Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

4.   Derivative Financial Instruments

Our risk management strategy, use and accounting of derivatives has not materially changed from that discussed in our 2010 Form 10-K. Please refer to Note 9, “Derivative Financial Instruments” in our 2010 Form 10-K for a full discussion.

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of our derivative instruments at June 30, 2011 and December 31, 2010, and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2011 and 2010.

Impact of Derivatives on Consolidated Balance Sheet

		Cash Flow						Fair Value						Trading						Total
	Hedged Risk	June 30,			Dec. 31,			June 30,			Dec. 31,			June 30,			Dec. 31,			June 30,			Dec. 31,
(Dollars in millions)	Exposure	2011			2010			2011			2010			2011			2010			2011			2010
Fair Values(1)
Derivative Assets
Interest rate swaps	Interest rate	$	—		$	—		$	972		$	967		$	158		$	200		$	1,130		$	1,167
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			2,768			1,925			100			101			2,868			2,026
Other(2)	Interest rate		—			—			—			—			3			26			3			26
Total derivative assets(3)			—			—			3,740			2,892			261			327			4,001			3,219
Derivative Liabilities
Interest rate swaps	Interest rate		(43	)		(75	)		—			—			(291	)		(348	)		(334	)		(423	)
Floor Income Contracts	Interest rate		—			—			—			—			(2,390	)		(1,315	)		(2,390	)		(1,315	)
Cross currency interest rate swaps	Foreign currency and interest rate		—			—			(184	)		(215	)		(1	)		—			(185	)		(215	)
Other(2)	Interest rate		—			—			—			—			—			(1	)		—			(1	)
Total derivative liabilities(3)			(43	)		(75	)		(184	)		(215	)		(2,682	)		(1,664	)		(2,909	)		(1,954	)
Net total derivatives		$	(43	)	$	(75	)	$	3,556		$	2,677		$	(2,421	)	$	(1,337	)	$	1,092		$	1,265

(1)	Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.
(2)	“Other” includes the fair value of Euro-dollar futures contracts, the embedded derivatives in asset-backed financings, and derivatives related to our Total Return Swap Facility. The embedded derivatives are required to be accounted for as derivatives.
(3)	The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:

	Other Assets						Other Liabilities
	June 30,			December 31,			June 30,			December 31,
(Dollars in millions)	2011			2010			2011			2010
Gross position	$	4,001		$	3,219		$	(2,909	)	$	(1,954	)
Impact of master netting agreements		(858	)		(782	)		858			782
Derivative values with impact of master netting agreements (as carried on balance sheet)		3,143			2,437			(2,051	)		(1,172	)
Cash collateral (held) pledged		(1,003	)		(886	)		993			809
Net position	$	2,140		$	1,551		$	(1,058	)	$	(363	)

The above fair values include adjustments for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset position at June 30, 2011 and December 31, 2010 by $77 million and $72 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset position at June 30, 2011 and December 31, 2010 by $112 million and $129 million, respectively.

	Cash Flow				Fair Value				Trading				Total
	June 30,		Dec. 31,		June 30,		Dec. 31,		June 30,		Dec. 31,		June 30,		Dec. 31,
(Dollars in billions)	2011		2010		2011		2010		2011		2010		2011		2010
Notional Values
Interest rate swaps	$	1.1	$	1.6	$	14.0	$	13.5	$	103.1	$	118.9	$	118.2	$	134.0
Floor Income Contracts		—		—		—		—		57.8		39.3		57.8		39.3
Cross currency interest rate swaps		—		—		16.5		17.5		.3		.3		16.8		17.8
Other(1)		—		—		—		—		1.4		1.0		1.4		1.0
Total derivatives	$	1.1	$	1.6	$	30.5	$	31.0	$	162.6	$	159.5	$	194.2	$	192.1

⁽¹⁾ “Other” includes Euro-dollar futures contracts, embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility.

Impact of Derivatives on Consolidated Statements of Income

	Three Months Ended June 30,
													Unrealized
							Realized Gain						Gain
	Unrealized Gain						(Loss)						(Loss)
	(Loss) on						on						on Hedged						Total Gain
	Derivatives(1)(2)						Derivatives(3)						Item(1)						(Loss)
(Dollars in millions)	2011			2010			2011			2010			2011			2010			2011			2010
Fair Value Hedges:
Interest rate swaps	$	203		$	437		$	121		$	129		$	(230	)	$	(475	)	$	94		$	91
Cross currency interest rate swaps		173			(1,733	)		83			81			(299	)		1,800			(43	)		148
Total fair value derivatives		376			(1,296	)		204			210			(529	)		1,325			51			239
Cash Flow Hedges:
Interest rate swaps		—			1			(9	)		(15	)		—			—			(9	)		(14	)
Total cash flow derivatives		—			1			(9	)		(15	)		—			—			(9	)		(14	)
Trading:
Interest rate swaps		54			289			17			(6	)		—			—			71			283
Floor Income Contracts		(277	)		(42	)		(202	)		(222	)		—			—			(479	)		(264	)
Cross currency interest rate swaps		16			33			2			2			—			—			18			35
Other		20			12			13			(1	)		—			—			33			11
Total trading derivatives		(187	)		292			(170	)		(227	)		—			—			(357	)		65
Total		189			(1,003	)		25			(32	)		(529	)		1,325			(315	)		290
Less: realized gains recorded in interest expense		—			—			195			195			—			—			195			195
Gains (losses) on derivative and hedging activities, net	$	189		$	(1,003	)	$	(170	)	$	(227	)	$	(529	)	$	1,325		$	(510	)	$	95

