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Fair Value Measurements

9 Months Ended

Sep. 30, 2011

10. FAIR VALUE MEASUREMENTS

For a description on how we estimate fair value, see Note 1 in our 2010 consolidated financial statements.

The following tables present our assets and liabilities measured at fair value on a recurring basis. Included in the tables are investment securities of $4,624 million and $5,706 million at September 30, 2011 and December 31, 2010, respectively, primarily investment securities supporting obligations to holders of GICs in Trinity (which ceased issuing new investment contracts beginning in the first quarter of 2010), and investment securities held at our treasury operations. Such securities are investment grade.

(In millions)										Netting
	Level 1		(a)	Level 2		(a)	Level 3		(b)	adjustment		(c)	Net balance
September 30, 2011
Assets
Investment securities
Debt
U.S. corporate	$	435		$	1,132		$	2,020		$	–		$	3,587
State and municipal		–			486			44			–			530
Residential mortgage-backed		–			1,511			27			–			1,538
Commercial mortgage-backed		–			1,306			–			–			1,306
Asset-backed		–			852			2,860			–			3,712
Corporate - non-U.S.		75			274			956			–			1,305
Government - non-U.S.		755			826			77			–			1,658
U.S. government and federal agency		–			2,536			–			–			2,536
Retained interests		–			–			37			–			37
Equity
Available-for-sale		750			–			16			–			766
Trading		387			–			–			–			387
Derivatives(d)		–			15,394			163			(3,120)			12,437
Other(e)		–			–			510			–			510
Total	$	2,402		$	24,317		$	6,710		$	(3,120)		$	30,309

Liabilities
Derivatives	$	–		$	4,837		$	32		$	(3,106)		$	1,763
Other		–			24			–			–			24
Total	$	–		$	4,861		$	32		$	(3,106)		$	1,787

December 31, 2010
Assets
Investment securities
Debt
U.S. corporate	$	588		$	1,360		$	1,697		$	–		$	3,645
State and municipal		–			508			182			–			690
Residential mortgage-backed		47			1,666			45			–			1,758
Commercial mortgage-backed		–			1,388			48			–			1,436
Asset-backed		–			563			2,496			–			3,059
Corporate - non-U.S.		89			356			961			–			1,406
Government - non-U.S.		776			850			128			–			1,754
U.S. government and federal agency		–			2,661			–			–			2,661
Retained interests		–			–			39			–			39
Equity
Available-for-sale		569			500			18			–			1,087
Trading		417			–			–			–			417
Derivatives(d)		–			10,319			330			(3,644)			7,005
Other(e)		–			–			450			–			450
Total	$	2,486		$	20,171		$	6,394		$	(3,644)		$	25,407

Liabilities
Derivatives	$	–		$	6,228		$	102		$	(3,635)		$	2,695
Other		–			31			–			–			31
Total	$	–		$	6,259		$	102		$	(3,635)		$	2,726

The fair value of securities transferred between Level 1 and Level 2 was $67 million during the nine months ended September 30, 2011.
Level 3 investment securities valued using non-binding broker quotes totaled $251 million and $711 million at September 30, 2011 and December 31, 2010, respectively, and were classified as available-for-sale securities.
The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Included fair value adjustments related to our own and counterparty credit risk.
The fair value of derivatives included an adjustment for non-performance risk. At September 30, 2011 and December 31, 2010, the cumulative adjustment for non-performance risk was a loss of $14 million and $9 million, respectively. See Note 11 for additional information on the composition of our derivative portfolio.
Included private equity investments and loans designated under the fair value option.

The following tables present the changes in Level 3 instruments measured on a recurring basis for the three and nine months ended September 30, 2011 and 2010. The majority of our Level 3 balances consist of investment securities classified as available-for-sale with changes in fair value recorded in shareowner's equity.

Changes in Level 3 Instruments for the Three Months Ended September 30, 2011

																						Net
(In millions)																						change in
						Net realized/																unrealized
			Net			unrealized																gains
			realized/			gains (losses)																(losses)
			unrealized			included in																relating to
			gains			accumulated																instruments
	Balance at		(losses)			other								Transfers			Transfers			Balance at		still held at
	July 1,		included in			comprehensive								into			out of			September 30,		September 30,
	2011		earnings		(a)	income		Purchases		Sales		Settlements		Level 3		(b)	Level 3		(b)	2011		2011		(c)

