Derivative Instruments

6 Months Ended

Jun. 30, 2011

Derivative Instruments [Abstract]

Derivative Instruments

Note 17.   Derivative Instruments

We are exposed to certain risks related to our ongoing business operations. The primary risks managed through the use of derivative instruments are interest rate risk and foreign exchange risk. We do not enter into derivative instruments for speculative purposes. As of June 30, 2011, none of our derivatives were designated as hedging instruments pursuant to GAAP.

We enter into various derivative instruments to manage our exposure to interest rate risk. The objective is to manage interest rate sensitivity by modifying the characteristics of certain assets and liabilities to reduce the adverse effect of changes in interest rates. We primarily use interest rate swaps and basis swaps to manage our interest rate risks.

Interest rate swaps are contracts in which a series of interest rate cash flows, based on a specific notional amount as well as fixed and variable interest rates, are exchanged over a prescribed period. To minimize the economic effect of interest rate fluctuations specific to our fixed rate debt and certain fixed rate loans, we enter into interest rate swap agreements whereby either we pay a fixed interest rate and receive a variable interest rate or we pay a variable interest rate and receive a fixed interest rate over a prescribed period.

We also enter into basis swaps to eliminate risk between our LIBOR-based term debt securitizations and the prime-based loans pledged as collateral for that debt. These basis swaps modify our exposure to interest rate risk typically by converting our prime rate loans to a one-month LIBOR rate. The objective of this swap activity is to protect us from risk that interest collected under the prime rate loans will not be sufficient to service the interest due under the one-month LIBOR-based term debt.

We enter into forward exchange contracts to hedge foreign currency denominated loans we originate against foreign currency fluctuations. The objective is to manage the uncertainty of future foreign exchange rate fluctuations. These forward exchange contracts provide for a fixed exchange rate which has the effect of reducing or eliminating changes to anticipated cash flows to be received from foreign currency-denominated loan transactions as the result of changes to exchange rates.

Derivative instruments expose us to credit risk in the event of nonperformance by counterparties to such agreements. This risk exposure consists primarily of the termination value of agreements where we are in a favorable position. We manage the credit risk associated with various derivative agreements through counterparty credit review and monitoring procedures. We obtain collateral from certain counterparties and monitor all exposure and collateral requirements daily. We continually monitor the fair value of collateral received from counterparties and may request additional collateral from counterparties or return collateral pledged as deemed appropriate. We also posted collateral of $10.0 million related to counterparty requirements for foreign exchange contracts at CapitalSource Bank as of June 30, 2011. Our agreements generally include master netting agreements whereby we are entitled to settle our individual derivative positions with the same counterparty on a net basis upon the occurrence of certain events. As of June 30, 2011, our derivative counterparty exposure was as follows ($ in thousands):

Gross derivative counterparty exposure	$	45,920
Master netting agreements		(28,231	)
Net derivative counterparty exposure	$	17,689

We report our derivatives in our consolidated balance sheets at fair value on a gross basis irrespective of our master netting arrangements. We held $18.1 million of collateral against our derivative instruments that were in an asset position as of June 30, 2011. For derivatives that were in a liability position, we had posted collateral of $51.8 million as of June 30, 2011.

As of June 30, 2011, the notional amounts and fair values of our various derivative instruments as well as their locations in our consolidated balance sheets were as follows:

	June 30, 2011						December 31, 2010
			Fair Value						Fair Value
	Notional Amount		Other Assets		Other Liabilities		Notional Amount		Other Assets		Other Liabilities
	($ in thousands)
Interest rate contracts	$	1,180,562	$	45,876	$	77,257	$	1,287,399	$	41,309	$	77,410
Foreign exchange contracts		34,681		44		927		35,557		—		877
Total	$	1,215,243	$	45,920	$	78,184	$	1,322,956	$	41,309	$	78,287

The gains and losses on our derivative instruments recognized during the three and six months ended June 30, 2011 and 2010 as well as the locations of such gains and losses in our consolidated statements of operations were as follows:

		Gain (Loss) Recognized in Income
		Three Months Ended						Six Months Ended
		June 30,						June 30,
	Location	2011			2010			2011			2010
		($ in thousands)
Interest rate contracts	Loss on derivatives	$	186		$	(4,620	)	$	(616	)	$	(7,323	)
Foreign exchange contracts	Loss on derivatives		(457	)		1,006			(1,533	)		(628	)
Total		$	(271	)	$	(3,614	)	$	(2,149	)	$	(7,951	)