4. Fair Value Disclosures.
Fair Value Measurements.
A description of the valuation techniques applied to the Company's major categories of assets and liabilities measured at fair value on a recurring basis follows.
Trading Assets and Trading Liabilities.
U.S. Government and Agency Securities.
• U.S. Treasury Securities. U.S. Treasury securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. Treasury securities are generally categorized in Level 1 of the fair value hierarchy.
• U.S. Agency Securities. U.S. agency securities are composed of three main categories consisting of agency-issued debt, agency mortgage pass-through pool securities and collateralized mortgage obligations. Non-callable agency-issued debt securities are generally valued using quoted market prices. Callable agency-issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. The fair value of agency mortgage pass-through pool securities is model-driven based on spreads of the comparable To-be-announced security. Collateralized mortgage obligations are valued using quoted market prices and trade data adjusted by subsequent changes in related indices for identical or comparable securities. Actively traded non-callable agency-issued debt securities are generally categorized in Level 1 of the fair value hierarchy. Callable agency-issued debt securities, agency mortgage pass-through pool securities and collateralized mortgage obligations are generally categorized in Level 2 of the fair value hierarchy.
Other Sovereign Government Obligations.
• Foreign sovereign government obligations are valued using quoted prices in active markets when available. These bonds are generally categorized in Level 1 of the fair value hierarchy. If the market is less active or prices are dispersed, these bonds are categorized in Level 2 of the fair value hierarchy. In instances where the inputs are unobservable, these bonds are categorized in Level 3 of the fair value hierarchy.
Corporate and Other Debt.
• State and Municipal Securities. The fair value of state and municipal securities is determined using recently executed transactions, market price quotations and pricing models that factor in, where applicable, interest rates, bond or credit default swap spreads and volatility. These bonds are generally categorized in Level 2 of the fair value hierarchy.
• Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities (“CMBS”) and other Asset-Backed Securities (“ABS”). RMBS, CMBS and other ABS may be valued based on price or spread data obtained from observed transactions or independent external parties such as vendors or brokers. When position-specific external price data are not observable, the fair value determination may require benchmarking to similar instruments and/or analyzing expected credit losses, default and recovery rates, and/or applying discounted cash flow techniques. In evaluating the fair value of each security, the Company considers security collateral-specific attributes, including payment priority, credit enhancement levels, type of collateral, delinquency rates and loss severity. In addition, for RMBS borrowers, Fair Isaac Corporation (“FICO”) scores and the level of documentation for the loan are also considered. Market standard models, such as Intex, Trepp or others, may be deployed to model the specific collateral composition and cash flow structure of each transaction. Key inputs to these models are market spreads, forecasted credit losses, and default and prepayment rates for each asset category. Valuation levels of RMBS and CMBS indices are also used as an additional data point for benchmarking purposes or to price outright index positions.
RMBS, CMBS and other ABS are generally categorized in Level 2 of the fair value hierarchy. If external prices or significant spread inputs are unobservable or if the comparability assessment involves significant subjectivity related to property type differences, cash flows, performance and other inputs, then RMBS, CMBS and other ABS are categorized in Level 3 of the fair value hierarchy.
• Corporate Bonds. The fair value of corporate bonds is determined using recently executed transactions, market price quotations (where observable), bond spreads, credit default swap spreads, at the money volatility and/or volatility skew obtained from independent external parties such as vendors and brokers adjusted for any basis difference between cash and derivative instruments. The spread data used are for the same maturity as the bond. If the spread data do not reference the issuer, then data that reference a comparable issuer are used. When position-specific external price data are not observable, fair value is determined based on either benchmarking to similar instruments or cash flow models with yield curves, bond or single-name credit default swap spreads and recovery rates as significant inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
• Collateralized Debt and Loan Obligations. The Company holds cash collateralized debt obligations (“CDOs”)/collateralized loan obligations (“CLOs”) that typically reference a tranche of an underlying synthetic portfolio of single name credit default swaps collateralized by corporate bonds (“credit-linked notes”) or cash portfolio of asset-backed securities/loans (“asset-backed CDOs/CLOs”). Credit correlation, a primary input used to determine the fair value of credit-linked notes, is usually unobservable and derived using a benchmarking technique. The other credit-linked note model inputs such as credit spreads, including collateral spreads, and interest rates are typically observable. Asset-backed CDOs/CLOs are valued based on an evaluation of the market and model input parameters sourced from similar positions as indicated by primary and secondary market activity. Each asset-backed CDO/CLO position is evaluated independently taking into consideration available comparable market levels, underlying collateral performance and pricing, and deal structures, as well as liquidity. Cash CDOs/CLOs are categorized in Level 2 of the fair value hierarchy when either the credit correlation input is insignificant or comparable market transactions are observable. In instances where the credit correlation input is deemed to be significant or comparable market transactions are unobservable, cash CDOs/CLOs are categorized in Level 3 of the fair value hierarchy.
• Corporate Loans and Lending Commitments. The fair value of corporate loans is determined using recently executed transactions, market price quotations (where observable), implied yields from comparable debt, and market observable credit default swap spread levels obtained from independent external parties such as vendors and brokers adjusted for any basis difference between cash and derivative instruments, along with proprietary valuation models and default recovery analysis where such transactions and quotations are unobservable. The fair value of contingent corporate lending commitments is determined by using executed transactions on comparable loans and the anticipated market price based on pricing indications from syndicate banks and customers. The valuation of loans and lending commitments also takes into account fee income that is considered an attribute of the contract. Corporate loans and lending commitments are categorized in Level 2 of the fair value hierarchy except in instances where prices or significant spread inputs are unobservable, in which case they are categorized in Level 3 of the fair value hierarchy.
• Mortgage Loans. Mortgage loans are valued using observable prices based on transactional data or third-party pricing for identical or comparable instruments, when available. Where position-specific external prices are not observable, the Company estimates fair value based on benchmarking to prices and rates observed in the primary market for similar loan or borrower types or based on the present value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount rates commensurate with the risks involved or a methodology that utilizes the capital structure and credit spreads of recent comparable securitization transactions. Mortgage loans valued based on observable market data for identical or comparable instruments are categorized in Level 2 of the fair value hierarchy. Where observable prices are not available, due to the subjectivity involved in the comparability assessment related to mortgage loan vintage, geographical concentration, prepayment speed and projected loss assumptions, mortgage loans are categorized in Level 3 of the fair value hierarchy. Mortgage loans are presented within Loans and lending commitments in the fair value hierarchy table.
Inputs that impact the valuation of SLARS are independent external market data, recently executed transactions of comparable ARS, the underlying collateral types, level of seniority in the capital structure, amount of leverage in each structure, credit rating and liquidity considerations. Inputs that impact the valuation of MARS are recently executed transactions, the maximum rate, quality of underlying issuers/insurers and evidence of issuer calls/prepayment. ARS are generally categorized in Level 2 of the fair value hierarchy as the valuation technique relies on observable external data. SLARS and MARS are presented within Asset-backed securities and State and municipal securities, respectively, in the fair value hierarchy table.
Corporate Equities.
• Exchange-Traded Equity Securities. Exchange-traded equity securities are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in Level 1 of the fair value hierarchy; otherwise, they are categorized in Level 2 or Level 3 of the fair value hierarchy.
• Unlisted Equity Securities. Unlisted equity securities are valued based on an assessment of each underlying security, considering rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable company transactions, trading multiples and changes in market outlook, among other factors. These securities are generally categorized in Level 3 of the fair value hierarchy.
• Fund Units. Listed fund units are generally marked to the exchange-traded price or net asset value (“NAV”) and are categorized in Level 1 of the fair value hierarchy if actively traded on an exchange or in Level 2 of the fair value hierarchy if trading is not active. Unlisted fund units are generally marked to NAV and categorized as Level 2; however, positions that are not redeemable at the measurement date or in the near future are categorized in Level 3 of the fair value hierarchy.
Derivative and Other Contracts.
• Listed Derivative Contracts. Listed derivatives that are actively traded are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Listed derivatives that are not actively traded are valued using the same approaches as those applied to OTC derivatives; they are generally categorized in Level 2 of the fair value hierarchy.
• OTC Derivative Contracts. OTC derivative contracts include forward, swap and option contracts related to interest rates, foreign currencies, credit standing of reference entities, equity prices or commodity prices.
Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be either observed or modeled using a series of techniques and model inputs from comparable benchmarks, including closed-form analytic formulas, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swaps, certain option contracts and certain credit default swaps. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. A substantial majority of OTC derivative products valued by the Company using pricing models fall into this category and are categorized in Level 2 of the fair value hierarchy.
Other derivative products, including complex products that have become illiquid, require more judgment in the implementation of the valuation technique applied due to the complexity of the valuation assumptions and the reduced observability of inputs. This includes certain types of interest rate derivatives with both volatility and correlation exposure and credit derivatives, including credit default swaps on certain mortgage-backed or asset-backed securities, basket credit default swaps and CDO-squared positions (a CDO-squared position is a special purpose vehicle that issues interests, or tranches, that are backed by tranches issued by other CDOs) where direct trading activity or quotes are unobservable. These instruments involve significant unobservable inputs and are categorized in Level 3 of the fair value hierarchy.
Derivative interests in credit default swaps on certain mortgage-backed or asset-backed securities, for which observability of external price data is limited, are valued based on an evaluation of the market and model input parameters sourced from similar positions as indicated by primary and secondary market activity. Each position is evaluated independently taking into consideration available comparable market levels as well as cash-synthetic basis, or the underlying collateral performance and pricing, behavior of the tranche under various cumulative loss and prepayment scenarios, deal structures (e.g., non-amortizing reference obligations, call features, etc.) and liquidity. While these factors may be supported by historical and actual external observations, the determination of their value as it relates to specific positions nevertheless requires significant judgment.
For basket credit default swaps and CDO-squared positions, the correlation input between reference credits is unobservable for each specific swap or position and is benchmarked to standardized proxy baskets for which correlation data are available. The other model inputs such as credit spread, interest rates and recovery rates are observable. In instances where the correlation input is deemed to be significant, these instruments are categorized in Level 3 of the fair value hierarchy; otherwise, these instruments are categorized in Level 2 of the fair value hierarchy.
The Company trades various derivative structures with commodity underlyings. Depending on the type of structure, the model inputs generally include interest rate yield curves, commodity underlier price curves, implied volatility of the underlying commodities and, in some cases, the implied correlation between these inputs. The fair value of these products is determined using executed trades and broker and consensus data to provide values for the aforementioned inputs. Where these inputs are unobservable, relationships to observable commodities and data points, based on historic and/or implied observations, are employed as a technique to estimate the model input values. Commodity derivatives are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
For further information on derivative instruments and hedging activities, see Note 12.
