significant or complex positions.
The valuation control function determines any valuation
adjustments that may be required to the estimates provided
by the risk-taking functions. No adjustments are applied to
the quoted market price for instruments classified within