Investment securities
Debt
U.S. corporate	$	1,530	$	(27)		$	(81)	$	500	$	(25)	$	5	$	120		$	(2)		$	2,020	$	0
State and municipal		166		0			2		0		0		(4)		0			(120)			44		0
Residential
mortgage-backed		29		0			(2)		0		0		0		0			0			27		0
Commercial
mortgage-backed		0		0			0		0		0		0		0			0			0		0
Asset-backed		3,086		(2)			(62)		269		(14)		0		0			(417)			2,860		0
Corporate – non-U.S.		1,032		2			(55)		0		(5)		(14)		0			(4)			956		0
Government
– non-U.S.		243		0			(27)		14		0		(13)		0			(140)			77		0
U.S. government and
federal agency		0		0			0		0		0		0		0			0			0		0
Retained interests		45		(1)			(6)		1		(1)		(1)		0			0			37		0
Equity
Available-for-sale		14		0			0		0		0		0		2			0			16		0
Trading		0		0			0		0		0		0		0			0			0		0
Derivatives(d)(e)		111		31			0		(3)		0		(5)		0			0			134		35
Other		595		(1)			(14)		26		(95)		(1)		0			0			510		(1)
Total	$	6,851	$	2		$	(245)	$	807	$	(140)	$	(33)	$	122		$	(683)		$	6,681	$	34

Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the Condensed Statement of Current and Retained Earnings.
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
Represented the amount of unrealized gains or losses for the period included in earnings.
Represented derivative assets net of derivative liabilities and included cash accruals of $3 million not reflected in the fair value hierarchy table.
Gains included in net realized/unrealized gains (losses) included in earnings were offset by the earnings effects from the underlying items that were economically hedged. See Note 11.

Changes in Level 3 Instruments for the Three Months Ended September 30, 2010

(In millions)						Net realized/										Net change
						unrealized										in unrealized
						gains (losses)										gains (losses)
			Net realized/			included in										relating to
			unrealized			accumulated		Purchases,			Transfers					instruments
	Balance at		gains(losses)			other		sales			in and/or			Balance at		still held at
	July 1,		included in			comprehensive		and			out of			September 30,		September 30,
	2010		earnings		(a)	income		settlements			Level 3		(b)	2010		2010		(c)

Investment securities
Debt
U.S. corporate	$	1,632	$	12		$	84		$	(66)	$	–		$	1,662	$	–
State and municipal		238		–			(48)			(9)		–			181		–
Residential
mortgage-backed		46		–			5			–		(9)			42		–
Commercial
mortgage-backed		48		–			–			–		–			48		–
Asset-backed		1,461		(1)			11			507		(5)			1,973		–
Corporate - non-U.S.		841		7			23			(9)		(10)			852		–
Government
- non-U.S.		115		–			5			–		–			120		–
U.S. government and
federal agency		–		–			–			–		–			–		–
Retained interests		41		1			1			(2)		–			41		–
Equity
Available-for-sale		15		–			1			–		–			16		–
Trading		–		–			–			–		–			–		–
Derivatives(d)(e)		224		51			12			(37)		148			398		47
Other		419		4			22			(3)		–			442		–
Total	$	5,080	$	74		$	116		$	381	$	124		$	5,775	$	47

Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the Condensed Statement of Current and Retained Earnings.
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
Represented the amount of unrealized gains or losses for the period included in earnings.
Represented derivative assets net of derivative liabilities and included cash accruals of $34 million not reflected in the fair value hierarchy table.
Gains included in net realized/unrealized gains (losses) included in earnings were offset by the earnings effects from the underlying items that were economically hedged. See Note 11.

Changes in Level 3 Instruments for the Nine Months Ended September 30, 2011

																						Net
(In millions)																						change in
						Net realized/																unrealized
			Net			unrealized																gains
			realized/			gains (losses)																(losses)
			unrealized			included in																relating to
			gains			accumulated																instruments
	Balance at		(losses)			other								Transfers			Transfers			Balance at		still held at
	January 1,		included in			comprehensive								into			out of			September 30,		September 30,
	2011		earnings		(a)	income		Purchases		Sales		Settlements		Level 3		(b)	Level 3		(b)	2011		2011		(c)

Investment securities
Debt
U.S. corporate	$	1,697	$	63		$	(154)	$	507	$	(180)	$	(31)	$	120		$	(2)		$	2,020	$	0
State and municipal		182		0			(3)		4		0		(8)		0			(131)			44		0
Residential
mortgage-backed		45		0			0		0		0		0		0			(18)			27		0
Commercial
mortgage-backed		48		0			0		0		0		0		0			(48)			0		0
Asset-backed		2,496		(3)			(8)		1,049		(166)		(10)		0			(498)			2,860		0
Corporate – non-U.S.		961		(32)			18		12		(31)		(39)		71			(4)			956		0
Government
– non-U.S.		128		(17)			(15)		27		0		(13)		107			(140)			77		0
U.S. government and
federal agency		0		0			0		0		0		0		0			0			0		0
Retained interests		39		(19)			24		1		(4)		(4)		0			0			37		0
Equity
Available-for-sale		18		0			(1)		0		0		0		2			(3)			16
Trading		0		0			0		0		0		0		0			0			0		0
Derivatives(d)(e)		227		86			4		2		0		(191)		0			6			134		67
Other		450		2			14		145		(95)		(6)		0			0			510		0
Total	$	6,291	$	80		$	(121)	$	1,747	$	(476)	$	(302)	$	300		$	(838)		$	6,681	$	67

Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the Condensed Statement of Current and Retained Earnings.
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
Represented the amount of unrealized gains or losses for the period included in earnings.
Represented derivative assets net of derivative liabilities and included cash accruals of $3 million not reflected in the fair value hierarchy table.
Gains (losses) included in net realized/unrealized gains (losses) included in earnings were offset by the earnings effects from the underlying items that were economically hedged. See Note 11.