Investments.
• The Company's investments include direct investments in equity securities as well as investments in private equity funds, real estate funds and hedge funds, which include investments made in connection with certain employee deferred compensation plans. Direct investments are presented in the fair value hierarchy table as Principal investments and Other. Initially, the transaction price is generally considered by the Company as the exit price and is the Company's best estimate of fair value.
After initial recognition, in determining the fair value of non-exchange-traded internally and externally managed funds, the Company generally considers the NAV of the fund provided by the fund manager to be the best estimate of fair value. For non-exchange-traded investments either held directly or held within internally managed funds, fair value after initial recognition is based on an assessment of each underlying investment, considering rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable company transactions, trading multiples and changes in market outlook, among other factors. Exchange-traded direct equity investments are generally valued based on quoted prices from the exchange.
Exchange-traded direct equity investments that are actively traded are categorized in Level 1 of the fair value hierarchy. Non-exchange-traded direct equity investments and investments in private equity and real estate funds are generally categorized in Level 3 of the fair value hierarchy. Investments in hedge funds that are redeemable at the measurement date or in the near future are categorized in Level 2 of the fair value hierarchy; otherwise, they are categorized in Level 3 of the fair value hierarchy.
Physical Commodities.
• The Company trades various physical commodities, including crude oil and refined products, natural gas, base and precious metals, and agricultural products. Fair value for physical commodities is determined using observable inputs, including broker quotations and published indices. Physical commodities are categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.
Securities Available for Sale.
• Securities available for sale are composed of U.S. government and agency securities (e.g., U.S. Treasury securities, agency-issued debt, agency mortgage pass-through securities and collateralized mortgage obligations), CMBS, Federal Family Education Loan Program (“FFELP”) student loan asset-backed securities, auto loan asset-backed securities, corporate bonds, collateralized loan obligations, and equity securities. Actively traded U.S. Treasury securities, non-callable agency-issued debt securities and equity securities are generally categorized in Level 1 of the fair value hierarchy. Callable agency-issued debt securities, agency mortgage pass-through securities, collateralized mortgage obligations, CMBS, FFELP student loan asset-backed securities, auto loan asset-backed securities, corporate bonds and collateralized loan obligations are generally categorized in Level 2 of the fair value hierarchy. For further information on securities available for sale, see Note 5.
Deposits.
• Time Deposits. The fair value of certificates of deposit is determined using third-party quotations. These deposits are generally categorized in Level 2 of the fair value hierarchy.
Commercial Paper and Other Short-Term Borrowings/Long-Term Borrowings.
• Structured Notes. The Company issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities. Fair value of structured notes is determined using valuation models for the derivative and debt portions of the notes. These models incorporate observable inputs referencing identical or comparable securities, including prices to which the notes are linked, interest rate yield curves, option volatility and currency, and commodity or equity prices. Independent, external and traded prices for the notes are considered as well. The impact of the Company's own credit spreads is also included based on the Company's observed secondary bond market spreads. Most structured notes are categorized in Level 2 of the fair value hierarchy.
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase.
• The fair value of a reverse repurchase agreement or repurchase agreement is computed using a standard cash flow discounting methodology. The inputs to the valuation include contractual cash flows and collateral funding spreads, which are estimated using various benchmarks, interest rate yield curves and option volatilities. In instances where the unobservable inputs are deemed significant, reverse repurchase agreements and repurchase agreements are categorized in Level 3 of the fair value hierarchy; otherwise, they are categorized in Level 2 of the fair value hierarchy.
The following fair value hierarchy tables present information about the Company's assets and liabilities measured at fair value on a recurring basis at December 31, 2013 and December 31, 2012.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013.
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Counterparty and Cash Collateral Netting | Balance at December 31, 2013 | |||||||||
(dollars in millions) | |||||||||||||
Assets at Fair Value | |||||||||||||
Trading assets: | |||||||||||||
U.S. government and agency securities: | |||||||||||||
U.S. Treasury securities | $ | 32,083 | $ | — | $ | — | $ | — | $ | 32,083 | |||
U.S. agency securities | 1,216 | 17,720 | — | — | 18,936 | ||||||||
Total U.S. government and agency securities | 33,299 | 17,720 | — | — | 51,019 | ||||||||
Other sovereign government obligations | 25,363 | 6,610 | 27 | — | 32,000 | ||||||||
Corporate and other debt: | |||||||||||||
State and municipal securities | — | 1,615 | — | — | 1,615 | ||||||||
Residential mortgage-backed securities | — | 2,029 | 47 | — | 2,076 | ||||||||
Commercial mortgage-backed securities | — | 1,534 | 108 | — | 1,642 | ||||||||
Asset-backed securities | — | 878 | 103 | — | 981 | ||||||||
Corporate bonds | — | 16,592 | 522 | — | 17,114 | ||||||||
Collateralized debt and loan obligations | — | 802 | 1,468 | — | 2,270 | ||||||||
Loans and lending commitments | — | 7,483 | 5,129 | — | 12,612 | ||||||||
Other debt | — | 6,365 | 27 | — | 6,392 | ||||||||
Total corporate and other debt | — | 37,298 | 7,404 | — | 44,702 | ||||||||
Corporate equities(1) | 107,818 | 1,206 | 190 | — | 109,214 | ||||||||
Derivative and other contracts: | |||||||||||||
Interest rate contracts | 750 | 526,127 | 2,475 | — | 529,352 | ||||||||
Credit contracts | — | 42,258 | 2,088 | — | 44,346 | ||||||||
Foreign exchange contracts | 52 | 61,570 | 179 | — | 61,801 | ||||||||
Equity contracts | 1,215 | 51,656 | 1,234 | — | 54,105 | ||||||||
Commodity contracts | 2,396 | 8,595 | 2,380 | — | 13,371 | ||||||||
Other | — | 43 | — | — | 43 | ||||||||
Netting(2) | (3,836) | (606,878) | (4,931) | (54,906) | (670,551) | ||||||||
Total derivative and other contracts | 577 | 83,371 | 3,425 | (54,906) | 32,467 | ||||||||
Investments: | |||||||||||||
Private equity funds | — | — | 2,531 | — | 2,531 | ||||||||
Real estate funds | — | 6 | 1,637 | — | 1,643 | ||||||||
Hedge funds | — | 377 | 432 | — | 809 | ||||||||
Principal investments | 43 | 42 | 2,160 | — | 2,245 | ||||||||
Other | 202 | 45 | 538 | — | 785 | ||||||||
Total investments | 245 | 470 | 7,298 | — | 8,013 | ||||||||
Physical commodities | — | 3,329 | — | — | 3,329 | ||||||||
Total trading assets | 167,302 | 150,004 | 18,344 | (54,906) | 280,744 | ||||||||
Securities available for sale | 24,412 | 29,018 | — | — | 53,430 | ||||||||
Securities received as collateral | 20,497 | 11 | — | — | 20,508 | ||||||||
Federal funds sold and securities purchased | |||||||||||||
under agreements to resell | — | 866 | — | — | 866 | ||||||||
Intangible assets(3) | — | — | 8 | — | 8 | ||||||||
Total assets measured at fair value | $ | 212,211 | $ | 179,899 | $ | 18,352 | $ | (54,906) | $ | 355,556 | |||
Liabilities at Fair Value | |||||||||||||
Deposits | $ | — | $ | 185 | $ | — | $ | — | $ | 185 | |||
Commercial paper and other short-term borrowings | — | 1,346 | 1 | — | 1,347 | ||||||||
Trading liabilities: | |||||||||||||
U.S. government and agency securities: | |||||||||||||
U.S. Treasury securities | 15,963 | — | — | — | 15,963 | ||||||||
U.S. agency securities | 2,593 | 116 | — | — | 2,709 | ||||||||
Total U.S. government and agency securities | 18,556 | 116 | — | — | 18,672 | ||||||||
Other sovereign government obligations | 14,717 | 2,473 | — | — | 17,190 | ||||||||
Corporate and other debt: | |||||||||||||
State and municipal securities | — | 15 | — | — | 15 | ||||||||
Corporate bonds | — | 5,033 | 22 | — | 5,055 | ||||||||
Collateralized debt and loan obligations | — | 3 | — | — | 3 | ||||||||
Unfunded lending commitments | — | 127 | 2 | — | 129 | ||||||||
Other debt | — | 1,144 | 48 | — | 1,192 | ||||||||
Total corporate and other debt | — | 6,322 | 72 | — | 6,394 | ||||||||
Corporate equities(1) | 27,983 | 513 | 8 | — | 28,504 | ||||||||
Derivative and other contracts: | |||||||||||||
Interest rate contracts | 675 | 504,292 | 2,362 | — | 507,329 | ||||||||
Credit contracts | — | 40,391 | 2,235 | — | 42,626 | ||||||||
Foreign exchange contracts | 23 | 61,925 | 111 | — | 62,059 | ||||||||
Equity contracts | 1,033 | 57,797 | 2,065 | — | 60,895 | ||||||||
Commodity contracts | 2,637 | 8,749 | 1,500 | — | 12,886 | ||||||||
Other | — | 72 | 4 | — | 76 | ||||||||
Netting(2) | (3,836) | (606,878) | (4,931) | (36,465) | (652,110) | ||||||||
Total derivative and other contracts | 532 | 66,348 | 3,346 | (36,465) | 33,761 | ||||||||
Total trading liabilities | 61,788 | 75,772 | 3,426 | (36,465) | 104,521 | ||||||||
Obligation to return securities received as collateral | 24,549 | 19 | — | — | 24,568 | ||||||||
Securities sold under agreements to repurchase | — | 407 | 154 | — | 561 | ||||||||
Other secured financings | — | 4,928 | 278 | — | 5,206 | ||||||||
Long-term borrowings | — | 33,750 | 1,887 | — | 35,637 | ||||||||
Total liabilities measured at fair value | $ | 86,337 | $ | 116,407 | $ | 5,746 | $ | (36,465) | $ | 172,025 |
_____________
(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 12.
(3) Amount represents mortgage servicing rights (“MSR”) accounted for at fair value. See Note 7 for further information on MSRs.
Transfers Between Level 1 and Level 2 During 2013.
For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period.
In 2013, there were no material transfers between Level 1 and Level 2.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2012.