(1)	Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
(2)	Represents ineffectiveness related to cash flow hedges.
(3)	For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

	Six Months Ended June 30,
							Realized Gain						Unrealized
	Unrealized Gain						(Loss)						Gain
	(Loss) on						on						(Loss)						Total Gain
	Derivatives(1)(2)						Derivatives(3)						on Hedged Item(1)						(Loss)
(Dollars in millions)	2011			2010			2011			2010			2011			2010			2011			2010
Fair Value Hedges:
Interest rate swaps	$	5		$	492		$	249		$	249		$	(25	)	$	(538	)	$	229		$	203
Cross currency interest rate swaps		874			(3,081	)		159			182			(1,177	)		3,163			(144	)		264
Total fair value derivatives		879			(2,589	)		408			431			(1,202	)		2,625			85			467
Cash Flow Hedges:
Interest rate swaps		(2	)		—			(23	)		(30	)		—			—			(25	)		(30	)
Total cash flow derivatives		(2	)		—			(23	)		(30	)		—			—			(25	)		(30	)
Trading:
Interest rate swaps		32			400			57			—			—			—			89			400
Floor Income Contracts		(126	)		(23	)		(428	)		(433	)		—			—			(554	)		(456	)
Cross currency interest rate swaps		(1	)		26			4			3			—			—			3			29
Other		23			6			12			(2	)		—			—			35			4
Total trading derivatives		(72	)		409			(355	)		(432	)		—			—			(427	)		(23	)
Total		805			(2,180	)		30			(31	)		(1,202	)		2,625			(367	)		414
Less: realized gains recorded in interest expense		—			—			385			401			—			—			385			401
Gains (losses) on derivative and hedging activities, net	$	805		$	(2,180	)	$	(355	)	$	(432	)	$	(1,202	)	$	2,625		$	(752	)	$	13

(1)	Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.
(2)	Represents ineffectiveness related to cash flow hedges.
(3)	For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
(Dollars in millions)	2011			2010			2011			2010
Total losses on cash flow hedges	$	(3	)	$	(11	)	$	(5	)	$	(26	)
Realized losses reclassified to interest expense(1)(2)(3)		8			10			18			22
Hedge ineffectiveness reclassified to earnings(1)(4)		—			(1	)		1			—
Total change in stockholders’ equity for unrealized gains (losses) on derivatives	$	5		$	(2	)	$	14		$	(4	)

(1)	Amounts included in “Realized gains (losses) on derivatives” in the “Impact of Derivatives on Consolidated Statements of Income” table above.
(2)	Includes net settlement income/expense.
(3)	We expect to reclassify $7 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to amortization of cash flow hedges that were hedging debt instruments that are outstanding as of the reporting date.
(4)	Recorded in “Gains (losses) derivatives and hedging activities, net” in the consolidated statements of income.

Collateral

Collateral held and pledged at June 30, 2011 and December 31, 2010 related to derivative exposures between us and our derivative counterparties are detailed in the following table:

(Dollars in millions)	June 30, 2011		December 31, 2010
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)	$	1,003	$	886
Securities at fair value (not recorded in financial statements)(2)		1,053		585
Total collateral held	$	2,056	$	1,471
Derivative asset at fair value including accrued interest	$	3,465	$	2,540
Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)	$	993	$	809
Securities at fair value (recorded in restricted investments)(3)		13		36
Total collateral pledged	$	1,006	$	845
Derivative liability at fair value including accrued interest and premium receivable	$	933	$	747

(1)	At June 30, 2011 and December 31, 2010, $136 million and $108 million, respectively, were held in restricted cash accounts.
(2)	We do not have the ability to sell or re-pledge these securities. As such, the securities are not recorded in the financial statements.
(3)	Counterparty has the right to sell or re-pledge securities.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $864 million with our counterparties as of the collateral call date. Further downgrades would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts with further downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $215 million and have posted $239 million of collateral to these counterparties. If the credit contingent feature was triggered for these two counterparties and the counterparties exercised their right to terminate, we would not be required to deliver additional assets to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.