Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
3 Months Ended
Mar. 31, 2012
Fair Value Disclosures [Abstract]  
Fair Value Measurements
NOTE 15 – Fair Value Measurements

Under applicable accounting guidance, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 – Summary of Significant Accounting Principles and Note 22 – Fair Value Measurements to the Consolidated Financial Statements of the Corporation's 2011 Annual Report on Form 10-K. The Corporation accounts for certain financial instruments under the fair value option. For more information, see Note 16 – Fair Value Option.

Valuation Processes

The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office, and periodic re-assessments of models to ensure that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are analyzed on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market-observable valuation model inputs to ensure that fair values are reasonably estimated. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.

While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

During the three months ended March 31, 2012, there were no changes to the Corporation's valuation techniques that had, or are expected to have, a material impact on its consolidated financial position or results of operations.

Recurring Fair Value

Assets and liabilities carried at fair value on a recurring basis at March 31, 2012 and December 31, 2011, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.
 
March 31, 2012
 
Fair Value Measurements
 
 
 
 
(Dollars in millions)
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Netting
Adjustments (2)
 
Assets/Liabilities
at Fair Value
Assets
 
 
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$

 
$
95,003

 
$

 
$

 
$
95,003

Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
44,083

 
25,581

 

 

 
69,664

Corporate securities, trading loans and other
994

 
32,115

 
6,001

 

 
39,110

Equity securities
24,574

 
8,236

 
525

 

 
33,335

Non-U.S. sovereign debt
40,245

 
11,280

 
546

 

 
52,071

Mortgage trading loans and ABS

 
11,583

 
4,012

 

 
15,595

Total trading account assets
109,896

 
88,795

 
11,084

 

 
209,775

Derivative assets (3)
2,780

 
1,488,433

 
11,315

 
(1,443,477
)
 
59,051

AFS debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and agency securities
36,539

 
3,427

 

 

 
39,966

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
175,058

 
33

 

 
175,091

Agency-collateralized mortgage obligations

 
42,355

 

 

 
42,355

Non-agency residential

 
11,441

 
29

 

 
11,470

Non-agency commercial

 
4,861

 
38

 

 
4,899

Non-U.S. securities
3,363

 
3,205

 

 

 
6,568

Corporate/Agency bonds

 
2,290

 
131

 

 
2,421

Other taxable securities
20

 
6,422

 
4,175

 

 
10,617

Tax-exempt securities

 
1,758

 
1,895

 

 
3,653

Total AFS debt securities
39,922

 
250,817

 
6,301

 

 
297,040

Loans and leases

 
6,410

 
2,782

 

 
9,192

Mortgage servicing rights

 

 
7,589

 

 
7,589

Loans held-for-sale

 
4,696

 
2,862

 

 
7,558

Other assets
22,153

 
10,031

 
3,487

 

 
35,671

Total assets
$
174,751

 
$
1,944,185

 
$
45,420

 
$
(1,443,477
)
 
$
720,879

Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in U.S. offices
$

 
$
3,191

 
$

 
$

 
$
3,191

Federal funds purchased and securities loaned or sold under agreements to repurchase

 
54,434

 

 

 
54,434

Trading account liabilities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
19,789

 
761

 

 

 
20,550

Equity securities
19,571

 
2,080

 

 

 
21,651

Non-U.S. sovereign debt
17,866

 
1,180

 

 

 
19,046

Corporate securities and other
638

 
8,405

 
124

 

 
9,167

Total trading account liabilities
57,864

 
12,426

 
124

 

 
70,414

Derivative liabilities (3)
2,437

 
1,468,536

 
7,128

 
(1,428,929
)
 
49,172

Other short-term borrowings

 
6,395

 

 

 
6,395

Accrued expenses and other liabilities
16,775

 
1,681

 
3

 

 
18,459

Long-term debt

 
48,537

 
2,500

 

