Fair Value Measurement

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENT

Fair value measurement

For a discussion of the Firm’s valuation methodologies for assets, liabilities and lending-related commitments measured at fair value and the fair value hierarchy, see Note 3 on pages 184–198 of JPMorgan Chase’s 2011 Annual Report.

The following table presents the asset and liabilities reported at fair value as of March 31, 2012, and December 31, 2011, by major product category and fair value hierarchy.

Assets and liabilities measured at fair value on a recurring basis
	Fair value hierarchy
March 31, 2012 (in millions)	Level 1(h)		Level 2(h)			Level 3(h)			Netting adjustments			Total fair value
Federal funds sold and securities purchased under resale agreements	$	—	$	26,259		$	—		$	—		$	26,259
Securities borrowed	—		12,519			—			—			12,519
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies(a)	23,458		5,712			79			—			29,249
Residential – nonagency	—		2,753			699			—			3,452
Commercial – nonagency	—		833			1,451			—			2,284
Total mortgage-backed securities	23,458		9,298			2,229			—			34,985
U.S. Treasury and government agencies(a)	20,011		6,948			—			—			26,959
Obligations of U.S. states and municipalities	—		15,809			1,747			—			17,556
Certificates of deposit, bankers’ acceptances and commercial paper	—		4,456			—			—			4,456
Non-U.S. government debt securities	24,780		39,654			81			—			64,515
Corporate debt securities	—		36,309			5,463			—			41,772
Loans(b)	—		21,361			11,144			—			32,505
Asset-backed securities	—		3,939			7,434			—			11,373
Total debt instruments	68,249		137,774			28,098			—			234,121
Equity securities	111,450		3,339			1,248			—			116,037
Physical commodities(c)	11,604		5,565			—			—			17,169
Other	—		2,303			993			—			3,296
Total debt and equity instruments(d)	191,303		148,981			30,339			—			370,623
Derivative receivables:
Interest rate	782		1,259,624			6,129			(1,225,015		)	41,520
Credit	—		114,462			11,796			(120,000		)	6,258
Foreign exchange	718		136,858			4,039			(128,559		)	13,056
Equity	—		44,317			5,054			(40,376		)	8,995
Commodity	367		55,496			2,512			(43,194		)	15,181
Total derivative receivables(e)	1,867		1,610,757			29,530			(1,557,144		)	85,010
Total trading assets	193,170		1,759,738			59,869			(1,557,144		)	455,633
Available-for-sale securities:
Mortgage-backed securities:
U.S. government agencies(a)	90,898		13,420			—			—			104,318
Residential – nonagency	—		77,511			31			—			77,542
Commercial – nonagency	—		11,386			180			—			11,566
Total mortgage-backed securities	90,898		102,317			211			—			193,426
U.S. Treasury and government agencies(a)	8,084		3,683			—			—			11,767
Obligations of U.S. states and municipalities	36		19,048			258			—			19,342
Certificates of deposit	—		3,044			—			—			3,044
Non-U.S. government debt securities	28,559		24,128			—			—			52,687
Corporate debt securities	—		60,395			—			—			60,395
Asset-backed securities:
Collateralized loan obligations	—		—			25,239			—			25,239
Other	—		13,117			209			—			13,326
Equity securities	2,467		38			—			—			2,505
Total available-for-sale securities	130,044		225,770			25,917			—			381,731
Loans	—		522			1,766			—			2,288
Mortgage servicing rights	—		—			8,039			—			8,039
Other assets:
Private equity investments(f)	316		573			6,739			—			7,628
All other	4,867		229			4,397			—			9,493
Total other assets	5,183		802			11,136			—			17,121
Total assets measured at fair value on a recurring basis	$	328,397	$	2,025,610	(g)	$	106,727	(g)	$	(1,557,144	)	$	903,590
Deposits	$	—	$	3,617		$	1,651		$	—		$	5,268
Federal funds purchased and securities loaned or sold under repurchase agreements	—		13,241			—			—			13,241
Other borrowed funds	—		8,920			1,233			—			10,153
Trading liabilities:
Debt and equity instruments(d)	56,596		14,660			273			—			71,529
Derivative payables:
Interest rate	698		1,220,935			2,891			(1,200,289		)	24,235
Credit	—		118,361			6,988			(118,353		)	6,996
Foreign exchange	767		147,519			5,099			(137,851		)	15,534
Equity	—		41,903			7,883			(36,877		)	12,909
Commodity	264		57,108			3,112			(45,391		)	15,093
Total derivative payables(e)	1,729		1,585,826			25,973			(1,538,761		)	74,767
Total trading liabilities	58,325		1,600,486			26,246			(1,538,761		)	146,296
Accounts payable and other liabilities	—		—			46			—			46
Beneficial interests issued by consolidated VIEs	—		160			841			—			1,001
Long-term debt	—		25,920			9,553			—			35,473
Total liabilities measured at fair value on a recurring basis	$	58,325	$	1,652,344		$	39,570		$	(1,538,761	)	$	211,478

