Securities

9 Months Ended

Sep. 30, 2011

5. Securities

The amortized cost and fair value of the securities available-for-sale and securities held to maturity are summarized in the following tables.


			Non-Credit
			Loss
			Component of
	Amortized		OTTI		Unrealized		Unrealized			Fair
September 30, 2011	Cost		Securities		Gains		Losses			Value

	(in millions)

Securities available-for-sale:
U.S. Treasury	$	17,664	$	-	$	530	$	(178	)	$	18,016
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities		41		-		1		-			42
Direct agency obligations		2,465		-		359		(1	)		2,823
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		15,096		-		719		(1	)		15,814
Collateralized mortgage obligations		6,670		-		193		-			6,863
Direct agency obligations		2		-		-		-			2
Obligations of U.S. states and political subdivisions		568		-		29		(1	)		596
Asset backed securities collateralized by:
Residential mortgages		13		-		1		(3	)		11
Commercial mortgages		472		-		7		(1	)		478
Home equity		397		-		-		(104	)		293
Student loans		24		-		-		(1	)		23
Other		116		-		-		(21	)		95
Corporate and other domestic debt securities⁽²⁾		600		-		4		-			604
Foreign debt securities⁽²⁾⁽⁶⁾		6,992		-		42		(79	)		6,955
Equity securities⁽³⁾		130		-		13		-			143

Total available-for-sale securities	$	51,250	$	-	$	1,898	$	(390	)	$	52,758

Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽⁴⁾
Mortgage-backed securities	$	1,485	$	-	$	205	$	-		$	1,690
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		83		-		14		-			97
Collateralized mortgage obligations		313		-		46		-			359
Obligations of U.S. states and political subdivisions		68		-		3		-			71
Asset backed securities collateralized by:
Residential mortgages		174		-		10		(1	)		183

Total held-to-maturity securities	$	2,123	$	-	$	278	$	(1	)	$	2,400


			Non-Credit
			Loss
			Component of
	Amortized		OTTI			Unrealized		Unrealized			Fair
December 31, 2010	Cost		Securities			Gains		Losses			Value

	(in millions)

Securities available-for-sale:
U.S. Treasury	$	19,336	$	-		$	139	$	(378	)	$	19,097
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities		47		-			-		(1	)		46
Direct agency obligations		2,115		-			79		(9	)		2,185
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		11,237		-			252		(27	)		11,462
Collateralized mortgage obligations		7,566		-			160		(52	)		7,674
Direct agency obligations		19		-			-		(1	)		18
Obligations of U.S. states and political subdivisions		571		-			13		(5	)		579
Asset backed securities collateralized by:
Residential mortgages		13		-			-		(2	)		11
Commercial mortgages		537		-			17		(2	)		552
Home equity		464		(1	)		-		(111	)		352
Student loans		29		-			-		(2	)		27
Other		120		-			1		(17	)		104
Corporate and other domestic debt securities⁽²⁾		676		-			7		-			683
Foreign debt securities⁽²⁾⁽⁶⁾		2,552		-			53		-			2,605
Equity securities⁽³⁾		126		-			2		-			128

Total available-for-sale securities	$	45,408	$	(1	)	$	723	$	(607	)	$	45,523

Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽⁴⁾
Mortgage-backed securities	$	1,586	$	-		$	151	$	-		$	1,737
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		94		-			15		-			109
Collateralized mortgage obligations		327		-			36		-			363
Obligations of U.S. states and political subdivisions		111		-			4		(1	)		114
Asset backed securities collateralized by:
Residential mortgages		191		-			8		(3	)		196
Asset-backed securities (predominantly credit card) and other debt securities held by consolidated VIE⁽⁵⁾		1,034		(153	)		-		-			881

Total held-to-maturity securities	$	3,343	$	(153	)	$	214	$	(4	)	$	3,400


⁽¹⁾		Includes securities at amortized cost of $26 million and $30 million issued or guaranteed by the FNMA at September 30, 2011 and December 31, 2010, respectively, and $15 million and $17 million issued or guaranteed by FHLMC at September 30, 2011 and December 31, 2010, respectively.

⁽²⁾		At September 30, 2011, other domestic debt securities included $575 million of securities at amortized cost fully backed by the Federal Deposit Insurance Corporation (“FDIC”) and foreign debt securities consisted of $2.4 billion of securities fully backed by foreign governments. The remainder of foreign debt securities represents foreign bank or corporate debt. At December 31, 2010, other domestic debt securities included $676 million of securities at amortized cost fully backed by the FDIC and foreign debt securities consisted of $2.2 billion of securities fully backed by foreign governments. The remainder of foreign debt securities represents foreign bank or corporate debt.