 
51,037

Total liabilities
$
77,076

 
$
1,595,200

 
$
9,755

 
$
(1,428,929
)
 
$
253,102

(1) 
During the three months ended March 31, 2012, approximately $1.7 billion and $350 million of assets and liabilities were transferred from Level 1 to Level 2, and approximately $250 million and $40 million of assets and liabilities were transferred from Level 2 to Level 1. Approximately $640 million of the transfer from Level 1 to Level 2 was due to a restriction that became effective for a private equity investment. The remaining transfers were the result of additional information associated with certain equities, derivative contracts and private equity investments.
(2) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(3) 
For further disaggregation of derivative assets and liabilities, see Note 3 – Derivatives.
 
December 31, 2011
 
Fair Value Measurements
 
 
 
 
(Dollars in millions)
Level 1 (1)
 
Level 2 (1)
 
Level 3
 
Netting
Adjustments (2)
 
Assets/Liabilities
at Fair Value
Assets
 
 
 
 
 
 
 
 
 
Federal funds sold and securities borrowed or purchased under agreements to resell
$

 
$
87,453

 
$

 
$

 
$
87,453

Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
30,540

 
22,073

 

 

 
52,613

Corporate securities, trading loans and other
1,067

 
28,624

 
6,880

 

 
36,571

Equity securities
17,181

 
5,949

 
544

 

 
23,674

Non-U.S. sovereign debt
33,667

 
8,937

 
342

 

 
42,946

Mortgage trading loans and ABS

 
9,826

 
3,689

 

 
13,515

Total trading account assets
82,455

 
75,409

 
11,455

 

 
169,319

Derivative assets (3)
2,186

 
1,865,310

 
14,366

 
(1,808,839
)
 
73,023

AFS debt securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and agency securities
39,389

 
3,475

 

 

 
42,864

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Agency

 
142,526

 
37

 

 
142,563

Agency-collateralized mortgage obligations

 
44,999

 

 

 
44,999

Non-agency residential

 
13,907

 
860

 

 
14,767

Non-agency commercial

 
5,482

 
40

 

 
5,522

Non-U.S. securities
1,664

 
3,256

 

 

 
4,920

Corporate/Agency bonds

 
2,873

 
162

 

 
3,035

Other taxable securities
20

 
8,593

 
4,265

 

 
12,878

Tax-exempt securities

 
1,955

 
2,648

 

 
4,603

Total AFS debt securities
41,073

 
227,066

 
8,012

 

 
276,151

Loans and leases

 
6,060

 
2,744

 

 
8,804

Mortgage servicing rights

 

 
7,378

 

 
7,378

Loans held-for-sale

 
4,243

 
3,387

 

 
7,630

Other assets
18,963

 
13,886

 
4,235

 

 
37,084

Total assets
$
144,677

 
$
2,279,427

 
$
51,577

 
$
(1,808,839
)
 
$
666,842

Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in U.S. offices
$

 
$
3,297

 
$

 
$

 
$
3,297

Federal funds purchased and securities loaned or sold under agreements to repurchase

 
34,235

 

 

 
34,235

Trading account liabilities:
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
19,120

 
1,590

 

 

 
20,710

Equity securities
13,259

 
1,335

 

 

 
14,594

Non-U.S. sovereign debt
16,760

 
680

 

 

 
17,440

Corporate securities and other
829

 
6,821

 
114

 

 
7,764

Total trading account liabilities
49,968

 
10,426

 
114

 

 
60,508

Derivative liabilities (3)
2,055

 
1,850,804

 
8,500

 
(1,801,839
)
 
59,520

Other short-term borrowings

 
6,558

 

 

 
6,558

Accrued expenses and other liabilities
13,832

 
1,897

 
14

 

 
15,743

Long-term debt

 
43,296

 
2,943

 

 
46,239

Total liabilities
$
65,855

 
$
1,950,513

 
$
11,571

 
$
(1,801,839
)
 
$
226,100

(1) 
Gross transfers between Level 1 and Level 2 during 2011 were not significant.
(2) 
Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.
(3) 
For further disaggregation of derivative assets and liabilities, see Note 3 – Derivatives.
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2012 and 2011, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.