	Fair value hierarchy
December 31, 2011 (in millions)	Level 1(h)		Level 2(h)			Level 3(h)			Netting adjustments			Total fair value
Federal funds sold and securities purchased under resale agreements	$	—	$	24,891		$	—		$	—		$	24,891
Securities borrowed	—		15,308			—			—			15,308
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies(a)	27,082		7,801			86			—			34,969
Residential – nonagency	—		2,956			796			—			3,752
Commercial – nonagency	—		870			1,758			—			2,628
Total mortgage-backed securities	27,082		11,627			2,640			—			41,349
U.S. Treasury and government agencies(a)	11,508		8,391			—			—			19,899
Obligations of U.S. states and municipalities	—		15,117			1,619			—			16,736
Certificates of deposit, bankers’ acceptances and commercial paper	—		2,615			—			—			2,615
Non-U.S. government debt securities	18,618		40,080			104			—			58,802
Corporate debt securities	—		33,938			6,373			—			40,311
Loans(b)	—		21,589			12,209			—			33,798
Asset-backed securities	—		2,406			7,965			—			10,371
Total debt instruments	57,208		135,763			30,910			—			223,881
Equity securities	93,799		3,502			1,177			—			98,478
Physical commodities(c)	21,066		4,898			—			—			25,964
Other	—		2,283			880			—			3,163
Total debt and equity instruments(d)	172,073		146,446			32,967			—			351,486
Derivative receivables:
Interest rate	1,324		1,433,469			6,728			(1,395,152		)	46,369
Credit	—		152,569			17,081			(162,966		)	6,684
Foreign exchange	833		162,689			4,641			(150,273		)	17,890
Equity	—		43,604			4,132			(40,943		)	6,793
Commodity	4,561		50,409			2,459			(42,688		)	14,741
Total derivative receivables(e)	6,718		1,842,740			35,041			(1,792,022		)	92,477
Total trading assets	178,791		1,989,186			68,008			(1,792,022		)	443,963
Available-for-sale securities:
Mortgage-backed securities:
U.S. government agencies(a)	92,426		14,681			—			—			107,107
Residential – nonagency	—		67,554			3			—			67,557
Commercial – nonagency	—		10,962			267			—			11,229
Total mortgage-backed securities	92,426		93,197			270			—			185,893
U.S. Treasury and government agencies(a)	3,837		4,514			—			—			8,351
Obligations of U.S. states and municipalities	36		16,246			258			—			16,540
Certificates of deposit	—		3,017			—			—			3,017
Non-U.S. government debt securities	25,381		19,884			—			—			45,265
Corporate debt securities	—		62,176			—			—			62,176
Asset-backed securities:
Collateralized loan obligations	—		116			24,745			—			24,861
Other	—		15,760			213			—			15,973
Equity securities	2,667		38			—			—			2,705
Total available-for-sale securities	124,347		214,948			25,486			—			364,781
Loans	—		450			1,647			—			2,097
Mortgage servicing rights	—		—			7,223			—			7,223
Other assets:
Private equity investments(f)	99		706			6,751			—			7,556
All other	4,336		233			4,374			—			8,943
Total other assets	4,435		939			11,125			—			16,499
Total assets measured at fair value on a recurring basis	$	307,573	$	2,245,722	(g)	$	113,489	(g)	$	(1,792,022	)	$	874,762
Deposits	$	—	$	3,515		$	1,418		$	—		$	4,933
Federal funds purchased and securities loaned or sold under repurchase agreements	—		9,517			—			—			9,517
Other borrowed funds	—		8,069			1,507			—			9,576
Trading liabilities:
Debt and equity instruments(d)	50,830		15,677			211			—			66,718
Derivative payables:
Interest rate	1,537		1,395,113			3,167			(1,371,807		)	28,010
Credit	—		155,772			9,349			(159,511		)	5,610
Foreign exchange	846		159,258			5,904			(148,573		)	17,435
Equity	—		39,129			7,237			(36,711		)	9,655
Commodity	3,114		53,684			3,146			(45,677		)	14,267
Total derivative payables(e)	5,497		1,802,956			28,803			(1,762,279		)	74,977
Total trading liabilities	56,327		1,818,633			29,014			(1,762,279		)	141,695
Accounts payable and other liabilities	—		—			51			—			51
Beneficial interests issued by consolidated VIEs	—		459			791			—			1,250
Long-term debt	—		24,410			10,310			—			34,720
Total liabilities measured at fair value on a recurring basis	$	56,327	$	1,864,603		$	43,091		$	(1,762,279	)	$	201,742

(a) At March 31, 2012, and December 31, 2011, included total U.S. government-sponsored enterprise obligations of $112.9 billion and $122.4 billion respectively, which were predominantly mortgage-related.