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Counterparty and Cash Collateral Netting | Balance at December 31, 2012 | |||||||||
(dollars in millions) | |||||||||||||
Assets at Fair Value | |||||||||||||
Trading assets: | |||||||||||||
U.S. government and agency securities: | |||||||||||||
U.S. Treasury securities | $ | 24,662 | $ | 14 | $ | — | $ | — | $ | 24,676 | |||
U.S. agency securities | 1,451 | 27,888 | — | — | 29,339 | ||||||||
Total U.S. government and agency securities | 26,113 | 27,902 | — | — | 54,015 | ||||||||
Other sovereign government obligations | 37,669 | 5,487 | 6 | — | 43,162 | ||||||||
Corporate and other debt: | |||||||||||||
State and municipal securities | — | 1,558 | — | — | 1,558 | ||||||||
Residential mortgage-backed securities | — | 1,439 | 45 | — | 1,484 | ||||||||
Commercial mortgage-backed securities | — | 1,347 | 232 | — | 1,579 | ||||||||
Asset-backed securities | — | 915 | 109 | — | 1,024 | ||||||||
Corporate bonds | — | 18,403 | 660 | — | 19,063 | ||||||||
Collateralized debt and loan obligations | — | 685 | 1,951 | — | 2,636 | ||||||||
Loans and lending commitments | — | 12,617 | 4,694 | — | 17,311 | ||||||||
Other debt | — | 4,457 | 45 | — | 4,502 | ||||||||
Total corporate and other debt | — | 41,421 | 7,736 | — | 49,157 | ||||||||
Corporate equities(1) | 68,072 | 1,067 | 288 | — | 69,427 | ||||||||
Derivative and other contracts: | |||||||||||||
Interest rate contracts | 446 | 819,581 | 3,774 | — | 823,801 | ||||||||
Credit contracts | — | 63,234 | 5,033 | — | 68,267 | ||||||||
Foreign exchange contracts | 34 | 52,729 | 31 | — | 52,794 | ||||||||
Equity contracts | 760 | 37,074 | 766 | — | 38,600 | ||||||||
Commodity contracts | 4,082 | 14,256 | 2,308 | — | 20,646 | ||||||||
Other | — | 143 | — | — | 143 | ||||||||
Netting(2) | (4,740) | (883,733) | (6,947) | (72,634) | (968,054) | ||||||||
Total derivative and other contracts | 582 | 103,284 | 4,965 | (72,634) | 36,197 | ||||||||
Investments: | |||||||||||||
Private equity funds | — | — | 2,179 | — | 2,179 | ||||||||
Real estate funds | — | 6 | 1,370 | — | 1,376 | ||||||||
Hedge funds | — | 382 | 552 | — | 934 | ||||||||
Principal investments | 185 | 83 | 2,833 | — | 3,101 | ||||||||
Other | 199 | 71 | 486 | — | 756 | ||||||||
Total investments | 384 | 542 | 7,420 | — | 8,346 | ||||||||
Physical commodities | — | 7,299 | — | — | 7,299 | ||||||||
Total trading assets | 132,820 | 187,002 | 20,415 | (72,634) | 267,603 | ||||||||
Securities available for sale | 14,466 | 25,403 | — | — | 39,869 | ||||||||
Securities received as collateral | 14,232 | 46 | — | — | 14,278 | ||||||||
Federal funds sold and securities purchased under | |||||||||||||
agreements to resell | — | 621 | — | — | 621 | ||||||||
Intangible assets(3) | — | — | 7 | — | 7 | ||||||||
Total assets measured at fair value | $ | 161,518 | $ | 213,072 | $ | 20,422 | $ | (72,634) | $ | 322,378 | |||
Liabilities at Fair Value | |||||||||||||
Deposits | $ | — | $ | 1,485 | $ | — | $ | — | $ | 1,485 | |||
Commercial paper and other short-term borrowings | — | 706 | 19 | — | 725 | ||||||||
Trading liabilities: | |||||||||||||
U.S. government and agency securities: | |||||||||||||
U.S. Treasury securities | 20,098 | 21 | — | — | 20,119 | ||||||||
U.S. agency securities | 1,394 | 107 | — | — | 1,501 | ||||||||
Total U.S. government and agency securities | 21,492 | 128 | — | — | 21,620 | ||||||||
Other sovereign government obligations | 27,583 | 2,031 | — | — | 29,614 | ||||||||
Corporate and other debt: | |||||||||||||
State and municipal securities | — | 47 | — | — | 47 | ||||||||
Residential mortgage-backed securities | — | — | 4 | — | 4 | ||||||||
Corporate bonds | — | 3,942 | 177 | — | 4,119 | ||||||||
Collateralized debt and loan obligations | — | 328 | — | — | 328 | ||||||||
Unfunded lending commitments | — | 305 | 46 | — | 351 | ||||||||
Other debt | — | 156 | 49 | — | 205 | ||||||||
Total corporate and other debt | — | 4,778 | 276 | — | 5,054 | ||||||||
Corporate equities(1) | 25,216 | 1,655 | 5 | — | 26,876 | ||||||||
Derivative and other contracts: | |||||||||||||
Interest rate contracts | 533 | 789,715 | 3,856 | — | 794,104 | ||||||||
Credit contracts | — | 61,283 | 3,211 | — | 64,494 | ||||||||
Foreign exchange contracts | 2 | 56,021 | 390 | — | 56,413 | ||||||||
Equity contracts | 748 | 39,212 | 1,910 | — | 41,870 | ||||||||
Commodity contracts | 4,530 | 15,702 | 1,599 | — | 21,831 | ||||||||
Other | — | 54 | 7 | — | 61 | ||||||||
Netting(2) | (4,740) | (883,733) | (6,947) | (46,395) | (941,815) | ||||||||
Total derivative and other contracts | 1,073 | 78,254 | 4,026 | (46,395) | 36,958 | ||||||||
Total trading liabilities | 75,364 | 86,846 | 4,307 | (46,395) | 120,122 | ||||||||
Obligation to return securities received as collateral | 18,179 | 47 | — | — | 18,226 | ||||||||
Securities sold under agreements to repurchase | — | 212 | 151 | — | 363 | ||||||||
Other secured financings | — | 9,060 | 406 | — | 9,466 | ||||||||
Long-term borrowings | — | 41,255 | 2,789 | — | 44,044 | ||||||||
Total liabilities measured at fair value | $ | 93,543 | $ | 139,611 | $ | 7,672 | $ | (46,395) | $ | 194,431 |
_____________
(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 12.
(3) Amount represents MSRs accounted for at fair value. See Note 7 for further information on MSRs.
Transfers Between Level 1 and Level 2 During 2012.
For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values are ascribed as if the assets or liabilities had been transferred as of the beginning of the period.
Trading assets—Derivative and other contracts and Trading liabilities—Derivative and other contracts. During 2012, the Company reclassified approximately $3.2 billion of derivative assets and approximately $2.5 billion of derivative liabilities from Level 2 to Level 1 as these listed derivatives became actively traded and were valued based on quoted prices from the exchange. Also during 2012, the Company reclassified approximately $0.4 billion of derivative assets and approximately $0.3 billion of derivative liabilities from Level 1 to Level 2 as transactions in these contracts did not occur with sufficient frequency and volume to constitute an active market.
Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis.
The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for 2013, 2012 and 2011, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories.
Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
For assets and liabilities that were transferred into Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred into Level 3 at the beginning of the period; similarly, for assets and liabilities that were transferred out of Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred out at the beginning of the period.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2013.
Beginning Balance at December 31, 2012 | Total Realized and Unrealized Gains (Losses) (1) | Purchases | Sales | Issuances | Settlements | Net Transfers | Ending Balance at December 31, 2013 | Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at December 31, 2013(2) | |||||||||||||
(dollars in millions) | |||||||||||||||||||||
Assets at Fair Value | |||||||||||||||||||||
Trading assets: | |||||||||||||||||||||
Other sovereign government obligations | $ | 6 | $ | (18) | $ | 41 | $ | (7) | $ | — | $ | — | $ | 5 | $ | 27 | $ | (18) | |||
Corporate and other debt: | |||||||||||||||||||||
Residential mortgage-backed securities | 45 | 25 | 54 | (51) | — | — | (26) | 47 | (6) | ||||||||||||
Commercial mortgage-backed securities | 232 | 13 | 57 | (187) | — | (7) | — | 108 | 4 | ||||||||||||
Asset-backed securities | 109 | — | 6 | (12) | — | — | — | 103 | — | ||||||||||||
Corporate bonds | 660 | (20) | 324 | (371) | — | (19) | (52) | 522 | (55) | ||||||||||||
Collateralized debt and loan obligations | 1,951 | 363 | 742 | (960) | — | (626) | (2) | 1,468 | 131 | ||||||||||||
Loans and lending commitments | 4,694 | (130) | 3,744 | (448) | — | (3,096) | 365 | 5,129 | (199) | ||||||||||||
Other debt | 45 | (1) | 20 | (36) | — | — | (1) | 27 | (2) | ||||||||||||
Total corporate and other debt | 7,736 | 250 | 4,947 | (2,065) | — | (3,748) | 284 | 7,404 | (127) | ||||||||||||
Corporate equities | 288 | (63) | 113 | (127) | — | — | (21) | 190 | (72) | ||||||||||||
Net derivative and other contracts(3): | |||||||||||||||||||||
Interest rate contracts | (82) | 28 | 6 | — | (34) | 135 | 60 | 113 | 36 | ||||||||||||
Credit contracts | 1,822 | (1,674) | 266 | — | (703) | (295) | 437 | (147) | (1,723) | ||||||||||||
Foreign exchange contracts | (359) | 130 | — | — | — | 281 | 16 | 68 | 124 | ||||||||||||
Equity contracts | (1,144) | 463 | 170 | (74) | (318) | (11) | 83 | (831) | 61 | ||||||||||||
Commodity contracts | 709 | 200 | 41 | — | (36) | (29) | (5) | 880 | 174 | ||||||||||||
Other | (7) | (6) | — | — | — | 9 | — | (4) | (7) | ||||||||||||
Total net derivative and | |||||||||||||||||||||
other contracts | 939 | (859) | 483 | (74) | (1,091) | 90 | 591 | 79 | (1,335) | ||||||||||||
Investments: | |||||||||||||||||||||
Private equity funds | 2,179 | 704 | 212 | (564) | — | — | — | 2,531 | 657 | ||||||||||||
Real estate funds | 1,370 | 413 | 103 | (249) | — | — | — | 1,637 | 625 | ||||||||||||
Hedge funds | 552 | 10 | 62 | (163) | — | — | (29) | 432 | 10 | ||||||||||||
Principal investments | 2,833 | 110 | 111 | (445) | — | — | (449) | 2,160 | 3 | ||||||||||||
Other | 486 | 76 | 13 | (36) | — | — | (1) | 538 | 77 | ||||||||||||
Total investments | 7,420 | 1,313 | 501 | (1,457) | — | — | (479) | 7,298 | 1,372 | ||||||||||||
Intangible assets | 7 | 9 | — | — | — | (8) | — | 8 | 3 | ||||||||||||
Liabilities at Fair Value | |||||||||||||||||||||
Commercial paper and other | |||||||||||||||||||||
short-term borrowings | $ | 19 | $ | — | $ | — | $ | — | $ | — | $ | (1) | $ | (17) | $ | 1 | $ | — | |||
Trading liabilities: | |||||||||||||||||||||
Corporate and other debt: | |||||||||||||||||||||
Residential mortgage-backed securities | 4 | 4 | — | — | — | — | — | — | 4 | ||||||||||||
Corporate bonds | 177 | 28 | (64) | 43 | — | — | (106) | 22 | 28 | ||||||||||||
Unfunded lending commitments | 46 | 44 | — | — | — | — | — | 2 | 44 | ||||||||||||
Other debt | 49 | 2 | — | 5 | — | (6) | 2 | 48 | 2 | ||||||||||||
Total corporate and other debt | 276 | 78 | (64) | 48 | — | (6) | (104) | 72 | 78 | ||||||||||||
Corporate equities | 5 | 1 | (26) | 29 | — | — | 1 | 8 | 3 | ||||||||||||
Securities sold under agreements to repurchase | 151 | (3) | — | — | — | — | — | 154 | (3) | ||||||||||||
Other secured financings | 406 | 11 | — | — | 19 | (136) | — | 278 | 4 | ||||||||||||
Long-term borrowings | 2,789 | (162) | — | — | 877 | (606) | (1,335) | 1,887 | (138) |
___________
(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated statements of income except for $1,313 million related to Trading assets—Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for 2013 related to assets and liabilities still outstanding at December 31, 2013.