Level 3 – Fair Value Measurements (1)
 
Three Months Ended March 31, 2012
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2012
Gains
(Losses) in
Earnings
Gains
(Losses) in
OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance
March 31
2012
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$
6,880

$
93

$

$
675

$
(1,065
)
$

$
(189
)
$
59

$
(452
)
$
6,001

Equity securities
544

15


79

(109
)

(10
)
8

(2
)
525

Non-U.S. sovereign debt
342

24


273

(81
)



(12
)
546

Mortgage trading loans and ABS
3,689

99


184

(455
)

(89
)
742

(158
)
4,012

Total trading account assets
11,455

231


1,211

(1,710
)

(288
)
809

(624
)
11,084

Net derivative assets (3)
5,866

(837
)

359

(321
)

(634
)
106

(352
)
4,187

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Agency
37






(4
)


33

Non-agency residential
860

(69
)
19


(293
)



(488
)
29

Non-agency commercial
40






(2
)


38

Corporate/Agency bonds
162

(2
)

(2
)




(27
)
131

Other taxable securities
4,265

7

17

362



(418
)

(58
)
4,175

Tax-exempt securities
2,648

26

18


(35
)

(762
)


1,895

Total AFS debt securities
8,012

(38
)
54

360

(328
)

(1,186
)

(573
)
6,301

Loans and leases (2, 4)
2,744

164





(117
)

(9
)
2,782

Mortgage servicing rights (4)
7,378

655




77

(521
)


7,589

Loans held-for-sale (2)
3,387

169


4



(97
)
31

(632
)
2,862

Other assets (5)
4,235

(32
)

43

(581
)

(167
)

(11
)
3,487

Trading account liabilities – Corporate securities and other
(114
)


48

(27
)


(65
)
34

(124
)
Accrued expenses and other liabilities (2)
(14
)
3


5





3

(3
)
Long-term debt (2)
(2,943
)
(241
)

76

(33
)
(65
)
433

(532
)
805

(2,500
)
(1) 
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
(2) 
Amounts represent items that are accounted for under the fair value option.
(3) 
Net derivatives include derivative assets of $11.3 billion and derivative liabilities of $7.1 billion.
(4) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
(5) 
Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.

During the three months ended March 31, 2012, the transfers into Level 3 included $809 million of trading account assets, $106 million of net derivative assets and $532 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of additional information related to certain CLOs. Transfers into Level 3 for net derivative assets primarily related to decreased market activity (i.e., executed trades) for certain structured rate derivatives. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the three months ended March 31, 2012, the transfers out of Level 3 included $624 million of trading account assets, $352 million of net derivative assets, $573 million of AFS debt securities, $632 million of LHFS and $805 million of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased market liquidity for certain corporate loans and loans backed by commercial real estate. Transfers out of Level 3 for net derivative assets primarily related to increased price observability (i.e., market comparables) for certain total return swaps and foreign exchange swaps. Transfers out of Level 3 for AFS debt securities primarily related to increased price observability for certain non-agency RMBS. Transfers out of Level 3 for LHFS primarily related to increased observable inputs, primarily liquid comparables. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.
Level 3 – Fair Value Measurements (1)
 
Three Months Ended March 31, 2011
 
 
 
 
Gross
 
 
 
(Dollars in millions)
Balance
January 1
2011
Gains
(Losses) in
Earnings
Gains
(Losses) in
OCI
Purchases
Sales
Issuances
Settlements
Gross
Transfers
into
Level 3
Gross
Transfers
out of
Level 3
Balance
March 31
2011
Trading account assets:
 
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$
7,751

$
494

$

$
1,550

$
(2,350
)
$

$
(181
)
$
569

$
(255
)
$
7,578

Equity securities
623

43


100

(70
)