(b) At March 31, 2012, and December 31, 2011, included within trading loans were $19.8 billion and $20.1 billion, respectively, of residential first-lien mortgages, and $2.4 billion and $2.0 billion, respectively, of commercial first-lien mortgages. Residential mortgage loans include conforming mortgage loans originated with the intent to sell to U.S. government agencies of $10.8 billion and $11.0 billion, respectively, and reverse mortgages of $3.9 billion and $4.0 billion, respectively.

(c) Physical commodities inventories are generally accounted for at the lower of cost or fair value, subject to any applicable fair value hedge accounting adjustments. For a further discussion of our hedge accounting relationships, see Note 5, Derivative Instruments, on pages 103–109 of this Form 10-Q.

(d) Balances reflect the reduction of securities owned (long positions) by the amount of securities sold but not yet purchased (short positions) when the long and short positions have identical Committee on Uniform Security Identification Procedures numbers (“CUSIPs”).

(e) As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of an asset or liability. Therefore, the balances reported in the fair value hierarchy table are gross of any counterparty netting adjustments. However, if the Firm were to net such balances within level 3, the reduction in the level 3 derivative receivable and payable balances would be $10.4 billion and $11.7 billion at March 31, 2012, and December 31, 2011, respectively; this is exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances.

(f) Private equity instruments represent investments within the Corporate/Private Equity line of business. The cost basis of the private equity investment portfolio totaled $9.2 billion and $9.5 billion at March 31, 2012, and December 31, 2011, respectively.

(g) Includes investments in hedge funds, private equity funds, real estate and other funds that do not have readily determinable fair values. The Firm uses net asset value per share when measuring the fair value of these investments. At March 31, 2012 and December 31, 2011, the fair values of these investments were $5.1 billion and $5.5 billion, respectively, of which $1.1 billion and $1.2 billion, respectively were classified in level 2, and $4.0 billion and $4.3 billion, respectively, in level 3.

(h) For the three months ended March 31, 2012 and 2011, there were no significant transfers between levels 1 and 2. For the three months ended March 31, 2012, transfers from level 3 into level 2 included $1.2 billion of equity derivative payables on increased observability of certain equity structured notes, and transfers from level 2 into level 3 were not significant. For the three months ended March 31, 2011, the transfers between levels 2 and 3 were not significant. All transfers are assumed to occur at the beginning of the reporting period.

Changes in level 3 recurring fair value measurements

The following tables include a rollforward of the Consolidated Balance Sheet amounts (including changes in fair value) for financial instruments classified by the Firm within level 3 of the fair value hierarchy for the three months ended March 31, 2012 and 2011. When a determination is made to classify a financial instrument within level 3, the determination is based on the significance of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. Also, the Firm risk-manages the observable components of level 3 financial instruments using securities and derivative positions that are classified within level 1 or 2 of the fair value hierarchy; as these level 1 and level 2 risk management instruments are not included below, the gains or losses in the following tables do not reflect the effect of the Firm’s risk management activities related to such level 3 instruments.