Changes in Level 3 Instruments for the Nine Months Ended September 30, 2010

(In millions)							Net realized/									Net change
							unrealized									in unrealized
							gains (losses)									gains (losses)
				Net realized/			included in									relating to
				unrealized			accumulated		Purchases,		Transfers					instruments
	Balance at			gains(losses)			other		sales		in and/or			Balance at		still held at
	January 1,			included in			comprehensive		and		out of			September 30,		September 30,
	2010		(a)	earnings		(b)	income		settlements		Level 3		(c)	2010		2010		(d)

Investment securities
Debt
U.S. corporate	$	1,642		$	29		$	129	$	(137)	$	(1)		$	1,662	$	–
State and municipal		173			–			21		(13)		–			181		–
Residential
mortgage-backed		44			–			8		–		(10)			42		–
Commercial
mortgage-backed		1,034			30			(3)		(1,013)		–			48		–
Asset-backed		1,475			5			25		570		(102)			1,973		–
Corporate - non-U.S.		948			2			(51)		179		(226)			852		–
Government
- non-U.S.		138			–			(18)		–		–			120		–
U.S. government and
federal agency		–			–			–		–		–			–		–
Retained interests		45			–			3		(7)		–			41		–
Equity
Available-for-sale		17			–			(1)		–		–			16		–
Trading		–			–			–		–		–			–		–
Derivatives(e)(f)		205			168			10		(84)		99			398		95
Other		480			4			(44)		2		–			442		3
Total	$	6,201		$	238		$	79	$	(503)	$	(240)		$	5,775	$	98

Included an increase of $1,015 million in debt securities, a reduction in retained interests of $8,782 million and a reduction in derivatives of $37 million related to adoption of ASU 2009-16 & 17.
Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the Condensed Statement of Current and Retained Earnings.
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
Represented the amount of unrealized gains or losses for the period included in earnings.
Represented derivative assets net of derivative liabilities and included cash accruals of $34 million not reflected in the fair value hierarchy table.
Gains included in net realized/unrealized gains (losses) included in earnings were offset by the earnings effects from the underlying items that were economically hedged. See Note 11.

Non-Recurring Fair Value Measurements

The following table represents non-recurring fair value amounts (as measured at the time of the adjustment) for those assets remeasured to fair value on a non-recurring basis during the fiscal year and still held at September 30, 2011 and December 31, 2010. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.

	Remeasured during				Remeasured during
	the nine months ended				the year ended
	September 30, 2011				December 31, 2010
(In millions)	Level 2		Level 3		Level 2		Level 3		(b)

Financing receivables and loans held for sale	$	5	$	6,278	$	35	$	6,833
Cost and equity method investments(a)		–		441		–		378
Long-lived assets, including real estate		1,124		3,243		1,023		5,809
Total	$	1,129	$	9,962	$	1,058	$	13,020

Includes the fair value of private equity and real estate funds included in Level 3 of $82 million and $296 million at September 30, 2011 and December 31, 2010, respectively.
During 2010, our retained investment in Regency, a formerly consolidated subsidiary, was remeasured to a Level 1 fair value of $549 million.

The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and still held at September 30, 2011 and 2010.

	Three months ended September 30,				Nine months ended September 30,
(In millions)	2011		2010		2011		2010

Financing receivables and loans held for sale	$	(265)	$	(512)	$	(756)	$	(1,519)
Cost and equity method investments(a)		(84)		(44)		(254)		(117)
Long-lived assets, including real estate(b)		(366)		(867)		(1,266)		(2,184)
Retained investments in formerly consolidated subsidiaries		–		–		–		109
Total	$	(715)	$	(1,423)	$	(2,276)	$	(3,711)

Includes fair value adjustments associated with private equity and real estate funds of $(3) million and $(14) million in the three months ended September 30, 2011 and 2010, respectively, and $(16) million and $(40) million in the nine months ended September 30, 2011 and 2010, respectively.
Includes impairments related to real estate equity properties and investments recorded in operating and administrative expenses of $223 million and $492 million in the three months ended September 30, 2011 and 2010, respectively, and $999 million and $1,595 million in the nine months ended September 30, 2011 and 2010, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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