39

(1
)
734

Non-U.S. sovereign debt
243

5


48

(4
)



(40
)
252

Mortgage trading loans and ABS
6,908

562


766

(1,086
)

(64
)
1

(390
)
6,697

Total trading account assets
15,525

1,104


2,464

(3,510
)

(245
)
609

(686
)
15,261

Net derivative assets (3)
7,745

438


502

(748
)

(1,670
)
307

(155
)
6,419

AFS debt securities:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Agency
4








(4
)

Agency-collateralized mortgage obligations



56






56

Non-agency residential
1,468

(16
)
(22
)

(237
)

(262
)
272


1,203

Non-agency commercial
19









19

Non-U.S. securities
3








(3
)

Corporate/Agency bonds
137

2

1


(7
)




133

Other taxable securities
13,018

29

57

552

(52
)

(2,582
)
2


11,024

Tax-exempt securities
1,224

(3
)
6


(49
)

(32
)


1,146

Total AFS debt securities
15,873

12

42

608

(345
)

(2,876
)
274

(7
)
13,581

Loans and leases (2, 4)
3,321

172



(109
)
846

(616
)
5


3,619

Mortgage servicing rights (4)
14,900

247




841

(706
)


15,282

Loans held-for-sale (2)
4,140

178


31

(173
)

(123
)
222

(16
)
4,259

Other assets (5)
6,856

122


77

(941
)

(288
)

(1,633
)
4,193

Trading account liabilities – Corporate securities and other
(7
)


7

(102
)




(102
)
Other short-term borrowings (2)
(706
)
(46
)




26



(726
)
Accrued expenses and other liabilities (2)
(828
)
143



(4
)




(689
)
Long-term debt (2)
(2,986
)
(148
)

84


(43
)
239

(637
)
353

(3,138
)
(1) 
Assets (liabilities). For assets, increase / (decrease) to Level 3 and for liabilities, (increase) / decrease to Level 3.
(2) 
Amounts represent items that are accounted for under the fair value option.
(3) 
Net derivatives include derivative assets of $16.2 billion and derivative liabilities of $9.8 billion.
(4) 
Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole loan sales.
(5) 
Other assets is primarily comprised of AFS marketable equity securities.

During the three months ended March 31, 2011, the transfers into Level 3 included $609 million of trading account assets and $637 million of long-term debt accounted for under the fair value option. Transfers into Level 3 for trading account assets were primarily certain CLOs that were transferred into Level 3 due to a lack of price transparency. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the three months ended March 31, 2011, the transfers out of Level 3 included $686 million of trading account assets and $1.6 billion of other assets. Transfers out of Level 3 for trading account assets were primarily driven by increased price observability on certain RMBS and consumer ABS portfolios. Transfers out of Level 3 for other assets were the result of an initial public offering of an equity investment.
The table below summarizes gains (losses) due to changes in fair value, including both realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities during the three months ended March 31, 2012 and 2011. These amounts include gains (losses) on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.

Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
 
Three Months Ended March 31, 2012
(Dollars in millions)
Equity
Investment
Income
(Loss)
 
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other
Income
(Loss)
 
Total
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$

 
$
93

 
$

 
$

 
$
93

Equity securities

 
15

 

 

 
15

Non-U.S. sovereign debt

 
24

 

 

 
24

Mortgage trading loans and ABS

 
99

 

 

 
99

Total trading account assets

 
231

 

 

 
231

Net derivative assets

 
(1,373
)
 
536

 

 
(837
)
AFS debt securities:
 
 
 
 
 
 
 
 
 
Non-agency residential MBS

 

 

 
(69
)
 
(69
)
Corporate/Agency bonds

 

 

 
(2
)
 
(2
)
Other taxable securities

 

 

 
7

 
7

Tax-exempt securities

 

 

 
26

 
26

Total AFS debt securities

 

 

 
(38
)
 