	Fair value measurements using significant unobservable inputs
Three months ended March 31, 2012 (in millions)	Fair value at January 1, 2012			Total realized/unrealized gains/(losses)															Transfers into and/or out of level 3(g)			Fair value at March 31, 2012				Change in unrealized gains/(losses) related to financial instruments held at Mar. 31, 2012
								Purchases(f)			Sales					Settlements
Assets:
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies	$	86		$	(12	)		$	5		$	—				$	—		$	—			$	79		$	(5	)
Residential – nonagency	796			32				92			(163		)			(36		)	(22		)		699			23
Commercial – nonagency	1,758			(77		)		112			(240		)			(11		)	(91		)		1,451			(79		)
Total mortgage-backed securities	2,640			(57		)		209			(403		)			(47		)	(113		)		2,229			(61		)
Obligations of U.S. states and municipalities	1,619			(7		)		320			(181		)			(4		)	—				1,747			(9		)
Non-U.S. government debt securities	104			8				205			(231		)			(5		)	—				81			1
Corporate debt securities	6,373			258				2,316			(1,269		)			(1,967		)	(248		)		5,463			115
Loans	12,209			156				901			(673		)			(945		)	(504		)		11,144			129
Asset-backed securities	7,965			230				824			(1,261		)			(326		)	2				7,434			198
Total debt instruments	30,910			588				4,775			(4,018		)			(3,294		)	(863		)		28,098			373
Equity securities	1,177			(7		)		22			(27		)			(13		)	96				1,248			(12		)
Other	880			153				35			(44		)			(31		)	—				993			159
Total trading assets – debt and equity instruments	32,967			734			(b)	4,832			(4,089		)			(3,338		)	(767		)		30,339			520			(b)
Net derivative receivables:
Interest rate	3,561			1,328				109			(68		)			(1,344		)	(348		)		3,238			580
Credit	7,732			(2,354		)		78			(18		)			(630		)	—				4,808			(2,228		)
Foreign exchange	(1,263		)	127				19			(158		)			218			(3		)		(1,060		)	89
Equity	(3,105		)	(720		)		333			(383		)			(9		)	1,055				(2,829		)	(880		)
Commodity	(687		)	6				53			(6		)			23			11				(600		)	1
Total net derivative receivables	6,238			(1,613		)	(b)	592			(633		)			(1,742		)	715				3,557			(2,438		)	(b)
Available-for-sale securities:
Asset-backed securities	24,958			3				1,321			(498		)			(452		)	116				25,448			2
Other	528			8				28			(20		)			(75		)	—				469			5
Total available-for-sale securities	25,486			11			(c)	1,349			(518		)			(527		)	116				25,917			7			(c)
Loans	1,647			30			(b)	127			—					(119		)	81				1,766			27			(b)
Mortgage servicing rights	7,223			596			(d)	573			—					(353		)	—				8,039			596			(d)
Other assets:
Private equity investments	6,751			252			(b)	111			(236		)			(139		)	—				6,739			167			(b)
All other	4,374			(164		)	(e)	356			(19		)			(150		)	—				4,397			(177		)	(e)
	Fair value measurements using significant unobservable inputs
Three months ended March 31, 2012 (in millions)	Fair value at January 1, 2012			Total realized/unrealized (gains)/losses															Transfers into and/or out of level 3(g)			Fair value at Mar. 31, 2012				Change in unrealized (gains)/losses related to financial instruments held at Mar. 31, 2012
								Purchases(f)			Sales			Issuances		Settlements
Liabilities:(a)
Deposits	$	1,418		$	131		(b)	$	—		$	—		$	351	$	(136	)	$	(113	)		$	1,651		$	129		(b)
Other borrowed funds	1,507			196			(b)	—			—			384		(845		)	(9		)		1,233			151			(b)
Trading liabilities – debt and equity instruments	211			(15		)	(b)	(705		)	793			—		(11		)	—				273			3			(b)
Accounts payable and other liabilities	51			—			(e)	—			—			—		(5		)	—				46			—			(e)
Beneficial interests issued by consolidated VIEs	791			45			(b)	—			—			36		(31		)	—				841			9			(b)
Long-term debt	10,310			139			(b)	—			—			1,124		(1,387		)	(633		)		9,553			193			(b)

	Fair value measurements using significant unobservable inputs
Three months ended March 31, 2011 (in millions)	Fair value at January 1, 2011			Total realized/unrealized gains/(losses)														Transfers into and/or out of level 3(g)			Fair value at March 31, 2011				Change in unrealized gains/(losses) related to financial instruments held at Mar. 31, 2011
								Purchases(f)		Sales					Settlements
Assets:
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies	$	174		$	17			$	21	$	(21	)			$	—		$	—			$	191		$	(1	)
Residential – nonagency	687			71				259		(168		)			(67		)	—				782			27
Commercial – nonagency	2,069			16				346		(482		)			(64		)	—				1,885			(22		)
Total mortgage-backed securities	2,930			104				626		(671		)			(131		)	—				2,858			4
Obligations of U.S. states and municipalities	2,257			(14		)		284		(555		)			(1		)	—				1,971			(14		)
Non-U.S. government debt securities	202			3				130		(143		)			(5		)	(74		)		113			4
Corporate debt securities	4,946			32				1,629		(1,075		)			(6		)	97				5,623			34
Loans	13,144			131				888		(1,024		)			(729		)	80				12,490			12
Asset-backed securities	8,460			400				1,118		(1,057		)			(57		)	19				8,883			291
Total debt instruments	31,939			656				4,675		(4,525		)			(929		)	122				31,938			331
Equity securities	1,685			70				37		(74		)			(330		)	(21		)		1,367			83
Other	930			35				5		(1		)			(26		)	—				943			35
Total trading assets – debt and equity instruments	34,554			761			(b)	4,717		(4,600		)			(1,285		)	101				34,248			449			(b)
Net derivative receivables:
Interest rate	2,836			519				128		(83		)			(915		)	(15		)		2,470			184
Credit	5,386			(853		)		1		—					(146		)	(15		)		4,373			(1,068		)
Foreign exchange	(614		)	61				25		—					482			48				2			69
Equity	(2,446		)	179				95		(330		)			(429		)	88				(2,843		)	54
Commodity	(805		)	595				86		(67		)			(424		)	(250		)		(865		)	209
Total net derivative receivables	4,357			501			(b)	335		(480		)			(1,432		)	(144		)		3,137			(552		)	(b)
Available-for-sale securities:
Asset-backed securities	13,775			478				1,109		(4		)			(342		)	—				15,016			475
Other	512			9				—		(3		)			(9		)	—				509			7
Total available-for-sale securities	14,287			487			(c)	1,109		(7		)			(351		)	—				15,525			482			(c)
Loans	1,466			120			(b)	84		—					(283		)	(16		)		1,371			108			(b)
Mortgage servicing rights	13,649			(751		)	(d)	758		—					(563		)	—				13,093			(751		)	(d)
Other assets:
Private equity investments	7,862			905			(b)	328		(139		)			(103		)	—				8,853			845			(b)
All other	4,179			60			(e)	409		(3		)			(86		)	1				4,560			60			(e)
	Fair value measurements using significant unobservable inputs
Three months ended March 31, 2011 (in millions)	Fair value at January 1, 2011			Total realized/unrealized (gains)/losses														Transfers into and/or out of level 3(g)			Fair value at Mar. 31, 2011				Change in unrealized (gains)/losses related to financial instruments held at Mar. 31, 2011
								Purchases(f)		Sales			Issuances		Settlements
Liabilities:(a)
Deposits	$	773		$	(11	)	(b)	$	—	$	—		$	59	$	(66	)	$	(1	)		$	754		$	(4	)	(b)
Other borrowed funds	1,384			(31		)	(b)	—		—			577		(88		)	2				1,844			58			(b)
Trading liabilities – debt and equity instruments	54			—			(b)	—		119			—		—			—				173			—			(b)
Accounts payable and other liabilities	236			(37		)	(e)	—		—			—		(53		)	—				146			4			(e)
Beneficial interests issued by consolidated VIEs	873			(6		)	(b)	—		—			11		(290		)	—				588			(7		)	(b)
Long-term debt	13,044			62			(b)	—		—			653		(971		)	239				13,027			258			(b)

