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Securities

3 Months Ended

Mar. 31, 2012

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.


March 31, 2012	Amortized Cost		Non-Credit Loss Component of OTTI Securities		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury	$	20,101	$	-	$	411	$	(143	)	$	20,369
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities		38		-		1		-			39
Direct agency obligations		2,954		-		305		(1	)		3,258
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		15,414		-		635		(5	)		16,044
Collateralized mortgage obligations		5,236		-		162		-			5,398
Direct agency obligations		1		-		-		-			1
Obligations of U.S. states and political subdivisions		549		-		35		-			584
Asset backed securities collateralized by:
Residential mortgages		5		-		-		-			5
Commercial mortgages		359		-		7		(1	)		365
Home equity		354		-		-		(89	)		265
Student loans		10		-		-		(1	)		9
Other		102		-		-		(17	)		85
Corporate and other domestic debt securities⁽²⁾		241		-		2		-			243
Foreign debt securities⁽²⁾⁽⁵⁾		6,737		-		30		(74	)		6,693
Equity securities⁽³⁾		132		-		19		-			151

Total available-for-sale securities	$	52,233	$	-	$	1,607	$	(331	)	$	53,509

Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽⁴⁾
Mortgage-backed securities	$	1,365	$	-	$	183	$	-		$	1,548
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		76		-		13		-			89
Collateralized mortgage obligations		300		-		48		-			348
Obligations of U.S. states and political subdivisions		50		-		3		-			53
Asset backed securities collateralized by residential mortgages		158		-		10		(1	)		167

Total held-to-maturity securities	$	1,949	$	-	$	257	$	(1	)	$	2,205


December 31, 2011	Amortized Cost		Non-Credit Loss Component of OTTI Securities		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Securities available-for-sale:
U.S. Treasury	$	18,199	$	-	$	498	$	(121	)	$	18,576
U.S. Government sponsored enterprises:⁽¹⁾
Mortgage-backed securities		40		-		1		-			41
Direct agency obligations		2,501		-		352		-			2,853
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		15,357		-		728		(3	)		16,082
Collateralized mortgage obligations		6,881		-		177		(3	)		7,055
Direct agency obligations		2		-		-		-			2
Obligations of U.S. states and political subdivisions		566		-		35		(1	)		600
Asset backed securities collateralized by:
Residential mortgages		6		-		-		(1	)		5
Commercial mortgages		444		-		9		(2	)		451
Home equity		369		-		-		(99	)		270
Student loans		13		-		-		(1	)		12
Other		102		-		-		(22	)		80
Corporate and other domestic debt securities⁽²⁾		541		-		3		-			544
Foreign debt securities⁽²⁾⁽⁵⁾		6,640		-		27		(97	)		6,570
Equity securities⁽³⁾		130		-		10		-			140

Total available-for-sale securities	$	51,791	$	-	$	1,840	$	(350	)	$	53,281

Securities held-to-maturity:
U.S. Government sponsored enterprises:⁽⁴⁾
Mortgage-backed securities	$	1,421	$	-	$	195	$	-		$	1,616
U.S. Government agency issued or guaranteed:
Mortgage-backed securities		79		-		13		-			92
Collateralized mortgage obligations		308		-		44		-			352
Obligations of U.S. states and political subdivisions		61		-		3		-			64
Asset backed securities collateralized by residential mortgages		166		-		9		(1	)		174

Total held-to-maturity securities	$	2,035	$	-	$	264	$	(1	)	$	2,298

⁽¹⁾	Includes securities at amortized cost of $24 million and $27 million issued or guaranteed by the FNMA at March 31, 2012 and December 31, 2011, respectively, and $14 million and $17 million issued or guaranteed by FHLMC at March 31, 2012 and December 31, 2011, respectively.

⁽²⁾

At March 31, 2012, other domestic debt securities included $216 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. At December 31, 2011, other domestic debt securities included $516 million of securities at amortized cost fully backed by the FDIC and foreign debt securities consisted of $2.7 billion of securities fully backed by foreign governments.

⁽³⁾	Includes preferred equity securities at amortized cost issued by FNMA of $2 million at March 31, 2012 and December 31, 2011. Balances at March 31, 2012 and December 31, 2011 reflect cumulative other-than-temporary impairment charges of $203 million.

⁽⁴⁾	Includes securities at amortized cost of $575 million and $591 million issued or guaranteed by FNMA at March 31, 2012 and December 31, 2011, respectively, and $791 million and $830 million issued and guaranteed by FHLMC at March 31, 2012 and December 31, 2011, respectively.

⁽⁵⁾	There were no foreign debt securities issued by the governments of Greece, Ireland, Italy, Portugal or Spain at either March 31, 2012 or December 31, 2011.

A summary of gross unrealized losses and related fair values as of March 31, 2012 and December 31, 2011, classified as to the length of time the losses have existed as follows:


	One Year or Less							Greater Than One Year
March 31, 2012	Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury		16	$	(27	)	$	8,711		12	$	(116	)	$	1,887
U.S. Government sponsored enterprises		7		(1	)		287		17		-			9
U.S. Government agency issued or guaranteed		28		(5	)		958		1		-			3
Obligations of U.S. states and political subdivisions		2		-			9		1		-			7
Asset backed securities		4		-			68		20		(108	)		376
Foreign debt securities		9		(74	)		3,897		-		-			-

Securities available-for-sale		66	$	(107	)	$	13,930		51	$	(224	)	$	2,282

Securities held-to-maturity:
U.S. Government sponsored enterprises		7	$	-		$	-		55	$	-		$	-
U.S. Government agency issued or guaranteed		18		-			-		1,048		-			3
Obligations of U.S. states and political subdivisions		4		-			2		2		-			1
Asset backed securities		-		-			-		2		(1	)		6