(3) Net derivative and other contracts represent Trading assets—Derivative and other contracts net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 12.
Long-term borrowings. During 2013, the Company reclassified approximately $1.3 billion of certain long-term borrowings, primarily structured notes, from Level 3 to Level 2. The Company reclassified the structured notes as the unobservable embedded derivative component became insignificant to the overall valuation.
In 2013, there were no material transfers from Level 2 to Level 3.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2012.
Beginning Balance at December 31, 2011 | Total Realized and Unrealized Gains (Losses) (1) | Purchases | Sales | Issuances | Settlements | Net Transfers | Ending Balance at December 31, 2012 | Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at December 31, 2012(2) | |||||||||||||
(dollars in millions) | |||||||||||||||||||||
Assets at Fair Value | |||||||||||||||||||||
Trading assets: | |||||||||||||||||||||
U.S. agency securities | $ | 8 | $ | — | $ | — | $ | (7) | $ | — | $ | — | $ | (1) | $ | — | $ | — | |||
Other sovereign government obligations | 119 | — | 12 | (125) | — | — | — | 6 | (9) | ||||||||||||
Corporate and other debt: | |||||||||||||||||||||
Residential mortgage-backed securities | 494 | (9) | 32 | (285) | — | — | (187) | 45 | (26) | ||||||||||||
Commercial mortgage-backed securities | 134 | 32 | 218 | (49) | — | (100) | (3) | 232 | 28 | ||||||||||||
Asset-backed securities | 31 | 1 | 109 | (32) | — | — | — | 109 | (1) | ||||||||||||
Corporate bonds | 675 | 22 | 447 | (450) | — | — | (34) | 660 | (7) | ||||||||||||
Collateralized debt and loan obligations | 980 | 216 | 1,178 | (384) | — | — | (39) | 1,951 | 142 | ||||||||||||
Loans and lending commitments | 9,590 | 37 | 2,648 | (2,095) | — | (4,316) | (1,170) | 4,694 | (91) | ||||||||||||
Other debt | 128 | 2 | — | (95) | — | — | 10 | 45 | (6) | ||||||||||||
Total corporate and other debt | 12,032 | 301 | 4,632 | (3,390) | — | (4,416) | (1,423) | 7,736 | 39 | ||||||||||||
Corporate equities | 417 | (59) | 134 | (172) | — | — | (32) | 288 | (83) | ||||||||||||
Net derivative and other contracts(3): | |||||||||||||||||||||
Interest rate contracts | 420 | (275) | 28 | — | (7) | (217) | (31) | (82) | 297 | ||||||||||||
Credit contracts | 5,814 | (2,799) | 112 | — | (502) | (961) | 158 | 1,822 | (3,216) | ||||||||||||
Foreign exchange contracts | 43 | (279) | — | — | — | 19 | (142) | (359) | (225) | ||||||||||||
Equity contracts | (1,234) | 390 | 202 | (9) | (112) | (210) | (171) | (1,144) | 241 | ||||||||||||
Commodity contracts | 570 | 114 | 16 | — | (41) | (20) | 70 | 709 | 222 | ||||||||||||
Other | (1,090) | 57 | — | — | — | 236 | 790 | (7) | 53 | ||||||||||||
Total net derivative and other contracts | 4,523 | (2,792) | 358 | (9) | (662) | (1,153) | 674 | 939 | (2,628) | ||||||||||||
Investments: | |||||||||||||||||||||
Private equity funds | 1,936 | 228 | 308 | (294) | — | — | 1 | 2,179 | 147 | ||||||||||||
Real estate funds | 1,213 | 149 | 143 | (136) | — | — | 1 | 1,370 | 229 | ||||||||||||
Hedge funds | 696 | 61 | 81 | (151) | — | — | (135) | 552 | 51 | ||||||||||||
Principal investments | 2,937 | 130 | 160 | (419) | — | — | 25 | 2,833 | 93 | ||||||||||||
Other | 501 | (45) | 158 | (70) | — | — | (58) | 486 | (48) | ||||||||||||
Total investments | 7,283 | 523 | 850 | (1,070) | — | — | (166) | 7,420 | 472 | ||||||||||||
Physical commodities | 46 | — | — | — | — | (46) | — | — | — | ||||||||||||
Intangible assets | 133 | (39) | — | (83) | — | (4) | — | 7 | (7) | ||||||||||||
Liabilities at Fair Value | |||||||||||||||||||||
Commercial paper and other short-term borrowings | $ | 2 | $ | (5) | $ | — | $ | — | $ | 3 | $ | (3) | $ | 12 | $ | 19 | $ | (4) | |||
Trading liabilities: | |||||||||||||||||||||
Other sovereign government obligations | 8 | — | (8) | — | — | — | — | — | — | ||||||||||||
Corporate and other debt: | |||||||||||||||||||||
Residential mortgage-backed securities | 355 | (4) | (355) | — | — | — | — | 4 | (4) | ||||||||||||
Corporate bonds | 219 | (15) | (129) | 110 | — | — | (38) | 177 | (23) | ||||||||||||
Unfunded lending commitments | 85 | 39 | — | — | — | — | — | 46 | 39 | ||||||||||||
Other debt | 73 | 9 | (1) | 36 | — | (55) | 5 | 49 | 11 | ||||||||||||
Total corporate and other debt | 732 | 29 | (485) | 146 | — | (55) | (33) | 276 | 23 | ||||||||||||
Corporate equities | 1 | (1) | (21) | 22 | — | — | 2 | 5 | (3) | ||||||||||||
Securities sold under agreements to repurchase | 340 | (14) | — | — | — | — | (203) | 151 | (14) | ||||||||||||
Other secured financings | 570 | (69) | — | — | 21 | (232) | (22) | 406 | (67) | ||||||||||||
Long-term borrowings | 1,603 | (651) | — | — | 1,050 | (279) | (236) | 2,789 | (652) |
____________
(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated statements of income except for $523 million related to Trading assets—Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for 2012 related to assets and liabilities still outstanding at December 31, 2012.
(3) Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 12.
Trading assets—Corporate and other debt. During 2012, the Company reclassified approximately $1.9 billion of certain Corporate and other debt, primarily loans, from Level 3 to Level 2. The Company reclassified the loans as external prices and/or spread inputs for these instruments became observable.
The Company also reclassified approximately $0.5 billion of certain Corporate and other debt from Level 2 to Level 3. The reclassifications were primarily related to corporate loans and were generally due to a reduction in market price quotations for these or comparable instruments, or a lack of available broker quotes, such that unobservable inputs had to be utilized for the fair value measurement of these instruments.
Trading assets—Net derivative and other contracts. During 2012, the Company reclassified approximately $1.4 billion of certain credit derivative assets and approximately $1.2 billion of certain credit derivative liabilities from Level 3 to Level 2. These reclassifications were primarily related to single name credit default swaps and basket credit default swaps for which certain unobservable inputs became insignificant to the overall measurement.
The Company also reclassified approximately $0.6 billion of certain credit derivative assets and approximately $0.3 billion of certain credit derivative liabilities from Level 2 to Level 3. The reclassifications were primarily related to basket credit default swaps for which certain unobservable inputs became significant to the overall measurement.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for 2011.