(38
)
Loans and leases (2)

 

 

 
164

 
164

Mortgage servicing rights

 

 
655

 

 
655

Loans held-for-sale (2)

 

 
90

 
79

 
169

Other assets
10

 

 
(8
)
 
(34
)
 
(32
)
Accrued expenses and other liabilities (2)

 

 

 
3

 
3

Long-term debt (2)

 
(139
)
 

 
(102
)
 
(241
)
Total
$
10

 
$
(1,281
)
 
$
1,273

 
$
72

 
$
74

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2011
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$

 
$
494

 
$

 
$

 
$
494

Equity securities

 
43

 

 

 
43

Non-U.S. sovereign debt

 
5

 

 

 
5

Mortgage trading loans and ABS

 
562

 

 

 
562

Total trading account assets

 
1,104

 

 

 
1,104

Net derivative assets

 
(459
)
 
897

 

 
438

AFS debt securities:
 
 
 
 
 
 
 
 
 
Non-agency residential MBS

 

 

 
(16
)
 
(16
)
Corporate/Agency bonds

 

 

 
2

 
2

Other taxable securities

 
12

 

 
17

 
29

Tax-exempt securities

 
(3
)
 

 

 
(3
)
Total AFS debt securities

 
9

 

 
3

 
12

Loans and leases (2)

 

 

 
172

 
172

Mortgage servicing rights

 

 
247

 

 
247

Loans held-for-sale (2)

 

 
2

 
176

 
178

Other assets
122

 

 

 

 
122

Other short-term borrowings (2)

 

 
(46
)
 

 
(46
)
Accrued expenses and other liabilities (2)

 
(8
)
 

 
151

 
143

Long-term debt (2)

 
(92
)
 

 
(56
)
 
(148
)
Total
$
122

 
$
554

 
$
1,100

 
$
446

 
$
2,222

(1) 
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts represent instruments that are accounted for under the fair value option.

The table below summarizes changes in unrealized gains (losses) recorded in earnings during the three months ended March 31, 2012 and 2011 for Level 3 assets and liabilities that were still held at March 31, 2012 and 2011. These amounts include changes in fair value on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.

Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
 
Three Months Ended March 31, 2012
(Dollars in millions)
Equity
Investment
Income
(Loss)
 
Trading
Account
Profits
(Losses)
 
Mortgage
Banking
Income
(Loss) (1)
 
Other
Income
(Loss)
 
Total
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$

 
$
56

 
$

 
$

 
$
56

Equity securities

 
11

 

 

 
11

Non-U.S. sovereign debt

 
13

 

 

 
13

Mortgage trading loans and ABS

 
53

 

 

 
53

Total trading account assets

 
133

 

 

 
133

Net derivative assets

 
(1,314
)
 
360

 

 
(954
)
Loans and leases (2)

 

 

 
214

 
214

Mortgage servicing rights

 

 
470

 

 
470

Loans held-for-sale (2)

 

 
55

 
23

 
78

Other assets
(19
)
 

 
6

 
(34
)
 
(47
)
Accrued expenses and other liabilities (2)

 

 

 
3

 
3

Long-term debt (2)

 
(129
)
 

 
(102
)
 
(231
)
Total
$
(19
)
 
$
(1,310
)
 
$
891

 
$
104

 
$
(334
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2011
Trading account assets:
 
 
 
 
 
 
 
 
 
Corporate securities, trading loans and other (2)
$

 
$
402

 
$

 
$

 
$
402

Equity securities

 
19

 

 

 
19

Non-U.S. sovereign debt

 
3

 

 

 
3

Mortgage trading loans and ABS

 
509

 

 

 
509

Total trading account assets

 
933

 

 

 
933

Net derivative assets

 
(290
)
 
428

 

 
138

AFS debt securities:
 
 
 
 
 
 
 
 
 
Non-agency residential MBS

 

 

 
(68
)
 
(68
)
Total AFS debt securities

 