⁽³⁾		Includes preferred equity securities at amortized cost issued by FNMA of $2 million at September 30, 2011 and December 31, 2010. Balances at September 30, 2011 and December 31, 2010 reflect cumulative other-than-temporary impairment charges of $203 million.

⁽⁴⁾		Includes securities at amortized cost of $610 million and $622 million issued or guaranteed by FNMA at September 30, 2011 and December 31, 2010, respectively, and $875 million and $964 million issued and guaranteed by FHLMC at September 30, 2011 and December 31, 2010, respectively.

⁽⁵⁾		Relates to securities held by Bryant Park Funding LLC, a variable interest entity which was consolidated at December 31, 2010. See Note 18, “Variable Interest Entities” for additional information.

⁽⁶⁾		There were no foreign debt securities issued by the governments of Portugal, Ireland, Italy, Greece or Spain at September 30, 2011 and December 31, 2010.

A summary of gross unrealized losses and related fair values as of September 30, 2011 and December 31, 2010, classified as to the length of time the losses have existed follows:


	One Year or Less							Greater Than One Year
			Gross			Aggregate				Gross			Aggregate
	Number of		Unrealized			Fair Value		Number of		Unrealized			Fair Value
September 30, 2011	Securities		Losses			of Investment		Securities		Losses			of Investment

	(dollars are in millions)

Securities available-for-sale:
U.S. Treasury		20	$	(178	)	$	6,628		-	$	-		$	-
U.S. Government sponsored enterprises		6		-			76		17		(1	)		9
U.S. Government agency issued or guaranteed		36		(1	)		489		2		-			4
Obligations of U.S. states and political subdivisions		5		(1	)		28		2		-			19
Asset backed securities		-		-			-		50		(130	)		428
Foreign debt securities		11		(79	)		4,245		-		-			-
Equity securities		1		-			-		-		-			-

Securities available-for-sale		79	$	(259	)	$	11,466		71	$	(131	)	$	460

Securities held-to-maturity:
U.S. Government sponsored enterprises		20	$	-		$	-		3	$	-		$	-
U.S. Government agency issued or guaranteed		681		-			2		5		-			-
Obligations of U.S. states and political subdivisions		10		-			4		7		-			3
Asset backed securities		-		-			-		4		(1	)		14

Securities held-to-maturity		711	$	-		$	6		19	$	(1	)	$	17


	One Year or Less							Greater Than One Year
	Number		Gross			Aggregate		Number		Gross			Aggregate
	of		Unrealized			Fair Value		of		Unrealized			Fair Value
December 31, 2010	Securities		Losses			of Investment		Securities		Losses			of Investment

	(dollars are in millions)

Securities available-for-sale:
U.S. Treasury		43	$	(378	)	$	10,034		-	$	-		$	-
U.S. Government sponsored enterprises		14		(9	)		131		13		(1	)		10
U.S. Government agency issued or guaranteed		70		(80	)		4,409		2		-			2
Obligations of U.S. states and political subdivisions		27		(3	)		127		5		(2	)		36
Asset backed securities		3		-			-		51		(133	)		506
Corporate and other domestic debt securities		3		-			200		-		-			-
Foreign debt securities		1		-			84		1		-			25

Securities available-for-sale		161	$	(470	)	$	14,985		72	$	(136	)	$	579

Securities held-to-maturity:
U.S. Government sponsored enterprises		21	$	-		$	-		1	$	-		$	-
U.S. Government agency issued or guaranteed		570		-			2		2		-			-
Obligations of U.S. states and political subdivisions		14		-			7		12		(1	)		14
Asset backed securities		-		-			-		6		(3	)		44

Securities held-to-maturity		605	$	-		$	9		21	$	(4	)	$	58

Gross unrealized losses decreased and gross unrealized gains increased within the available-for-sale portfolio overall in the first nine months of 2011 primarily due to decreases in interest rates since December 31, 2010, particularly during the third quarter due to market conditions. In addition, rates rose significantly toward the end of 2010 driven by inflationary fears and uncertainty about the quantity and timing of the Federal Reserve’s bond buying program. We have reviewed the securities for which there is an unrealized loss in accordance with our accounting policies for other-than-temporary impairment. During the three and nine months ended September 30, 2011, none of our debt securities were determined to have either initial other-than-temporary impairment or changes to previous other-than-temporary impairment estimates relating to the credit component and changes in the non-credit portion for the nine month period ended September 30, 2011 represent a reversal of a portion of previously recorded impairment losses that were recognized in other comprehensive income. During the three and nine months ended September 30, 2010, 5 and 38 debt securities were determined to have either initial other-than-temporary impairment or changes to previous other-than-temporary impairment estimates. The credit loss component of the applicable debt securities totaling $4 million and $45 million was recorded as a component of net other-than-temporary impairment losses in the accompanying consolidated statement of income for the three and nine months ended September 30, 2010, respectively, while there was no significant losses in the non-credit component of such impaired securities reflected in accumulated other comprehensive income (loss) and changes in the non-credit portion for the nine month period ended September 30, 2010 primarily represent a net reversal of a portion of previously recorded impairment losses recognized in other comprehensive income.