Beginning Balance at December 31, 2010 | Total Realized and Unrealized Gains (Losses)(1) | Purchases | Sales | Issuances | Settlements | Net Transfers | Ending Balance at December 31, 2011 | Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at December 31, 2011(2) | |||||||||||||
(dollars in millions) | |||||||||||||||||||||
Assets at Fair Value | |||||||||||||||||||||
Trading assets: | |||||||||||||||||||||
U.S. agency securities | $ | 13 | $ | — | $ | 66 | $ | (68) | $ | — | $ | — | $ | (3) | $ | 8 | $ | — | |||
Other sovereign government obligations | 73 | (4) | 56 | (2) | — | — | (4) | 119 | (2) | ||||||||||||
Corporate and other debt: | |||||||||||||||||||||
State and municipal securities | 110 | (1) | — | (96) | — | — | (13) | — | — | ||||||||||||
Residential mortgage-backed securities | 319 | (61) | 382 | (221) | — | (1) | 76 | 494 | (59) | ||||||||||||
Commercial mortgage-backed securities | 188 | 12 | 75 | (90) | — | — | (51) | 134 | (18) | ||||||||||||
Asset-backed securities | 13 | 4 | 13 | (19) | — | — | 20 | 31 | 2 | ||||||||||||
Corporate bonds | 1,368 | (136) | 467 | (661) | — | — | (363) | 675 | (20) | ||||||||||||
Collateralized debt and loan obligations | 1,659 | 109 | 613 | (1,296) | — | (55) | (50) | 980 | (84) | ||||||||||||
Loans and lending commitments | 11,666 | (251) | 2,932 | (1,241) | — | (2,900) | (616) | 9,590 | (431) | ||||||||||||
Other debt | 193 | 42 | 14 | (76) | — | (11) | (34) | 128 | — | ||||||||||||
Total corporate and other debt | 15,516 | (282) | 4,496 | (3,700) | — | (2,967) | (1,031) | 12,032 | (610) | ||||||||||||
Corporate equities | 484 | (46) | 416 | (360) | — | — | (77) | 417 | 16 | ||||||||||||
Net derivative and other contracts(3): | |||||||||||||||||||||
Interest rate contracts | 424 | 628 | 45 | — | (714) | (150) | 187 | 420 | 522 | ||||||||||||
Credit contracts | 6,594 | 319 | 1,199 | — | (277) | (2,165) | 144 | 5,814 | 1,818 | ||||||||||||
Foreign exchange contracts | 46 | (35) | 2 | — | — | 28 | 2 | 43 | (13) | ||||||||||||
Equity contracts | (762) | 592 | 214 | (133) | (1,329) | 136 | 48 | (1,234) | 564 | ||||||||||||
Commodity contracts | 188 | 708 | 52 | — | — | (433) | 55 | 570 | 689 | ||||||||||||
Other | (913) | (552) | 1 | — | (118) | 405 | 87 | (1,090) | (536) | ||||||||||||
Total net derivative and other contracts | 5,577 | 1,660 | 1,513 | (133) | (2,438) | (2,179) | 523 | 4,523 | 3,044 | ||||||||||||
Investments: | |||||||||||||||||||||
Private equity funds | 1,986 | 159 | 245 | (513) | — | — | 59 | 1,936 | 85 | ||||||||||||
Real estate funds | 1,176 | 21 | 196 | (171) | — | — | (9) | 1,213 | 251 | ||||||||||||
Hedge funds | 901 | (20) | 169 | (380) | — | — | 26 | 696 | (31) | ||||||||||||
Principal investments | 3,131 | 288 | 368 | (819) | — | — | (31) | 2,937 | 87 | ||||||||||||
Other | 560 | 38 | 8 | (34) | — | — | (71) | 501 | 23 | ||||||||||||
Total investments | 7,754 | 486 | 986 | (1,917) | — | — | (26) | 7,283 | 415 | ||||||||||||
Physical commodities | — | (47) | 771 | — | — | (673) | (5) | 46 | 1 | ||||||||||||
Securities received as collateral | 1 | — | — | (1) | — | — | — | — | — | ||||||||||||
Intangible assets | 157 | (25) | 6 | (1) | — | (4) | — | 133 | (27) | ||||||||||||
Liabilities at Fair Value | |||||||||||||||||||||
Deposits | $ | 16 | $ | 2 | $ | — | $ | — | $ | — | $ | (14) | $ | — | $ | — | $ | — | |||
Commercial paper and other short-term borrowings | 2 | — | — | — | — | — | — | 2 | — | ||||||||||||
Trading liabilities: | |||||||||||||||||||||
Other sovereign government obligations | — | 1 | — | 9 | — | — | — | 8 | — | ||||||||||||
Corporate and other debt: | |||||||||||||||||||||
Residential mortgage-backed securities | — | (8) | — | 347 | — | — | — | 355 | (8) | ||||||||||||
Corporate bonds | 44 | 37 | (407) | 694 | — | — | (75) | 219 | 51 | ||||||||||||
Unfunded lending commitments | 263 | 178 | — | — | — | — | — | 85 | 178 | ||||||||||||
Other debt | 194 | 123 | (12) | 22 | — | (2) | (6) | 73 | 12 | ||||||||||||
Total corporate and other debt | 501 | 330 | (419) | 1,063 | — | (2) | (81) | 732 | 233 | ||||||||||||
Corporate equities | 15 | (1) | (15) | 5 | — | — | (5) | 1 | — | ||||||||||||
Obligation to return securities received as collateral | 1 | — | (1) | — | — | — | — | — | — | ||||||||||||
Securities sold under agreements to repurchase | 351 | 11 | — | — | — | — | — | 340 | 11 | ||||||||||||
Other secured financings | 1,016 | 27 | — | — | 154 | (267) | (306) | 570 | 13 | ||||||||||||
Long-term borrowings | 1,316 | 39 | — | — | 769 | (377) | (66) | 1,603 | 32 |
___________
(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the consolidated statements of income except for $486 million related to Trading assets—Investments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for 2011 related to assets and liabilities still outstanding at December 31, 2011.
(3) Net derivative and other contracts represent Trading assets—Derivative and other contracts, net of Trading liabilities—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 12.
Trading assets—Corporate and other debt. During 2011, the Company reclassified approximately $1.8 billion of certain Corporate and other debt, primarily corporate loans, from Level 3 to Level 2. The Company reclassified these corporate loans as external prices and/or spread inputs for these instruments became observable.
The Company also reclassified approximately $0.8 billion of certain Corporate and other debt from Level 2 to Level 3. The reclassifications were primarily related to corporate loans and were generally due to a reduction in market price quotations for these or comparable instruments, or a lack of available broker quotes, such that unobservable inputs had to be utilized for the fair value measurement of these instruments.
Quantitative Information about and Sensitivity of Significant Unobservable Inputs Used in Recurring Level 3 Fair Value Measurements at December 31, 2013 and December 31, 2012.
The disclosures below provide information on the valuation techniques, significant unobservable inputs and their ranges and averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3 balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry because of diversity in the types of products included in each firm's inventory. The following disclosures also include qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs.
At December 31, 2013.
Balance at | ||||||||||||||
December 31, | ||||||||||||||
2013 | ||||||||||||||
(dollars | Significant Unobservable Input(s) / | |||||||||||||
in | Valuation | Sensitivity of the Fair Value to Changes | ||||||||||||
millions) | Technique(s) | in the Unobservable Inputs | Range(1) | Averages(2) | ||||||||||
Assets | ||||||||||||||
Trading assets: | ||||||||||||||
Corporate and other debt: | ||||||||||||||
Commercial mortgage-backed | ||||||||||||||
securities | 108 | Comparable pricing | Comparable bond price / (A) | 40 to 93 points | 78 points | |||||||||
Asset-backed securities | 103 | Discounted cash flow | Discount rate / (C) | 18% | 18% | |||||||||
Corporate bonds | 522 | Comparable pricing | Comparable bond price / (A) | 1 to 159 points | 85 points | |||||||||
Collateralized debt and loan | 1,468 | Comparable pricing(6) | Comparable bond price / (A) | 18 to 99 points | 73 points | |||||||||
obligations | Correlation model | Credit correlation / (B) | 29 to 59 % | 43% | ||||||||||
Loans and lending commitments | 5,129 | Corporate loan model | Credit spread / (C) | 28 to 487 basis points | 249 basis points | |||||||||
Margin loan model | Credit spread / (C)(D) | 10 to 265 basis points | 135 basis points | |||||||||||
Volatility skew / (C)(D) | 3 to 40 % | 14% | ||||||||||||
Comparable bond price / (A)(D) | 80 to 120 points | 100 points | ||||||||||||
Option model | Volatility skew / (C) | -1 to 0 % | 0% | |||||||||||
Comparable pricing(6) | Comparable loan price / (A) | 10 to 100 points | 76 points | |||||||||||
Corporate equities(3) | 190 | Net asset value(6) | Discount to net asset value / (C) | 0 to 85 % | 43% | |||||||||
Comparable pricing | Comparable equity price / (A) | 0 to 100 % | 47% | |||||||||||
Comparable pricing | Comparable price / (A) | 0 to 100 points | 50 points | |||||||||||
Market approach | EBITDA multiple / (A)(D) | 5 to 9 times | 6 times | |||||||||||
Price/Book ratio / (A)(D) | 0 to 1 times | 1 times | ||||||||||||
Net derivative and other contracts: | ||||||||||||||
Interest rate contracts | 113 | Option model | Interest rate volatility concentration | |||||||||||
liquidity multiple / (C)(D) | 0 to 6 times | 2 times | ||||||||||||
Comparable bond price / (A)(D) | 5 to 100 points | 58 points / 65 points (4) | ||||||||||||
Interest rate - Foreign exchange | ||||||||||||||
correlation / (A)(D) | 3 to 63 % | 43% / 48% (4) | ||||||||||||
Interest rate volatility skew / (A)(D) | 24 to 50 % | 33% / 28% (4) | ||||||||||||
Interest rate quanto correlation / (A)(D) | -11 to 34 % | 8% / 5% (4) | ||||||||||||
Interest rate curve correlation / (A)(D) | 46 to 92 % | 74% / 80% (4) | ||||||||||||
Inflation volatility / (A)(D) | 77 to 86 % | 81% / 80% (4) | ||||||||||||
Credit contracts | (147) | Comparable pricing | Cash synthetic basis / (C)(D) | 2 to 5 points | 4 points | |||||||||
Comparable bond price / (C)(D) | 0 to 75 points | 27 points | ||||||||||||
Correlation model(6) | Credit correlation / (B) | 19 to 96 % | 56% | |||||||||||
Foreign exchange contracts(5) | 68 | Option model | Comparable bond price / (A)(D) | 5 to 100 points | 58 points / 65 points (4) | |||||||||
Interest rate quanto correlation / (A)(D) | -11 to 34 % | 8% / 5% (4) | ||||||||||||
Interest rate curve correlation / (A)(D) | 46 to 92 % | 74% / 80% (4) | ||||||||||||
Interest rate - Foreign exchange correlation | ||||||||||||||
/ (A)(D) | 3 to 63 % | 43% / 48% (4) | ||||||||||||
Interest rate volatility skew / (A)(D) | 24 to 50 % | 33% / 28% (4) | ||||||||||||
Interest rate curve / (A)(D) | 0 to 1 % | 1% / 0% (4) | ||||||||||||
Equity contracts(5) | (831) | Option model | At the money volatility / (A)(D) | 20 to 53 % | 31% | |||||||||
Volatility skew / (A)(D) | -3 to 0 % | -1% | ||||||||||||
Equity - Equity correlation / (C)(D) | 40 to 99 % | 69% | ||||||||||||
Equity - Foreign exchange correlation / (C)(D) | -50 to 9 % | -20% | ||||||||||||
Equity - Interest rate correlation / (C)(D) | -4 to 70 % | 39% / 40% (4) | ||||||||||||
Commodity contracts | 880 | Option model | Forward power price / (C)(D) | $14 to $91 per | $40 per | |||||||||
Megawatt hour | Megawatt hour | |||||||||||||
Commodity volatility / (A)(D) | 11 to 30 % | 14% | ||||||||||||
Cross commodity correlation / (C)(D) | 34 to 99 % | 93% | ||||||||||||
Investments(3): | ||||||||||||||
Principal investments | 2,160 | Discounted cash flow | Implied weighted average cost of capital / (C)(D) | 12% | 12% | |||||||||
Exit multiple / (A)(D) | 9 times | 9 times | ||||||||||||
Discounted cash flow(6) | Capitalization rate / (C)(D) | 5 to 13 % | 7% | |||||||||||
Equity discount rate / (C)(D) | 10 to 30 % | 21% | ||||||||||||
Market approach | EBITDA multiple / (A) | 5 to 6 times | 5 times | |||||||||||
Other | 538 | Discounted cash flow | Implied weighted average cost of capital / (C)(D) | 7 to 10 % | 8% | |||||||||
Exit multiple / (A)(D) | 7 to 9 times | 9 times | ||||||||||||
Market approach(6) | EBITDA multiple / (A) | 8 to 14 times | 10 times | |||||||||||
Liabilities | ||||||||||||||
Securities sold under agreements | ||||||||||||||
to repurchase | $ | 154 | Discounted cash flow | Funding spread / (A) | 92 to 97 basis points | 95 basis points | ||||||||
Other secured financings | 278 | Comparable pricing(6) | Comparable bond price / (A) | 99 to 102 points | 101 points | |||||||||
Discounted cash flow | Funding spread / (A) | 97 basis points | 97 basis points | |||||||||||
Long-term borrowings | 1,887 | Option model | At the money volatility / (C)(D) | 20 to 33 % | 26% | |||||||||
Volatility skew / (A)(D) | -2 to 0 % | 0% | ||||||||||||
Equity - Equity correlation / (A)(D) | 50 to 70 % | 69% | ||||||||||||
Equity - Foreign exchange correlation / (C)(D) | -60 to 0 % | -23% |
___________________
EBITDA - Earnings before interest, taxes, depreciation and amortization
(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par; for example, 93 points would be 93% of par. A basis point equals 1/100th of 1%; for example, 487 basis points would equal 4.87%.