(a) Level 3 liabilities as a percentage of total Firm liabilities accounted for at fair value (including liabilities measured at fair value on a nonrecurring basis) were 19% and 21% at March 31, 2012, and December 31, 2011, respectively.

(b) Predominantly reported in principal transactions revenue, except for changes in fair value for Retail Financial Services (“RFS”) mortgage loans and lending-related commitments originated with the intent to sell, which are reported in mortgage fees and related income.

(c) Realized gains/(losses) on available-for-sale (“AFS”) securities, as well as other-than-temporary impairment losses that are recorded in earnings, are reported in securities gains. Unrealized gains/(losses) are reported in OCI. Realized gains/(losses) and foreign exchange remeasurement adjustments recorded in income on AFS securities were $96 million and $330 million for the three months ended March 31, 2012 and 2011, respectively. Unrealized gains/(losses) recorded on AFS securities in OCI were $(85) million and $156 million for the three months ended March 31, 2012 and 2011, respectively.

(d) Changes in fair value for RFS mortgage servicing rights are reported in mortgage fees and related income.

(e) Predominantly reported in other income.

(f) Loan originations are included in purchases.

(g) All transfers into and/or out of level 3 are assumed to occur at the beginning of the reporting period.

Assets and liabilities measured at fair value on a nonrecurring basis

Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). At March 31, 2012, assets measured at fair value on a nonrecurring basis were $3.1 billion comprised predominantly of loans that had fair value adjustments in the first three months of 2012. At December 31, 2011, assets measured at fair value on a nonrecurring basis were $5.3 billion, comprised predominantly of loans that had fair value adjustments in the twelve months of 2011. At March 31, 2012, $638 million and $2.5 billion of these assets were classified in levels 2 and 3 of the fair value hierarchy, respectively. At December 31, 2011, $369 million and $4.9 billion of these assets were classified in levels 2 and 3 of the fair value hierarchy, respectively. Liabilities measured at fair value on a nonrecurring basis were not significant at March 31, 2012, and December 31, 2011. For the three months ended March 31, 2012 and 2011, there were no significant transfers between levels 1, 2, and 3. The total change in the value of assets and liabilities for which a fair value adjustment has been included in the Consolidated Statements of Income for the three months ended March 31, 2012 and 2011, related to financial instruments held at those dates were losses of $534 million and $688 million, respectively; these losses were predominantly associated with loans.

For information about the measurement of impaired collateral-dependent loans, and other loans where the carrying value is based on the fair value of the underlying collateral (e.g., residential mortgage loans charged off in accordance with regulatory guidance), see Note 14 on pages 231–252 of JPMorgan Chase’s 2011 Annual Report.

Valuation

The Firm has an established and well-documented process for determining fair value. Fair value is based on quoted market prices, where available. If listed or quoted prices are not available, fair value is based on internally developed models that consider relevant transaction data such as maturity and use as inputs market-based or independently sourced market parameters. For further information on the Firm’s valuation process and a detailed discussion of the determination of fair value for individual financial instruments, see Note 3 on pages 184-198 of JPMorgan Chase’s 2011 Annual Report.