Except as noted above, we do not consider any other securities to be other-than-temporarily impaired as we expect to recover the amortized cost basis of these securities and we neither intend nor expect to be required to sell these securities prior to recovery, even if that equates to holding securities until their individual maturities. However, additional other-than-temporary impairments may occur in future periods if the credit quality of the securities deteriorates.

On-going Assessment for Other-Than-Temporary Impairment On a quarterly basis, we perform an assessment to determine whether there have been any events or economic circumstances to indicate that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if its fair value is less than its amortized cost at the reporting date. If impaired, we assess whether the unrealized loss is other-than-temporary.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized, net of tax, in other comprehensive income provided we do not intend to sell the underlying debt security and it is more-likely-than-not that we would not have to sell the debt security prior to recovery.

For all securities held in the available-for-sale or held-to-maturity portfolio for which unrealized losses have existed for a period of time, we do not have the intention to sell and believe we will not be required to sell the securities for contractual, regulatory or liquidity reasons as of the reporting date. As debt securities issued by U.S. Treasury, U.S. Government agencies and government sponsored entities accounted for 83 percent and 89 percent of total available-for-sale and held-to-maturity securities as of September 30, 2011 and December 31, 2010, respectively, our assessment for credit loss was concentrated on private label asset-backed securities. Substantially all of the private label asset-backed securities are supported by residential mortgages, home equity loans or commercial mortgages. Our assessment for credit loss was concentrated on this particular asset class because of the following inherent risk factors:


	•	The recovery of the U.S. economy remains sluggish;

	•	The continued weakness in the U.S. housing markets with high levels of delinquency and foreclosure;

	•	A lack of significant traction in government sponsored programs in loan modifications;

	•	A lack of refinancing activities within certain segments of the mortgage market, even at the current low interest rate environment, and the re-default rate for refinanced loans;

	•	The unemployment rate remains high and consumer confidence remains low compared to historical levels;

	•	The decline in the occupancy rate in commercial properties; and

	•	The severity and duration of unrealized loss.

In determining whether a credit loss exists and the period over which the debt security is expected to recover, we considered the following factors:


	•	The length of time and the extent to which the fair value has been less than the amortized cost basis;

	•	The level of credit enhancement provided by the structure, which includes but is not limited to credit subordination positions, over collateralization, protective triggers and financial guarantees provided by monoline wraps;

	•	Changes in the near term prospects of the issuer or underlying collateral of a security such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;

	•	The level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

	•	Any adverse change to the credit conditions of the issuer, the monoline insurer or the security such as credit downgrades by the rating agencies.

We use a standard valuation model to measure the credit loss for available-for-sale and held-to-maturity securities. The valuation model captures the composition of the underlying collateral and the cash flow structure of the security. Management develops inputs to the model based on external analyst reports and forecasts and internal credit assessments. Significant inputs to the model include delinquencies, collateral types and related contractual features, estimated rates of default, loss given default and prepayment assumptions. Using the inputs, the model estimates cash flows generated from the underlying collateral and distributes those cash flows to respective tranches of securities considering credit subordination and other credit enhancement features. The projected future cash flows attributable to the debt security held are discounted using the effective interest rates determined at the original acquisition date if the security bears a fixed rate of return. The discount rate is adjusted for the floating index rate for securities which bear a variable rate of return, such as LIBOR-based instruments.