(2) Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 4 below). Weighted averages are calculated by weighting each input by the fair value of the respective financial instruments except for long-term borrowings and derivative instruments where inputs are weighted by risk.
(3) Investments in funds measured using an unadjusted NAV are excluded.
(4) The data structure of the significant unobservable inputs used in valuing Interest rate contracts, Foreign exchange contracts and certain Equity contracts may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, a simple average and median, together with the range of data inputs, may be more appropriate measurements than a single point weighted average.
(5) Includes derivative contracts with multiple risks (i.e., hybrid products).
(6) This is the predominant valuation technique for this major asset or liability class.
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.
(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing) correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior tranches become more (less) risky.
(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.
(D) There are no predictable relationships between the significant unobservable inputs.
At December 31, 2012.
Balance at | ||||||||||||||
December 31, | ||||||||||||||
2012 | ||||||||||||||
(dollars | Significant Unobservable Input(s) / | |||||||||||||
in | Valuation | Sensitivity of the Fair Value to Changes | Weighted | |||||||||||
millions) | Technique(s) | in the Unobservable Inputs | Range(1) | Average | ||||||||||
Assets | ||||||||||||||
Trading assets: | ||||||||||||||
Corporate and other debt: | ||||||||||||||
Commercial mortgage-backed | ||||||||||||||
securities | $ | 232 | Comparable pricing | Comparable bond price / (A) | 46 to 100 points | 76 points | ||||||||
Asset-backed securities | 109 | Discounted cash flow | Discount rate / (C) | 21% | 21% | |||||||||
Corporate bonds | 660 | Comparable pricing | Comparable bond price / (A) | 0 to 143 points | 24 points | |||||||||
Collateralized debt and loan | 1,951 | Comparable pricing | Comparable bond price / (A) | 15 to 88 points | 59 points | |||||||||
obligations | Correlation model | Credit correlation / (B) | 15 to 45 % | 40% | ||||||||||
Loans and lending commitments | 4,694 | Corporate loan model | Credit spread / (C) | 17 to 1,004 basis points | 281 basis points | |||||||||
Comparable pricing | Comparable bond price / (A) | 80 to 120 points | 104 points | |||||||||||
Comparable pricing | Comparable loan price / (A) | 55 to 100 points | 88 points | |||||||||||
Corporate equities(2) | 288 | Net asset value | Discount to net asset value / (C) | 0 to 37 % | 8% | |||||||||
Comparable pricing | Discount to comparable equity price / (C) | 0 to 27 points | 14 points | |||||||||||
Market approach | EBITDA multiple / (A) | 6 times | 6 times | |||||||||||
Net derivative and other contracts: | ||||||||||||||
Interest rate contracts | (82) | Option model | Interest rate volatility concentration | See (3) | ||||||||||
liquidity multiple / (C)(D) | 0 to 8 times | |||||||||||||
Comparable bond price / (A)(D) | 5 to 98 points | |||||||||||||
Interest rate - Foreign exchange | ||||||||||||||
correlation / (A)(D) | 2 to 63 % | |||||||||||||
Interest rate volatility skew / (A)(D) | 9 to 95 % | |||||||||||||
Interest rate quanto correlation / (A)(D) | -53 to 33 % | |||||||||||||
Interest rate curve correlation / (A)(D) | 48 to 99 % | |||||||||||||
Inflation volatility / (A)(D) | 49 to 100 % | |||||||||||||
Discounted cash flow | Forward commercial paper rate-LIBOR basis / (A) | -18 to 95 basis points | ||||||||||||
Credit contracts | 1,822 | Comparable pricing | Cash synthetic basis / (C) | 2 to 14 points | See (4) | |||||||||
Comparable bond price / (C) | 0 to 80 points | |||||||||||||
Correlation model | Credit correlation / (B) | 14 to 94 % | ||||||||||||
Foreign exchange contracts(5) | (359) | Option model | Comparable bond price / (A)(D) | 5 to 98 points | See (6) | |||||||||
Interest rate quanto correlation / (A)(D) | -53 to 33 % | |||||||||||||
Interest rate - Credit spread correlation / (A)(D) | -59 to 65 % | |||||||||||||
Interest rate - Foreign exchange correlation | ||||||||||||||
/ (A)(D) | 2 to 63 % | |||||||||||||
Interest rate volatility skew / (A)(D) | 9 to 95 % | |||||||||||||
Equity contracts(5) | (1,144) | Option model | At the money volatility / (C)(D) | 7 to 24 % | See (7) | |||||||||
Volatility skew / (C)(D) | -2 to 0 % | |||||||||||||
Equity - Equity correlation / (C)(D) | 40 to 96 % | |||||||||||||
Equity - Foreign exchange correlation / (C)(D) | -70 to 38 % | |||||||||||||
Equity - Interest rate correlation / (C)(D) | 18 to 65 % | |||||||||||||
Commodity contracts | 709 | Option model | Forward power price / (C)(D) | $28 to $84 per | ||||||||||
Megawatt hour | ||||||||||||||
Commodity volatility / (A)(D) | 17 to 29 % | |||||||||||||
Cross commodity correlation / (C)(D) | 43 to 97 % | |||||||||||||
Investments(2): | ||||||||||||||
Principal investments | 2,833 | Discounted cash flow | Implied weighted average cost of capital / (C)(D) | 8 to 15 % | 9% | |||||||||
Exit multiple / (A)(D) | 5 to 10 times | 9 times | ||||||||||||
Discounted cash flow | Capitalization rate / (C)(D) | 6 to 10 % | 7% | |||||||||||
Equity discount rate / (C)(D) | 15 to 35 % | 23% | ||||||||||||
Market approach | EBITDA multiple / (A) | 3 to 17 times | 10 times | |||||||||||
Other | 486 | Discounted cash flow | Implied weighted average cost of capital / (C)(D) | 11 % | 11% | |||||||||
Exit multiple / (A)(D) | 6 times | 6 times | ||||||||||||
Market approach | EBITDA multiple / (A) | 6 to 8 times | 7 times | |||||||||||
Liabilities | ||||||||||||||
Trading liabilities: | ||||||||||||||
Corporate and other debt: | ||||||||||||||
Corporate bonds | $ | 177 | Comparable pricing | Comparable bond price / (A) | 0 to 150 points | 50 points | ||||||||
Securities sold under agreements | ||||||||||||||
to repurchase | 151 | Discounted cash flow | Funding spread / (A) | 110 to 184 basis points | 166 basis points | |||||||||
Other secured financings | 406 | Comparable pricing | Comparable bond price / (A) | 55 to 139 points | 102 points | |||||||||
Discounted cash flow | Funding spread / (A) | 183 to 186 basis points | 184 basis points | |||||||||||
Long-term borrowings | 2,789 | Option model | At the money volatility / (A)(D) | 20 to 24 % | 24% | |||||||||
Volatility skew / (A)(D) | -1 to 0 % | 0% | ||||||||||||
Equity - Equity correlation / (A)(D) | 50 to 90 % | 77% | ||||||||||||
Equity - Foreign exchange correlation / (A)(D) | -70 to 36 % | -15% |
________________
(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par; for example, 100 points would be 100% of par. A basis point equals 1/100th of 1%; for example, 1,004 basis points would equal 10.04%.
(2) Investments in funds measured using an unadjusted NAV are excluded.
(3) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitative discussion of the wide unobservable input ranges for comparable bond prices, interest rate volatility skew, interest rate quanto correlation and forward commercial paper rate–LIBOR basis.
(4) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitative discussion of the wide unobservable input ranges for comparable bond prices and credit correlation.
(5) Includes derivative contracts with multiple risks (i.e., hybrid products).
(6) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitative discussion of the wide unobservable input ranges for comparable bond prices, interest rate quanto correlation, interest rate-credit spread correlation and interest rate volatility skew.
(7) See Note 4 to the consolidated financial statements for the year ended December 31, 2012 included in the Form 10-K for a qualitative discussion of the wide unobservable input range for equity-foreign exchange correlation.
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.
(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing) correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior tranches become more (less) risky.
(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.
(D) There are no predictable relationships between the significant unobservable inputs.
The following provides a description of significant unobservable inputs included in the December 31, 2013 and December 31, 2012 tables above for all major categories of assets and liabilities:
Fair Value of Investments That Calculate Net Asset Value.
The Company's Investments measured at fair value were $8,013 million and $8,346 million at December 31, 2013 and December 31, 2012, respectively. The following table presents information solely about the Company's investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV at December 31, 2013 and December 31, 2012, respectively:
At December 31, 2013 | At December 31, 2012 | ||||||||
Unfunded | Unfunded | ||||||||
Fair Value | Commitment | Fair Value | Commitment | ||||||
(dollars in millions) | |||||||||
Private equity funds | $ | 2,531 | $ | 559 | $ | 2,179 | $ | 644 | |
Real estate funds | 1,643 | 124 | 1,376 | 221 | |||||
Hedge funds(1): | |||||||||
Long-short equity hedge funds | 469 | ─ | 475 | ─ | |||||
Fixed income/credit-related hedge funds | 82 | ─ | 86 | ─ | |||||
Event-driven hedge funds | 38 | ─ | 52 | ─ | |||||
Multi-strategy hedge funds | 220 | 3 | 321 | 3 | |||||
Total | $ | 4,983 | $ | 686 | $ | 4,489 | $ | 868 |
(1) Fixed income/credit-related hedge funds, event-driven hedge funds, and multi-strategy hedge funds are redeemable at least on a three-month period basis primarily with a notice period of 90 days or less. At December 31, 2013, approximately 42% of the fair value amount of long-short equity hedge funds is redeemable at least quarterly, 42% is redeemable every six months and 16% of these funds have a redemption frequency of greater than six months. The notice period for long-short equity hedge funds at December 31, 2013 is primarily greater than six months. At December 31, 2012, approximately 36% of the fair value amount of long-short equity hedge funds is redeemable at least quarterly, 38% is redeemable every six months and 26% of these funds have a redemption frequency of greater than six months. The notice period for long-short equity hedge funds at December 31, 2012 is primarily greater than six months.