For instruments classified within level 3 of the fair value hierarchy judgments used to estimate fair value may be significant. In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate model to use. Second, due to the lack of observability of significant inputs, management must assess all relevant empirical data in deriving valuation inputs - including, but not limited to, transaction details, yield curves, interest rates, volatilities, equity or debt prices, valuations of comparable instruments, foreign exchange rates and credit curves. Finally, management judgment must be applied to assess the appropriate level of valuation adjustments to reflect counterparty credit quality, the Firm’s credit worthiness, constraints on liquidity and unobservable parameters, where relevant. The judgments made are typically affected by the type of product and its specific contractual terms, and the level of liquidity for the product or within the market as a whole.

The Firm has numerous controls in place to ensure that its valuations are appropriate. An independent model review group reviews the Firm’s valuation models and approves them for use for specific products. All valuation models of the Firm are subject to this review process. A price verification group, independent from the risk-taking functions, ensures observable market prices and market-based parameters are used for valuation whenever possible. For those products with material parameter risk for which observable levels do not exist, an independent review of the assumptions made on pricing is performed. Additional review includes deconstruction of the model valuations for certain structured instruments into their components; benchmarking valuations, where possible, to similar products; validating valuation estimates through actual cash settlement; and detailed review and explanation of recorded gains and losses, which are analyzed daily and over time. Valuation adjustments, which are also determined by the independent price verification group, are based on established policies and applied consistently over time. Any changes to the valuation methodology are reviewed by management to confirm the changes are justified. As markets and products develop and the pricing for certain products becomes more transparent, the Firm continues to refine its valuation methodologies.

Level 3 financial instruments

The following table presents the Firm’s primary level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, and the significant unobservable inputs and the range of values for those inputs. While the determination to classify an instrument within level 3 is based on the significance of the unobservable inputs to the overall fair value measurement, level 3 financial instruments typically include observable components (that is, components that are actively quoted and can be validated to external sources) in addition to the unobservable components. The level 1 and/or level 2 inputs are not included in the table. In addition, the Firm manages the risk of the observable components of level 3 financial instruments using securities and derivative positions that are classified within levels 1 or 2 of the fair value hierarchy.

The range of values presented in the table is representative of the highest and lowest level input used to value the significant instruments within a classification. The input range does not reflect the level of input uncertainty, instead it is driven by the different underlying characteristics of the various instruments within the classification.

For more information on valuation inputs and control, see Note 3 on pages 184–198 of JPMorgan Chase’s 2011 Annual Report.

Level 3 inputs(a)
March 31, 2012 (in millions, except for ratios and basis points)
Product/Instrument	Fair value			Principal valuation technique	Unobservable inputs	Range of input values
Residential mortgage-backed securities and loans	$	9,488		Discounted cash flows	Discount rate	5	%	-	25	%
					Constant prepayment rate	0	%	-	40	%
					Constant default rate	0	%	-	70	%
					Loss severity	0	%	-	90	%
Commercial mortgage-backed securities and loans(b)	2,166			Discounted cash flows	Discount rate	5	%	-	45	%
					Constant prepayment rate	0	%	-	10	%
					Constant default rate	0	%	-	100	%
					Loss severity	0	%	-	40	%
Corporate debt securities, obligations of U.S. states and municipalities, and other	19,725			Discounted cash flows	Credit spread	130 bps		-	225 bps
					Discount rate	1	%	-	35	%
				Consensus pricing	Price	25		-	115
Net interest rate derivatives	3,238			Option pricing	Interest rate correlation	(75	)%	-	100	%
					Interest rate spread volatility	0	%	-	60	%
Net credit derivatives(b)	4,808			Discounted cash flows	Credit correlation	15	%	-	75	%
Net foreign exchange derivatives	(1,060		)	Option pricing	Foreign exchange correlation	(55	)%	-	45	%
Net equity derivatives	(2,829		)	Option pricing	Equity volatility	20	%	-	60	%
Net commodity derivatives	(600		)	Option pricing	Commodity volatility	30	%	-	50	%
Collateralized loan obligations(c)	31,040			Discounted cash flows	Default correlation(e)	70	%	-	99	%
					Recovery lag(f)	18 Months
					Liquidity spread(g)	150 bps		-	250 bps
					Recovery rate	0	%	-	55	%
					Default rate	0	%	-	75	%
					Prepayment rate	10	%	-	20	%
Mortgage servicing rights (“MSRs”)	8,039			Discounted cash flows	Refer to Note 16 on pages 144–146 of this Form 10-Q.
Private equity direct investments	4,812			Market comparables	EBITDA multiple	3.2x		-	10.8x
					Liquidity adjustment	0	%	-	40	%
Private equity fund investments	1,927			Net asset value	Net asset value(h)
Long-term debt, other borrowed funds, and deposits(d)	12,437			Option pricing	Interest rate correlation	(75	)%	-	100	%
					Foreign exchange correlation	(55	)%	-	45	%
					Equity correlation	(50	)%	-	75	%
				Discounted cash flows	Credit correlation	15	%	-	75	%

(a) The categories presented in the table have been aggregated based upon product type which may differ from balance sheet classification.