The amortized cost and fair value of those asset-backed securities with unrealized loss of more than 12 months for which no other-than-temporary-impairment has been recognized at September 30, 2011 and December 31, 2010 are as follows:


	Balance as of September 30, 2011
			Unrealized Losses for
	Amortized Cost		More Than 12 Months			Fair Value

	(in millions)

Available-for-sale:
Asset-backed securities:
Residential mortgages	$	10	$	(3	)	$	7
Commercial mortgages		24		(1	)		23
Home equity loans		397		(104	)		293
Student loans		24		(1	)		23
Other		103		(21	)		82

Subtotal		558		(130	)		428
Held-to-maturity classification:
Asset-backed securities:
Residential mortgages		15		(1	)		14

Total	$	573	$	(131	)	$	442


	Balance as of December 31, 2010
			Unrealized Losses for
	Amortized Cost		More Than 12 Months			Fair Value

	(in millions)

Available-for-sale:
Asset-backed securities:
Residential mortgages	$	3	$	(1	)	$	2
Commercial mortgages		39		(2	)		37
Home equity loans		457		(112	)		345
Student loans		29		(2	)		27
Other		103		(16	)		87

Subtotal		631		(133	)		498
Held-to-maturity classification:
Asset-backed securities:
Residential mortgages		47		(3	)		44

Total	$	678	$	(136	)	$	542

Although the fair value of a particular security is below its amortized cost for more than 12 months, it does not necessarily result in a credit loss and hence other-than-temporary impairment. The decline in fair value may be caused by, among other things, the illiquidity of the market. To the extent we do not intend to sell the debt security and it is more-likely-than-not we will not be required to sell the security before the recovery of the amortized cost basis, no other-than-temporary impairment is deemed to have occurred.

For the nine months ended September 30, 2011 there were no other-than-temporary impairment losses recognized related to credit loss. At September 30, 2011, there are no remaining non-credit component unrealized loss amounts recognized. The excess of amortized cost over the present value of expected future cash flows recognized during the nine months ended September 30, 2010 on our other-than-temporarily impaired debt securities, which represents the credit loss associated with these securities, was $45 million. The excess of the present value of expected future cash flows over fair value, representing the non-credit component of the unrealized loss associated with all other-than-temporarily impaired securities, was $154 million at December 31, 2010. Since we did not have the intention to sell the securities and had sufficient capital and liquidity to hold these securities until a full recovery of the fair value occurs, only the credit loss component was reflected in the consolidated statement of income. The non-credit component of the unrealized loss was recorded, net of taxes, in other comprehensive income (loss).

The following table summarizes the roll-forward of credit losses on debt securities that were other-than-temporarily impaired which were recognized in income:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011		2010			2011			2010

	(in millions)

Credit losses at the beginning of the period	$	1	$	47		$	36		$	81
Credit losses related to securities for which an other-than-temporary impairment was not previously recognized		-		-			-			20
Increase in credit losses for which an other-than-temporary impairment was previously recognized		-		4			-			25
Reduction of credit losses previously recognized on sold securities		-		(25	)		(4	)		(75	)
Reduction of credit losses previously recognized on held to maturity securities due to deconsolidation of VIE		-		-			(31	)		-
Reductions of credit losses for increases in cash flows expected to be collected that are recognized over the remaining life of the security		-		(1	)		-			(26	)

Ending balance of credit losses on debt securities held for which a portion of an other-than-temporary impairment may have been recognized in other comprehensive income (loss)	$	1	$	25		$	1		$	25

At September 30, 2011, we held 76 individual asset-backed securities in the available-for-sale portfolio, of which 23 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $373 million of the total aggregate fair value of asset-backed securities of $900 million at September 30, 2011. The gross unrealized losses on these monoline securities were $124 million at September 30, 2011. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of September 30, 2011 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment with a fair value of $126 million. One security wrapped by a below investment grade monoline insurance company with an aggregate fair value of $1 million was deemed to be other-than-temporarily impaired at September 30, 2011.

At December 31, 2010, we held 78 individual asset-backed securities in the available-for-sale portfolio, of which 24 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $437 million of the total aggregate fair value of asset-backed securities of $1.0 billion at December 31, 2010. The gross unrealized losses on these securities were $127 million at December 31, 2010. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 2010 and, therefore, we only considered the financial guarantee of monoline insurers on securities for purposes of evaluating other-than-temporary impairment with a fair value of $156 million. Two securities wrapped by below investment grade monoline insurance companies with an aggregate fair value of $5 million were deemed to be other-than-temporarily impaired at December 31, 2010.

As discussed above, certain asset-backed securities have an embedded financial guarantee provided by monoline insurers. Because the financial guarantee is not a separate and distinct contract from the asset-backed security, they are considered as a single unit of account for fair value measurement and impairment assessment purposes. The monoline insurers are regulated by the insurance commissioners of the relevant states and certain monoline insurers that write the financial guarantee contracts are public companies. In evaluating the extent of our reliance on investment grade monoline insurance companies, consideration is given to our assessment of the creditworthiness of the monoline and other market factors. We perform both a credit as well as a liquidity analysis on the monoline insurers each quarter. Our analysis also compares market-based credit default spreads, when available, to assess the appropriateness of our monoline insurer’s creditworthiness. Based on the public information available, including the regulatory reviews and actions undertaken by the state insurance commissions and the published financial results, we determine the degree of reliance to be placed on the financial guarantee policy in estimating the cash flows to be collected for the purpose of recognizing and measuring impairment loss.