Private Equity Funds. Amount includes several private equity funds that pursue multiple strategies including leveraged buyouts, venture capital, infrastructure growth capital, distressed investments, and mezzanine capital. In addition, the funds may be structured with a focus on specific domestic or foreign geographic regions. These investments are generally not redeemable with the funds. Instead, the nature of the investments in this category is that distributions are received through the liquidation of the underlying assets of the fund. At December 31, 2013, it was estimated that 9% of the fair value of the funds will be liquidated in the next five years, another 55% of the fair value of the funds will be liquidated between five to 10 years and the remaining 36% of the fair value of the funds have a remaining life of greater than 10 years.
Real Estate Funds. Amount includes several real estate funds that invest in real estate assets such as commercial office buildings, retail properties, multi-family residential properties, developments or hotels. In addition, the funds may be structured with a focus on specific geographic domestic or foreign regions. These investments are generally not redeemable with the funds. Distributions from each fund will be received as the underlying investments of the funds are liquidated. At December 31, 2013, it was estimated that 4% of the fair value of the funds will be liquidated within the next five years, another 52% of the fair value of the funds will be liquidated between five to 10 years and the remaining 44% of the fair value of the funds have a remaining life of greater than 10 years.
Hedge Funds. Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedge fund lock-up provision is a provision that provides that, during a certain initial period, an investor may not make a withdrawal from the fund. The purpose of a gate is to restrict the level of redemptions that an investor in a particular hedge fund can demand on any redemption date.
• Long-Short Equity Hedge Funds. Amount includes investments in hedge funds that invest, long or short, in equities. Equity value and growth hedge funds purchase stocks perceived to be undervalued and sell stocks perceived to be overvalued. Investments representing approximately 12% of the fair value of the investments in this category cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for these investments subject to lock-up restrictions was primarily two years or less at December 31, 2013. Investments representing approximately 19% of the fair value of the investments in long-short equity hedge funds cannot be redeemed currently because an exit restriction has been imposed by the hedge fund manager. The restriction period for these investments subject to an exit restriction was primarily indefinite at December 31, 2013.
• Fixed Income/Credit-Related Hedge Funds. Amount includes investments in hedge funds that employ long-short, distressed or relative value strategies in order to benefit from investments in undervalued or overvalued securities that are primarily debt or credit related. Investments representing approximately 7% of the fair value of the investments in this category cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for these investments subject to lock-up restrictions was primarily over three years at December 31, 2013.
• Event-Driven Hedge Funds. Amount includes investments in hedge funds that invest in event-driven situations such as mergers, hostile takeovers, reorganizations, or leveraged buyouts. This may involve the simultaneous purchase of stock in companies being acquired and the sale of stock in its acquirer, with the expectation to profit from the spread between the current market price and the ultimate purchase price of the target company. At December 31, 2013, there were no restrictions on redemptions.
• Multi-strategy Hedge Funds. Amount includes investments in hedge funds that pursue multiple strategies to realize short- and long-term gains. Management of the hedge funds has the ability to overweight or underweight different strategies to best capitalize on current investment opportunities. At December 31, 2013, investments representing approximately 50% of the fair value of the investments in this category cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for these investments subject to lock-up restrictions was primarily two years or less at December 31, 2013. Investments representing approximately 8% of the fair value of the investments in multi-strategy hedge funds cannot be redeemed currently because an exit restriction has been imposed by the hedge fund manager. The restriction period for these investments subject to an exit restriction was indefinite at December 31, 2013.
Fair Value Option.
The Company elected the fair value option for certain eligible instruments that are risk managed on a fair value basis to mitigate income statement volatility caused by measurement basis differences between the elected instruments and their associated risk management transactions or to eliminate complexities of applying certain accounting models. The following table presents net gains (losses) due to changes in fair value for items measured at fair value pursuant to the fair value option election for 2013, 2012 and 2011, respectively:
Interest | Gains (Losses) | ||||||
Income | Included in | ||||||
Trading | (Expense) | Net Revenues | |||||
(dollars in millions) | |||||||
Year Ended December 31, 2013 | |||||||
Federal funds sold and securities purchased under | |||||||
agreements to resell | $ | (1) | $ | 6 | $ | 5 | |
Deposits | 52 | (60) | (8) | ||||
Commercial paper and other short-term borrowings(1) | 181 | (8) | 173 | ||||
Securities sold under agreements to repurchase | (3) | (6) | (9) | ||||
Long-term borrowings(1) | 664 | (971) | (307) | ||||
Year Ended December 31, 2012 | |||||||
Federal funds sold and securities purchased under | |||||||
agreements to resell | $ | 8 | $ | 5 | $ | 13 | |
Deposits | 57 | (86) | (29) | ||||
Commercial paper and other short-term borrowings(1) | (31) | ─ | (31) | ||||
Securities sold under agreements to repurchase | (15) | (4) | (19) | ||||
Long-term borrowings(1) | (5,687) | (1,321) | (7,008) | ||||
Year Ended December 31, 2011 | |||||||
Federal funds sold and securities purchased under | |||||||
agreements to resell | $ | 12 | $ | ─ | $ | 12 | |
Deposits | 66 | (117) | (51) | ||||
Commercial paper and other short-term borrowings(1) | 567 | ─ | 567 | ||||
Securities sold under agreements to repurchase | 3 | (7) | (4) | ||||
Long-term borrowings(1) | 4,204 | (1,075) | 3,129 |
In addition to the amounts in the above table, as discussed in Note 2, all of the instruments within Trading assets or Trading liabilities are measured at fair value, either through the election of the fair value option or as required by other accounting guidance. The amounts in the above table are included within Net revenues and do not reflect gains or losses on related hedging instruments, if any.
The Company hedges the economics of market risk for short-term and long-term borrowings (i.e., risks other than that related to the credit quality of the Company) as part of its overall trading strategy and manages the market risks embedded within the issuance by the related business unit as part of the business unit's portfolio. The gains and losses on related economic hedges are recorded in Trading revenues and largely offset the gains and losses on short-term and long-term borrowings attributable to market risk.
At December 31, 2013 and December 31, 2012, a breakdown of the short-term and long-term borrowings measured at fair value on a recurring basis by business unit responsible for risk-managing each borrowing is shown in the table below:
Short-Term and Long-Term | |||||
Borrowings | |||||
At | At | ||||
December 31, | December 31, | ||||
Business Unit | 2013 | 2012 | |||
(dollars in millions) | |||||
Interest rates | $ | 15,933 | $ | 23,330 | |
Equity | 17,945 | 17,326 | |||
Credit and foreign exchange | 2,561 | 3,337 | |||
Commodities | 545 | 776 | |||
Total | $ | 36,984 | $ | 44,769 | |
The following tables present information on the Company's short-term and long-term borrowings (primarily structured notes), loans and unfunded lending commitments for which the fair value option was elected:
Gains (Losses) due to Changes in Instrument-Specific Credit Risk.
2013 | 2012 | 2011 | ||||
(dollars in millions) | ||||||
Short-term and long-term borrowings(1) | $ | (681) | $ | (4,402) | $ | 3,681 |
Loans(2) | 137 | 340 | (585) | |||
Unfunded lending commitments(3) | 255 | 1,026 | (787) |
_____________
(1) The change in the fair value of short-term and long-term borrowings (primarily structured notes) includes an adjustment to reflect the change in credit quality of the Company based upon observations of the Company's secondary bond market spreads.
(2) Instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates.
(3) Gains (losses) were generally determined based on the differential between estimated expected client yields and contractual yields at each respective period-end.
Net Difference between Contractual Principal Amount and Fair Value.
Contractual Principal Amount Exceeds Fair Value | ||||
At | At | |||
December 31, | December 31, | |||
2013 | 2012 | |||
(dollars in millions) | ||||
Short-term and long-term borrowings(1) | $ | (2,409) | $ | (436) |
Loans(2) | 17,248 | 25,249 | ||
Loans 90 or more days past due and/or on nonaccrual status(2)(3) | 15,113 | 20,456 |
_____________
(1) These amounts do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in the reference price or index.
(2) The majority of this difference between principal and fair value amounts emanates from the Company's distressed debt trading business, which purchases distressed debt at amounts well below par.
(3) The aggregate fair value of loans that were in nonaccrual status, which includes all loans 90 or more days past due, was $1,205 million and $1,360 million at December 31, 2013 and December 31, 2012, respectively. The aggregate fair value of loans that were 90 or more days past due was $655 million and $840 million at December 31, 2013 and December 31, 2012, respectively.
The tables above exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial assets, pledged commodities and other liabilities that have specified assets attributable to them.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis.
Certain assets were measured at fair value on a non-recurring basis and are not included in the tables above. These assets may include loans, other investments, premises, equipment and software costs, and intangible assets.
The following tables present, by caption on the consolidated statements of financial condition, the fair value hierarchy for those assets measured at fair value on a non-recurring basis for which the Company recognized a non-recurring fair value adjustment for 2013, 2012 and 2011, respectively.
2013.
Fair Value Measurements Using: | |||||||||||
Quoted Prices | |||||||||||
in Active | |||||||||||
Carrying | Markets for | Significant | Significant | Total | |||||||
Value at | Identical | Observable | Unobservable | Gains (Losses) | |||||||
December 31, | Assets | Inputs | Inputs | for | |||||||
2013 | (Level 1) | (Level 2) | (Level 3) | 2013(1) | |||||||
(dollars in millions) | |||||||||||
Loans(2) | $ | 1,822 | $ | ─ | $ | 1,616 | $ | 206 | $ | (71) | |
Other investments(3) | 46 | ─ | ─ | 46 | (38) | ||||||
Premises, equipment and | |||||||||||
software costs(3) | 8 | ─ | ─ | 8 | (133) | ||||||
Intangible assets(3) | 92 | ─ | ─ | 92 | (44) | ||||||
Total | $ | 1,968 | $ | ─ | $ | 1,616 | $ | 352 | $ | (286) |
____________
(1) Fair value adjustments related to Loans and losses related to Other investments are recorded within Other revenues whereas losses related to Premises, equipment and software costs and Intangible assets are recorded within Other expenses in the consolidated statements of income.