(b) The unobservable inputs and associated input ranges for approximately $2.3 billion in credit derivative receivables and $1.6 billion in credit derivative payables with underlying mortgage risk have been included in the inputs and ranges provided for commercial mortgage-backed securities and loans.

(c) CLOs are securities backed by corporate loans. At March 31, 2012, $25.2 billion of CLOs were held in the AFS securities portfolio and $5.8 billion were included in asset-backed securities held in the trading portfolio. Substantially all of the securities are rated "AAA", "AA" and "A." For a further discussion of CLOs held in the AFS securities portfolio, see Note 11 on pages 113–117 of this Form 10-Q.

(d) Long-term debt, other borrowed funds, and deposits include structured notes issued by the Firm that are financial instruments containing embedded derivatives. The estimation of the fair value of structured notes is predominantly based on the derivative features embedded within the instruments. The significant unobservable inputs are broadly consistent with those presented for derivative receivables.

(e) Default correlation measures whether the loans that collateralize an issued CLO are more likely to default together or separately.

(f) Recovery lag is the assumed length of time between an underlying loan default and its liquidation.

(g) Liquidity spread is an adjustment taken to the discount rate to adjust for the level of liquidity in the CLO market.

(h) The range has not been disclosed due to the diverse nature of the underlying investments.

Level 3 analysis

The following provides a general description of the impact of a change in an unobservable input on the fair value measurement and the interrelationship of unobservable inputs, where relevant/significant. Interrelationships may also exist between observable and unobservable inputs (for example, as interest rates rise, prepayment rates decline). Such relationships have not been included in the discussion below.

In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads. For derivatives, given a long position to the parameter, an increase in correlation or volatility, in isolation, would result in an increase in the fair value measurement. For direct private equity investments, an increase in the EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) input, net of adjustments, would result in an increase in the fair value measurement. For each of the individual relationships described above, the inverse relationship would also generally apply.

Consolidated Balance Sheets changes

Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 4.7% of total Firm assets at March 31, 2012. The following describes significant changes to level 3 assets since December 31, 2011.

For the three months ended March 31, 2012

Level 3 assets decreased by $9.2 billion during 2012, due to the following:

• $5.5 billion decrease in derivative receivables, predominantly driven by tightening of credit spreads; and

• $2.6 billion decrease in trading assets – debt and equity instruments, predominantly driven by sales and settlements of loans and corporate debt.

Gains and Losses

Included in the tables for the three months ended March 31, 2012

• $1.6 billion of net losses on derivatives, related to tightening of credit spreads, partially offset by gains in interest rate derivatives.

Included in the tables for the three months ended March 31, 2011

• $905 million gain in private equity, largely driven by net increase in investment valuations in the portfolio.

Credit adjustments

When determining the fair value of an instrument, it may be necessary to record a valuation adjustment to arrive at an exit price under U.S. GAAP. Valuation adjustments include, but are not limited to, amounts to reflect counterparty credit quality and the Firm’s own creditworthiness. The market’s view of the Firm’s credit quality is reflected in credit spreads observed in the credit default swap (“CDS”) market. For a detailed discussion of the valuation adjustments the Firm considers, see the valuation discussion in Note 3 on pages 184–188 of JPMorgan Chase’s 2011 Annual Report.

The following table provides the credit adjustments, excluding the effect of any hedging activity, reflected within the Consolidated Balance Sheets as of the dates indicated.

(in millions)	March 31, 2012			December 31, 2011
Derivative receivables balance (net of derivatives CVA)	$	85,010		$	92,477
Derivatives CVA(a)	(5,475		)	(6,936		)
Derivative payables balance (net of derivatives DVA)	74,767			74,977
Derivatives DVA	(981		)	(1,420		)
Structured notes balance (net of structured notes DVA)(b)(c)	50,894			49,229
Structured notes DVA	(1,584		)	(2,052		)

(a) Derivatives credit valuation adjustments (“CVA”), gross of hedges, includes results managed by the Credit Portfolio and other lines of business within the Investment Bank (“IB”).

(b) Structured notes are recorded within long-term debt, other borrowed funds or deposits on the Consolidated Balance Sheets, depending upon the tenor and legal form of the note.

(c) Structured notes are measured at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 101–102 of this Form 10-Q.

The following table provides the impact of credit adjustments on earnings in the respective periods, excluding the effect of any hedging activity.