 

 
(68
)
 
(68
)
Loans and leases (2)

 

 

 
169

 
169

Mortgage servicing rights

 

 
(64
)
 

 
(64
)
Loans held-for-sale (2)

 

 
(12
)
 
159

 
147

Other assets
(131
)
 

 

 

 
(131
)
Other short-term borrowings (2)

 

 
(34
)
 

 
(34
)
Accrued expenses and other liabilities (2)

 
(8
)
 

 
108

 
100

Long-term debt (2)

 
(92
)
 

 
(56
)
 
(148
)
Total
$
(131
)
 
$
543

 
$
318

 
$
312

 
$
1,042

(1) 
Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.
(2) 
Amounts represent instruments that are accounted for under the fair value option.

The following tables present information about significant unobservable inputs related to the Corporation's material categories of Level 3 financial assets and liabilities at March 31, 2012.

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)
 
Inputs
Financial Instrument
Fair Value
Significant Unobservable Inputs
Ranges of Inputs
Loans and Securities (1)
 
 
 
Instruments backed by residential real estate assets
$
5,542

Yield
1% to 25%
Trading account assets – Mortgage trading loans and ABS
689

Prepayment speeds
0% to 25% CPR
Loans and leases
2,332

Default rates
0% to 54% CDR
Loans held-for-sale
2,521

Loss severities
0% to 80%
Instruments backed by commercial real estate assets
$
2,449

Yield
1% to 15%
Trading account assets – Mortgage trading loans and ABS
299

Loss severities
0% to 91%
Loans held-for-sale
341

 
 
Other assets
1,809

 
 
Instruments backed by other assets
$
3,089

Yield
1% to 5%
Trading account assets – Mortgage trading loans and ABS
184

 
 
AFS debt securities – Other taxable securities
2,455

 
 
Loans and leases
450

 
 
Corporate loans and debt securities
$
2,773

Yield
2% to 20%
Trading account assets – Corporate securities, trading loans and other
2,773

Enterprise value/EBITDA multiple
3x to 7x
Corporate CLOs and CDOs
$
4,520

Prepayment speed
5% to 25%
Trading account assets – Corporate securities, trading loans and other
1,219

Default rates
1% to 5%
Trading account assets – Mortgage trading loans and ABS
2,840

Loss severity
25% to 40%
AFS debt securities – Other taxable securities
461

Yield
2% to 20%
Auction rate securities
$
5,163

Weighted-average life
5 years
Trading account assets – Corporate securities, trading loans and other
2,009

Discount rate
LIBOR +200 or JJK +150
AFS debt securities – Other taxable securities
1,259

Projected tender price/Re-financing level
50% to 99%
AFS debt securities – Tax-exempt securities
1,895

 
Structured liabilities
 
 
 
Long-term debt
$
(2,500
)
Correlation (Index/Index)
50% to 97%
 
 
Correlation (Stock/Stock)
30% to 80%
 
 
Long-dated volatilities
20% to 70%
(1) 
The total amount of the Level 3 line items that cross multiple categories of loans and securities for which ranges of inputs are provided in the table above is as follows: trading account assets – corporate securities, trading loans and other of $6.0 billion, trading account assets – mortgage trading loans and ABS of $4.0 billion, AFS debt securities – other taxable securities of $4.2 billion, AFS debt securities – tax-exempt securities of $1.9 billion, loans and leases of $2.8 billion, LHFS of $2.9 billion and other assets of $1.8 billion. Such amounts agree to the respective line items in the table on page 194.
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
JJK = J.J. Kenny (tax-exempt municipal rate)



Quantitative Information about Level 3 Fair Value Measurements (continued)
(Dollars in millions)
 
Inputs
Financial Instrument
Fair Value
Significant Unobservable Inputs
Ranges of Inputs
Net derivatives assets
 
 
 