Securities held-to-maturity		29	$	-		$	2		1,107	$	(1	)	$	10


	One Year or Less							Greater Than One Year
December 31, 2011	Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment		Number of Securities		Gross Unrealized Losses			Aggregate Fair Value of Investment
	(dollars are in millions)
Securities available-for-sale:
U.S. Treasury		5	$	(1	)	$	4,978		12	$	(120	)	$	2,592
U.S. Government sponsored enterprises		6		-			8		15		-			9
U.S. Government agency issued or guaranteed		14		(6	)		833		2		-			4
Obligations of U.S. states and political subdivisions		3		(1	)		20		3		-			25
Asset backed securities		2		-			45		22		(125	)		387
Foreign debt securities		15		(97	)		4,223		-		-			-

Securities available-for-sale		45	$	(105	)	$	10,107		54	$	(245	)	$	3,017

Securities held-to-maturity:
U.S. Government sponsored enterprises		47	$	-		$	-		11	$	-		$	-
U.S. Government agency issued or guaranteed		629		-			2		463		-			1
Obligations of U.S. states and political subdivisions		2		-			-		4		-			2
Asset backed securities		-		-			-		4		(1	)		14

Securities held-to-maturity		678	$	-		$	2		482	$	(1	)	$	17

Net unrealized gains decreased within the available-for-sale portfolio in the first three months of 2012 primarily due to an increase in interest rates on U.S. Treasury securities since December 31, 2011. 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 months ended March 31, 2012 and 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. Changes in the non-credit portion during 2011 represented a reversal of a portion of previously recorded impairment losses that were recognized in other comprehensive income.

We do not consider any securities to be other-than-temporarily impaired at March 31, 2012 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, 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 84 percent of total available-for-sale and held-to-maturity securities as of both March 31, 2012 and December 31, 2011, 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 has been slow;

•

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

•

A lack of 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 despite recent improvement and although consumer confidence is improving, it 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.

For the three months ended March 31, 2012 and 2011 there were no other-than-temporary impairment losses recognized related to credit loss. At March 31, 2012 and 2011, there were no remaining non-credit component unrealized loss amounts recognized.

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 March 31,	2012		2011
	(in millions)
Credit losses at the beginning of the period	$	-	$	36
Reduction for credit losses previously recognized on sold securities		-		(4	)
Reduction for credit losses previously recognized on held to maturity securities due to deconsolidation of VIE		-		(31	)

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

At March 31, 2012, we held 35 individual asset-backed securities in the available-for-sale portfolio, of which 9 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $350 million of the total aggregate fair value of asset-backed securities of $729 million at March 31, 2012. The gross unrealized losses on these securities were $106 million at March 31, 2012. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of March 31, 2012 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 $116 million. No security wrapped by a below investment grade monoline insurance company was deemed to be other-than-temporarily impaired at March 31, 2012.

At December 31, 2011, we held 45 individual asset-backed securities in the available-for-sale portfolio, of which 9 were also wrapped by a monoline insurance company. The asset-backed securities backed by a monoline wrap comprised $349 million of the total aggregate fair value of asset-backed securities of $818 million at December 31, 2011. The gross unrealized losses on these securities were $121 million at December 31, 2011. We did not take into consideration the value of the monoline wrap of any non-investment grade monoline insurers as of December 31, 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 $154 million. One security wrapped by a below investment grade monoline insurance company with an aggregate fair value of less than $1 million was deemed to be other-than-temporarily impaired at December 31, 2011.

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 securities.


	Gross Realized Gains		Gross Realized (Losses)			Net Realized Gains
	(in millions)
Three months ended March 31, 2012:
Securities available-for-sale	$	70	$	(40	)	$	30
Three months ended March 31, 2011:
Securities available-for-sale	$	82	$	(38	)	$	44

The amortized cost and fair values of securities available-for-sale and securities held-to-maturity at March 31, 2012, 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 March 31, 2012, together with the approximate 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 March 31, 2012.


	Within One Year					After One But Within Five Years					After Five But Within Ten Years					After Ten Years
As of March 31, 2012	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(dollars are in millions)
Available-for-sale:
U.S. Treasury	$	-		-	%	$	13,420		.55	%	$	2,800		2.31	%	$	3,881		3.30	%
U.S. Government sponsored enterprises		-		-			50		.39			2,344		3.75			598		3.84
U.S. Government agency issued or guaranteed		1		.10			1		5.27			86		2.10			20,563		3.42
Obligations of U.S. states and political subdivisions		-		-			17		4.21			286		4.23			246		4.53
Asset backed securities		16		5.64			-		-			23		.69			791		3.18
Other domestic debt securities		216		.72			-		-			-		-			25		3.90
Foreign debt securities		1,435		3.19			5,302		1.99			-		-			-		-

Total amortized cost	$	1,668		2.89	%	$	18,790		0.96	%	$	5,539		3.01	%	$	26,104		3.42	%

Total fair value	$	1,672		-		$	18,767				$	5,993				$	26,926

Held-to-maturity:
U.S. Government sponsored enterprises	$	1		8.07	%	$	11		7.93	%	$	2		7.08	%	$	1,351		6.17	%
U.S. Government agency issued or guaranteed		-		-			1		7.61			4		7.65			371		6.52
Obligations of U.S. states and political subdivisions		5		5.41			17		5.41			10		4.59			18		4.81
Asset backed securities		-		-			-		-			-		-			158		6.24

Total amortized cost	$	6		5.79	%	$	29		6.42	%	$	16		5.67	%	$	1,898		6.23	%

Total fair value	$	5				$	31				$	16				$	2,153

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 March 31, 2012 and December 31, 2011.