A credit downgrade to non-investment grade is a key but not the only factor in determining the credit risk or the monoline insurer’s ability to fulfill its contractual obligation under the financial guarantee arrangement. Although a monoline may have been down-graded by the credit rating agencies or have been ordered to commute its operations by the insurance commissioners, it may retain the ability and the obligation to continue to pay claims in the near term. We evaluate the short-term liquidity of and the ability to pay claims by the monoline insurers in estimating the amounts of cash flows expected to be collected from specific asset-backed securities for the purpose of assessing and measuring credit loss.

The following table summarizes realized gains and losses on investment securities transactions attributable to available-for-sale and held to maturity securities.


	Gross		Gross			Net
	Realized		Realized			Realized
	Gains		(Losses)			Gains (Losses)

	(in millions)

Three months ended September 30, 2011:
Securities available-for-sale	$	73	$	(24	)	$	49
Securities held to maturity		-		-			-

	$	73	$	(24	)	$	49

Three months ended September 30, 2010:
Securities available-for-sale	$	78	$	(44	)	$	34
Securities held to maturity		-		(1	)		(1	)

	$	78	$	(45	)	$	33

Nine months ended September 30, 2011:
Securities available-for-sale	$	213	$	(108	)	$	105
Securities held to maturity		-		-			-

	$	213	$	(108	)	$	105

Nine months ended September 30, 2010:
Securities available-for-sale	$	148	$	(130	)	$	18
Securities held to maturity		-		(4	)		(4	)

	$	148	$	(134	)	$	14

The amortized cost and fair values of securities available-for-sale and securities held-to-maturity at September 30, 2011, are summarized in the table below by contractual maturity. Expected maturities differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties in certain cases. Securities available-for-sale amounts exclude equity securities as they do not have stated maturities. The table below also reflects the distribution of maturities of debt securities held at September 30, 2011, together with the approximate taxable equivalent yield of the portfolio. The yields shown are calculated by dividing annual interest income, including the accretion of discounts and the amortization of premiums, by the amortized cost of securities outstanding at September 30, 2011. Yields on tax-exempt obligations have been computed on a taxable equivalent basis using applicable statutory tax rates.


						After One					After Five
	Within					But Within					But Within					After Ten
Taxable Equivalent Basis	One Year					Five Years					Ten Years					Years
as of September 30, 2011	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

	(dollars are in millions)

Available-for-sale:
U.S. Treasury	$	503		1.55	%	$	6,443		1.00	%	$	6,226		2.04	%	$	4,492		3.49	%
U.S. Government sponsored enterprises		-		-			-		-			2,029		3.92			477		3.58
U.S. Government agency issued or guaranteed		-		-			1		5.13			36		4.26			21,731		3.65
Obligations of U.S. states and political subdivisions		-		-			1		4.60			309		4.24			258		4.52
Asset backed securities		38		5.79			15		4.18			5		1.46			964		3.16
Corporate and other domestic debt securities		559		1.53			16		0.61			-		-			25		3.90
Foreign debt securities		2,126		2.78			4,855		2.01			11		4.93			-		-

Total amortized cost	$	3,226		2.41	%	$	11,331		1.44	%	$	8,616		2.57	%	$	27,947		3.62	%

Total fair value	$	3,249				$	11,327				$	8,953				$	29,086

Held-to-maturity:
U.S. Government sponsored enterprises	$	-		-	%	$	15		7.95	%	$	2		7.00	%	$	1,468		6.15	%
U.S. Government agency issued or guaranteed		-		-			-		-			5		7.66			391		6.52
Obligations of U.S. states and political subdivisions		8		5.00			18		5.66			15		4.48			27		4.96
Asset backed securities		-		-			-		-			-		-			174		6.19

Total amortized cost	$	8		5.00	%	$	33		6.72	%	$	22		5.64	%	$	2,060		6.20	%

Total fair value	$	8				$	37				$	23				$	2,332

Investments in Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank (“FRB”) stock of $133 million and $483 million, respectively, were included in other assets at September 30, 2011. Investments in FHLB stock and FRB stock of $119 million and $477 million, respectively, were included in other assets at December 31, 2010.