Credit default swaps referencing CLOs and corporate assets
$
849

Prepayment speed
5% to 25%
 
 
Default rates
1% to 5%
 
 
Loss severity
25% to 40%
 
 
Yield
2% to 20%
 
 
Credit spreads
100 bps to 500 bps
 
 
Recovery
30% to 50%
Credit default swaps referencing other assets
$
1,072

Upfront points
53 points to 99 points
 
 
Correlation
45% to 70%
 
 
Spread to index
-1,000 bps to 4,000 bps
 
 
Yield
6% to 25%
 
 
Prepayment speed
0% to 25% CPR
 
 
Default rates
0% to 4% CDR
 
 
Loss severity
0% to 65%
Structured credit derivatives
$
2,114

Default correlation
30% to 80%
 
 
Wrong-way correlation
20% to 50%
 
 
Ratings-based spreads
300 bps to 500 bps
Equity derivatives
$
(657
)
Correlation (Index/Index)
50% to 97%
 
 
Correlation (Stock/Stock)
30% to 80%
 
 
Long-dated volatilities
20% to 70%
Commodity derivatives
$
(14
)
Long-term natural gas basis curve
-$0.53 to $0.22
Interest rate derivatives
$
823

Correlation (IR/IR)
46% to 98%
 
 
Correlation (FX/IR)
-65% to 50%
 
 
Long-dated inflation rates
2% to 3%
 
 
Long-dated inflation volatilities
1% to 2%
 
 
Long-dated volatilities (IR, FX)
4% to 45%
 
 
Long-dated swap rates
11% to 12%
Total net derivative assets
$
4,187

 
 
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
IR = Interest Rate
FX = Foreign Exchange

In the tables above, instruments valued using a discounted cash flow model include instruments backed by residential and commercial real estate assets including RMBS, CMBS, whole loans, mortgage CDOs and net monoline exposure, and instruments backed by other assets (i.e., securities backed by non-real estate assets), corporate loans, debt securities, CLOs, CDOs and auction rate securities. In addition, market comparables are used in the valuation of certain corporate loans, debt securities and auction rate securities. Structured liabilities primarily include equity-linked notes that are accounted for under the fair value option. The equity exposure in these instruments is valued using industry standard derivative pricing models such as Monte Carlo simulation and Black Scholes.

CDS referencing CLOs and corporate and other assets, primarily CDS on residential and commercial single name and baskets, and commodity derivatives are valued using a discounted cash flow model. For CDS referencing corporate assets, a hazard rate model, which is an industry standard model for valuing CDS for single names or indices, is also utilized. Structured credit derivatives include tranched portfolio CDS and derivatives with derivative product company (DPC) and monoline counterparties. These instruments are valued using a Stochastic recovery correlation model which is adjusted for counterparty credit risk.

Equity and interest rate derivatives are valued using industry standard derivative pricing models such as Monte Carlo simulation, Black Scholes and other numerical methods that, for example, model the joint dynamics of interest, inflation and foreign exchange rates.

In addition to the instruments in the tables above, the Corporation holds $1.7 billion of instruments consisting primarily of certain direct private equity investments and private equity funds that are classified as Level 3 and reported within other assets. Valuations of direct private equity investments are prepared internally based on the most recent company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables. The Corporation selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value. Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly-traded companies. For private equity funds, fair value is determined using the net asset value as provided by the individual fund's general partner.

For information on the inputs and techniques used in the valuation of MSRs, see Note 18 – Mortgage Servicing Rights.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

For instruments backed by residential real estate assets, commercial real estate assets, and corporate CLOs and CDOs, a significant increase in market yields, default rates or loss severities would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

For closed-end auction rate securities, a significant increase in discount rates would result in a significantly lower fair value. The impact of a significant change in the weighted-average life on the fair value is dependent upon how the coupon on the auction rate security compares to the discount rate. In cases where the coupon is higher than the discount rate, lengthening of the weighted-average life would result in a higher fair value. Conversely, in cases where the coupon rate is lower than the discount rate, lengthening of the weighted-average life would result in a lower fair value. For student loan and municipal auction rate securities, a significant increase in projected tender price/refinancing levels would result in a significantly higher fair value.