(2) Non-recurring changes in the fair value of loans held for investment or held for sale were calculated using recently executed transactions; market price quotations; valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments; or default recovery analysis where such transactions and quotations are unobservable.
(3) Losses recorded were determined primarily using discounted cash flow models.
There were no significant liabilities measured at fair value on a non-recurring basis during 2013.
2012.
Fair Value Measurements Using: | |||||||||||
Quoted Prices | |||||||||||
in Active | |||||||||||
Carrying | Markets for | Significant | Significant | Total | |||||||
Value at | Identical | Observable | Unobservable | Gains (Losses) | |||||||
December 31, | Assets | Inputs | Inputs | for | |||||||
2012 | (Level 1) | (Level 2) | (Level 3) | 2012(1) | |||||||
(dollars in millions) | |||||||||||
Loans(2) | $ | 1,821 | $ | ─ | $ | 277 | $ | 1,544 | $ | (60) | |
Other investments(3) | 90 | ─ | ─ | 90 | (37) | ||||||
Premises, equipment and | |||||||||||
software costs(4) | 33 | ─ | ─ | 33 | (170) | ||||||
Intangible assets(3) | ─ | ─ | ─ | ─ | (4) | ||||||
Total | $ | 1,944 | $ | ─ | $ | 277 | $ | 1,667 | $ | (271) |
_____________
(1) Losses are recorded within Other expenses in the consolidated statements of income except for fair value adjustments related to Loans and losses related to Other investments, which are included in Other revenues.
(2) Non-recurring changes in the fair value of loans held for investment or held for sale were calculated using recently executed transactions; market price quotations; valuation models that incorporate market observable inputs where possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments; or default recovery analysis where such transactions and quotations are unobservable.
(3) Losses recorded were determined primarily using discounted cash flow models.
(4) Losses were determined using discounted cash flow models and primarily represented the write-off of the carrying value of certain premises and software that were abandoned during 2012 in association with the Wealth Management JV integration.
In addition to the losses included in the table above, there was a pre-tax gain of approximately $51 million (related to Other assets) included in discontinued operations in the year ended December 31, 2012 in connection with the disposition of Saxon (see Note 1). This pre-tax gain was primarily due to the subsequent increase in the fair value of Saxon, which had incurred impairment losses of $98 million in the quarter ended December 31, 2011. The fair value of Saxon was determined based on the revised purchase price agreed upon with the buyer.
There were no liabilities measured at fair value on a non-recurring basis during 2012.
2011.
Fair Value Measurements Using: | |||||||||||
Quoted Prices | |||||||||||
in Active | |||||||||||
Carrying | Markets for | Significant | Significant | Total | |||||||
Value at | Identical | Observable | Unobservable | Gains (Losses) | |||||||
December 31, | Assets | Inputs | Inputs | for | |||||||
2011 | (Level 1) | (Level 2) | (Level 3) | 2011(1) | |||||||
(dollars in millions) | |||||||||||
Loans(2) | $ | 70 | $ | ─ | $ | ─ | $ | 70 | $ | 5 | |
Other investments(3) | 71 | ─ | ─ | 71 | (52) | ||||||
Premises, equipment and software costs(4) | 4 | ─ | ─ | 4 | (7) | ||||||
Goodwill | ─ | ─ | ─ | ─ | ─ | ||||||
Intangible assets(3) | ─ | ─ | ─ | ─ | (7) | ||||||
Total | $ | 145 | $ | ─ | $ | ─ | $ | 145 | $ | (61) |
___________________
(1) Losses are recorded within Other expenses in the consolidated statements of income except for fair value adjustments related to Loans and losses related to Other investments, which are included in Other revenues.
(2) Non-recurring changes in the fair value of loans held for investment were calculated using valuation models that incorporate market observable inputs or default recovery analyses or collateral appraisal values where such inputs were unobservable; or discounted cash flow techniques.
(3) Losses recorded were determined primarily using discounted cash flow models.
(4) Losses were determined primarily using discounted cash flow models or a valuation technique incorporating an observable market index.
In addition to the losses included in the table above, impairment losses of approximately $98 million (of which $83 million related to Other assets and $15 million related to Premises, equipment and software costs) were included in discontinued operations related to Saxon (see Note 1). These losses were determined using the purchase price agreed upon with the buyer.
There were no liabilities measured at fair value on a non-recurring basis during 2011.
Financial Instruments Not Measured at Fair Value.
The tables below present the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value in the consolidated statements of financial condition. The tables below exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities such as the value of the long-term relationships with our deposit customers.
The carrying value of cash and cash equivalents, including Interest bearing deposits with banks, and other short-term financial instruments such as Federal funds sold and securities purchased under agreements to resell; Securities borrowed; Securities sold under agreements to repurchase; Securities loaned; certain Customer and other receivables and Customer and other payables arising in the ordinary course of business; certain Deposits; Commercial paper and other short-term borrowings; and Other secured financings approximate fair value because of the relatively short period of time between their origination and expected maturity.
For longer-dated Federal funds sold and securities purchased under agreements to resell, Securities borrowed, Securities sold under agreements to repurchase, Securities loaned and Other secured financings, fair value is determined using a standard cash flow discounting methodology. The inputs to the valuation include contractual cash flows and collateral funding spreads, which are estimated using various benchmarks and interest rate yield curves.
For consumer and residential real estate loans and lending commitments where position-specific external price data are not observable, the fair value is based on the credit risks of the borrower using a probability of default and loss given default method, discounted at the estimated external cost of funding level. The fair value of corporate loans and lending commitments is determined using recently executed transactions, market price quotations (where observable), implied yields from comparable debt, and market observable credit default swap spread levels along with proprietary valuation models and default recovery analysis where such transactions and quotations are unobservable.
The fair value of long-term borrowings is generally determined based on transactional data or third-party pricing for identical or comparable instruments, when available. Where position-specific external prices are not observable, fair value is determined based on current interest rates and credit spreads for debt instruments with similar terms and maturity.
Financial Instruments Not Measured at Fair Value at December 31, 2013 and December 31, 2012.
At December 31, 2013.
At December 31, 2013 | Fair Value Measurements Using: | ||||||||||
Carrying Value | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||
(dollars in millions) | |||||||||||
Financial Assets: | |||||||||||
Cash and due from banks | $ | 16,602 | $ | 16,602 | $ | 16,602 | $ | — | $ | — | |
Interest bearing deposits with banks | 43,281 | 43,281 | 43,281 | — | — | ||||||
Cash deposited with clearing organizations or segregated under federal and | |||||||||||
other regulations or requirements | 39,203 | 39,203 | 39,203 | — | — | ||||||
Federal funds sold and securities purchased under agreements to resell | 117,264 | 117,263 | — | 116,584 | 679 | ||||||
Securities borrowed | 129,707 | 129,705 | — | 129,374 | 331 | ||||||
Customer and other receivables(1) | 53,112 | 53,031 | — | 47,525 | 5,506 | ||||||
Loans(2) | 42,874 | 42,765 | — | 11,288 | 31,477 | ||||||
Financial Liabilities: | |||||||||||
Deposits | $ | 112,194 | $ | 112,273 | $ | — | $ | 112,273 | $ | — | |
Commercial paper and other short-term borrowings | 795 | 795 | — | 787 | 8 | ||||||
Securities sold under agreements to repurchase | 145,115 | 145,157 | — | 138,161 | 6,996 | ||||||
Securities loaned | 32,799 | 32,826 | — | 31,731 | 1,095 | ||||||
Other secured financings | 9,009 | 9,034 | — | 5,845 | 3,189 | ||||||
Customer and other payables(1) | 154,654 | 154,654 | — | 154,654 | — | ||||||
Long-term borrowings | 117,938 | 123,133 | — | 122,099 | 1,034 |
___________________
(1) Accrued interest, fees and dividend receivables and payables where carrying value approximates fair value have been excluded.
(2) Includes all loans measured at fair value on a non-recurring basis.
The fair value of the Company's unfunded lending commitments, primarily related to corporate lending in the Institutional Securities business segment, that are not carried at fair value at December 31, 2013 was $853 million, of which $669 million and $184 million would be categorized in Level 2 and Level 3 of the fair value hierarchy, respectively. The carrying value of these commitments, if fully funded, would be $75.4 billion.
At December 31, 2012.
At December 31, 2012 | Fair Value Measurements Using: | ||||||||||
Carrying Value | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||
(dollars in millions) | |||||||||||
Financial Assets: | |||||||||||
Cash and due from banks | $ | 20,878 | $ | 20,878 | $ | 20,878 | $ | — | $ | — | |
Interest bearing deposits with banks | 26,026 | 26,026 | 26,026 | — | — | ||||||
Cash deposited with clearing organizations or segregated under federal and | |||||||||||
other regulations or requirements | 30,970 | 30,970 | 30,970 | — | — | ||||||
Federal funds sold and securities purchased under agreements to resell | 133,791 | 133,792 | — | 133,035 | 757 | ||||||
Securities borrowed | 121,701 | 121,705 | — | 121,691 | 14 | ||||||
Customer and other receivables(1) | 59,702 | 59,634 | — | 53,532 | 6,102 | ||||||
Loans(2) | 29,046 | 27,263 | — | 5,307 | 21,956 | ||||||
Financial Liabilities: | |||||||||||
Deposits | $ | 81,781 | $ | 81,781 | $ | — | $ | 81,781 | $ | — | |
Commercial paper and other short-term borrowings | 1,413 | 1,413 | — | 1,107 | 306 | ||||||
Securities sold under agreements to repurchase | 122,311 | 122,389 | — | 111,722 | 10,667 | ||||||
Securities loaned | 36,849 | 37,163 | — | 35,978 | 1,185 | ||||||
Other secured financings | 6,261 | 6,276 | — | 3,649 | 2,627 | ||||||
Customer and other payables(1) | 125,037 | 125,037 | — | 125,037 | — | ||||||
Long-term borrowings | 125,527 | 126,683 | — | 116,511 | 10,172 |
_________________
(1) Accrued interest, fees and dividend receivables and payables where carrying value approximates fair value have been excluded.
(2) Includes all loans measured at fair value on a non-recurring basis.
The fair value of the Company's unfunded lending commitments, primarily related to corporate lending in the Institutional Securities business segment, that are not carried at fair value at December 31, 2012 was $755 million, of which $543 million and $212 million would be categorized in Level 2 and Level 3 of the fair value hierarchy, respectively. The carrying value of these commitments, if fully funded, would be $50.0 billion.