	Three months ended March 31,
(in millions)	2012			2011
Credit adjustments:
Derivative CVA(a)	$	1,461		$	535
Derivative DVA	(439		)	(69		)
Structured note DVA(b)	(468		)	23

(a) Derivatives CVA, gross of hedges, includes results managed by the Credit Portfolio and other lines of business within IB.

(b) Structured notes are measured at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 101–102 of this Form 10-Q.

Additional disclosures about the fair value of financial instruments that are not carried on the Consolidated Balance Sheets at fair value

The following table presents the carrying values and estimated fair values at March 31, 2012, of financial assets and liabilities, excluding financial instruments which are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value, see Note 3 on pages 184–198 of JPMorgan Chase’s 2011 Annual Report.

	March 31, 2012					December 31, 2011
(in billions)	Carrying value		Estimated fair value			Carrying value		Estimated fair value
Financial assets
Cash and due from banks	$	55.4	$	55.4	(a)	$	59.6	$	59.6
Deposits with banks	115.0		115.0		(a)	85.3		85.3
Accrued interest and accounts receivable	64.8		64.8		(b)	61.5		61.5
Federal funds sold and securities purchased under resale agreements	214.2		214.2		(b)	210.4		210.4
Securities borrowed	123.1		123.1		(b)	127.2		127.2
Loans	692.8		692.0		(c)	694.0		693.7
Other	47.7		48.2		(b)	49.8		50.3
Financial liabilities
Deposits	$	1,123.2	$	1,123.8	(b)	$	1,122.9	$	1,123.4
Federal funds purchased and securities loaned or sold under repurchase agreements	237.2		237.2		(b)	204.0		204.0
Commercial paper	50.6		50.6		(b)	51.6		51.6
Other borrowed funds	17.1		17.1		(b)	12.3		12.3
Accounts payable and other liabilities	168.6		168.5		(b)	166.9		166.8
Beneficial interests issued by consolidated VIEs	66.7		67.0		(b)	64.7		64.9
Long-term debt and junior subordinated deferrable interest debentures	220.4		222.2		(b)	222.1		219.5

(a) Products/instruments are predominantly classified within level 1 of the fair value hierarchy.

(b) Products/instruments are predominantly classified within level 2 of the fair value hierarchy.

(c) Loans are predominantly classified within level 3 of the fair value hierarchy. Fair value is typically estimated using a discounted cash flow model that incorporates the characteristics of the underlying loans (including principal, contractual interest rate and contractual fees) and other key inputs, including expected lifetime credit losses, interest rates, prepayment rates, and primary origination or secondary market spreads. For certain loans, the fair value is measured based on the value of the underlying collateral. The difference between the estimated fair value and carrying value of a financial asset or liability is the result of the different methodologies used to determine fair value as compared with carrying value. For example, credit losses are estimated for a financial asset’s remaining life in a fair value calculation but are estimated for a loss emergence period in a loan loss reserve calculation; future loan income (interest and fees) is incorporated in a fair value calculation but is generally not considered in the allowance for loan losses. For a further discussion of the Firm’s methodologies for estimating the fair value of loans and lending-related commitments, see Note 3 on pages 184–198 of JPMorgan Chase’s 2011 Annual Report and pages 97–98 of this Note.

The majority of the Firm’s lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded. The carrying value and estimated fair value of the Firm’s wholesale lending-related commitments were as follows for the periods indicated.

	March 31, 2012					December 31, 2011
(in billions)	Carrying value(a)		Estimated fair value			Carrying value(a)		Estimated fair value
Wholesale lending-related commitments	$	0.7	$	1.9	(b)	$	0.7	$	3.4

(a) Represents the allowance for wholesale lending-related commitments. Excludes the current carrying values of the guarantee liability and the offsetting asset, each of which are recognized at fair value at the inception of guarantees.

(b) Products/instruments are predominantly classified within level 3 of the fair value hierarchy.

The Firm does not estimate the fair value of consumer lending-related commitments. In many cases, the Firm can reduce or cancel these commitments by providing the borrower notice or, in some cases, without notice as permitted by law. For a further discussion of the valuation of lending-related commitments, see pages 97–98 of this Note.

Trading assets and liabilities – average balances

Average trading assets and liabilities were as follows for the periods indicated.

	Three months ended March 31,
(in millions)	2012		2011
Trading assets – debt and equity instruments(a)	$	355,335	$	417,463
Trading assets – derivative receivables	90,446		85,437
Trading liabilities – debt and equity instruments(a)(b)	68,984		82,919
Trading liabilities – derivative payables	76,069		71,288

(a) Balances reflect the reduction of securities owned (long positions) by the amount of securities sold, but not yet purchased (short positions) when the long and short positions have identical CUSIP numbers.

(b) Primarily represent securities sold, not yet purchased.