Structured Liabilities and Derivatives

For CDS referencing CLOs and corporate and other assets, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception) or spreads, default rates or loss severities would result in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

Default correlation, which is a parameter that describes the degree of dependence between credit default rates within a credit portfolio that underlies a credit derivative instrument, is utilized in valuing synthetic basket positions and structured credit derivatives. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way.

Transactions with DPC counterparties are impacted by ratings-based spreads and wrong-way correlation with the underlying derivative exposure. Ratings-based spreads represent the CDS spread implied from liquid credits with comparable credit ratings. A significant increase in ratings-based spreads would result in a significantly lower fair value for net long positions. Net short positions would be impacted in a directionally opposite way. Wrong-way correlation is a parameter that describes the probability that as exposure to a counterparty increases, the credit quality of the counterparty decreases. A significantly higher degree of wrong-way correlation between the DPC counterparty and underlying derivative exposure would result in a significantly lower fair value.

For equity derivatives, equity-linked long-term debt (structured liabilities) and interest rate derivatives, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security to an index, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value. However, the magnitude and direction of the impact depends on whether the Corporation is long or short the exposure.
Nonrecurring Fair Value

The Corporation held certain assets that are measured at fair value on a nonrecurring basis and are not included in the previous tables in this Note. These assets primarily include LHFS, certain loans and leases, and foreclosed properties. The amounts below represent only balances measured at fair value during the three months ended March 31, 2012 and 2011, and still held as of the reporting date.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
March 31, 2012
 
Three Months Ended March 31, 2012
(Dollars in millions)
Level 2
 
Level 3
 
Gains (Losses)
Assets
 
 
 
 
 
Loans held-for-sale
$
3,465

 
$
857

 
$
68

Loans and leases (1)
21

 
5,813

 
(1,497
)
Foreclosed properties (2)

 
2,149

 
(90
)
Other assets

 
14

 

 
 
 
 
 
 
 
March 31, 2011
 
Three Months Ended March 31, 2011
(Dollars in millions)
Level 2
 
Level 3
 
Gains (Losses)
Assets
 
 
 
 
 
Loans held-for-sale
$
587

 
$
5,043

 
$
38

Loans and leases (1)
22

 
7,598

 
(1,609
)
Foreclosed properties (2)

 
2,028

 
(72
)
Other assets

 
91

 
(4
)
(1) 
Gains (losses) represent charge-offs on real estate-secured loans.
(2) 
Amounts are included in other assets on the Consolidated Balance Sheet and represent fair value and related losses on foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.
The table below presents information about significant unobservable inputs related to the Corporation's nonrecurring Level 3 financial assets and liabilities at March 31, 2012.

Quantitative Information about Nonrecurring Level 3 Fair Value Measurements
(Dollars in millions)
 
Inputs
Financial Instrument
Fair Value
Significant Unobservable Inputs
Ranges of Inputs
Instruments backed by residential real estate assets
$
6,537

Yield
4% to 7%
Loans held-for-sale
724

Prepayment speeds
3% to 24%
Loans and leases
5,813

Default rates
0% to 59%
 
 
Loss severities
0% to 60%
 
 
OREO discount
1% to 28%
 
 
Cost to sell
8%
Instruments backed by commercial real estate assets
$
133

Yield
4% to 15%
Loans held-for-sale
133

Loss severities
0% to 91%

Instruments backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral. These loans are valued based on market comparables. Additionally, whole loans with fair value below cost are included in instruments backed by residential and commercial real estate assets and are valued using a discounted cash flow model.

In addition to the instruments disclosed in the table above, the Corporation holds foreclosed residential properties where the fair value is based on unadjusted third-party appraisals or broker price opinions. Appraisals are conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.