Fair Value Measurement

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENT

Fair value measurement

JPMorgan Chase carries a portion of its assets and liabilities at fair value. These assets and liabilities are predominantly carried at fair value on a recurring basis (i.e., assets and liabilities that are measured and reported at fair value on the Firm’s Consolidated Balance Sheets). Certain assets (e.g. certain mortgage, home equity and other loans, where the carrying value is based on the fair value of the underlying collateral), 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).

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on models that consider relevant transaction characteristics (such as maturity) and use as inputs observable or unobservable market parameters, including but not limited to yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, as described below.

Imprecision in estimating unobservable market inputs or other factors can affect the amount of gain or loss recorded for a particular position. Furthermore, while the Firm believes its valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across the Firm’s businesses and portfolios.

The Firm uses various methodologies and assumptions in the determination of fair value. The use of different methodologies or assumptions to those used by the Firm could result in a different estimate of fair value at the reporting date.

Valuation process

Risk-taking functions are responsible for providing fair value estimates for assets and liabilities carried on the Consolidated Balance Sheets at fair value. The Firm’s valuation control function, which is part of the Firm’s Finance function and independent of the risk-taking functions, is responsible for verifying these estimates and determining any fair value adjustments that may be required to ensure that the Firm’s positions are recorded at fair value. In addition, the Firm has a firm-wide Valuation Governance Forum (“VGF”) comprising senior finance and risk executives to oversee the management of risks arising from valuation activities conducted across the Firm. The VGF is chaired by the firm-wide head of the valuation control function, and also includes sub-forums for the CIB, MB, and certain corporate functions including Treasury and CIO.

The valuation control function verifies fair value estimates leveraging independently derived prices, valuation inputs and other market data, where available. Where independent prices or inputs are not available, additional review is performed by the valuation control function to ensure the reasonableness of estimates that cannot be verified to external independent data, and may include: evaluating the limited market activity including client unwinds; benchmarking of valuation inputs to those for similar instruments; decomposing the valuation of structured instruments into individual components; comparing expected to actual cash flows; reviewing profit and loss trends; and reviewing trends in collateral valuation. In addition there are additional levels of management review for more significant or complex positions.

The valuation control function determines any valuation adjustments that may be required to the estimates provided by the risk-taking functions. No adjustments are applied to the quoted market price for instruments classified within level 1 of the fair value hierarchy (see below for further information on the fair value hierarchy). For other positions, judgment is required to assess the need for valuation adjustments to appropriately reflect liquidity considerations, unobservable parameters, and, for certain portfolios that meet specified criteria, the size of the net open risk position. The determination of such adjustments follows a consistent framework across the Firm:

• Liquidity valuation adjustments are considered when the Firm may not be able to observe a recent market price for a financial instrument that trades in an inactive (or less active) market. The Firm estimates the amount of uncertainty in the initial fair value estimate based on the degree of liquidity in the market. Factors considered in determining the liquidity adjustment include: (1) the amount of time since the last relevant pricing point; (2) whether there was an actual trade or relevant external quote or alternatively pricing points for similar instruments in active markets; and (3) the volatility of the principal risk component of the financial instrument. For certain portfolios of financial instruments that the Firm manages on the basis of net open risk exposure, valuation adjustments are necessary to reflect the cost of exiting a larger-than-normal market-size net open risk position. Where applied, such adjustments are based on factors including the size of the adverse market move that is likely to occur during the period required to reduce the net open risk position to a normal market-size.

• Unobservable parameter valuation adjustments may be made when positions are valued using internally developed models that incorporate unobservable parameters – that is, parameters that must be estimated and are, therefore, subject to management judgment. Unobservable parameter valuation adjustments are applied to reflect the uncertainty inherent in the valuation estimate provided by the model.

Where appropriate, the Firm also applies adjustments to its estimates of fair value in order to appropriately reflect counterparty credit quality and the Firm’s own creditworthiness, applying a consistent framework across the Firm. For more information on such adjustments see Credit adjustments on page 212 of this Note

Valuation model review and approval

If prices or quotes are not available for an instrument or a similar instrument, fair value is generally determined using valuation models that consider relevant transaction data such as maturity and use as inputs market-based or independently sourced parameters. Where this is the case the price verification process described above is applied to the inputs to those models.

The Firm’s Model Risk function within the Firm’s Model Risk and Development Group, which in turn reports to the Chief Risk Officer, reviews and approves valuation models used by the Firm. Model reviews consider a number of factors about the model’s suitability for valuation of a particular product including whether it accurately reflects the characteristics and significant risks of a particular instrument; the selection and reliability of model inputs; consistency with models for similar products; the appropriateness of any model-related adjustments; and sensitivity to input parameters and assumptions that cannot be observed from the market. When reviewing a model, the Model Risk function analyzes and challenges the model methodology and the reasonableness of model assumptions and may perform or require additional testing, including back-testing of model outcomes.

New significant valuation models, as well as material changes to existing models, are reviewed and approved prior to implementation except where specified conditions are met. The Model Risk function performs an annual Firmwide model risk assessment where developments in the product or market are considered in determining whether valuation models which have already been reviewed need to be reviewed and approved again.

Valuation Hierarchy

A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.

• Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – one or more inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following table describes the valuation methodologies used by the Firm to measure its more significant products/instruments at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Product/instrument	Valuation methodology, inputs and assumptions	Classifications in the valuation hierarchy
Securities financing agreements	Valuations are based on discounted cash flows, which consider:	Level 2
	• Derivative features. For further information refer to discussion on derivatives below.
	• Market rates for the respective maturity
	• Collateral
Loans and lending-related commitments - wholesale
Trading portfolio	Where observable market data is available, valuations are based on:	Level 2 or 3
	• Observed market prices (circumstances are limited)
	• Relevant broker quotes
	• Observed market prices for similar instruments
	Where observable market data is unavailable or limited, valuations are based on discounted cash flows, which consider the following:
	• Yield
	• Lifetime credit losses
	• Loss severity
	• Prepayment speed
	• Servicing costs
Loans held for investment and associated lending related commitments	Valuations are based on discounted cash flows, which consider:	Predominantly level 3
	• Credit spreads, derived from the cost of CDS; or benchmark credit curves developed by the Firm, by industry and credit rating, and which take into account the difference in loss severity rates between bonds and loans
	• Prepayment speed
	Lending related commitments are valued similar to loans and reflect the portion of an unused commitment expected, based on the Firm’s average portfolio historical experience, to become funded prior to an obligor default
	For information regarding the valuation of loans measured at collateral value, see Note 14 on pages 250-275 of this Annual Report.
Loans - consumer
Held for investment consumer loans, excluding credit card	Valuations are based on discounted cash flows, which consider:	Predominantly level 3
	• Discount rates (derived from primary origination rates and market activity)
	• Expected lifetime credit losses (considering expected and current default rates for existing portfolios, collateral prices, and economic environment expectations (i.e., unemployment rates))
	• Estimated prepayments
	• Servicing costs
	• Market liquidity
	For information regarding the valuation of loans measured at collateral value, see Note 14 on pages 250-275 of this Annual Report.
Credit card receivables	Valuations are based on discounted cash flows, which consider:	Level 3
	• Projected interest income and late fee revenue, funding, servicing and credit costs, and loan repayment rates
	• Estimated life of receivables (based on projected loan payment rates)
	• Discount rate - based on expected return on receivables
	• Credit costs - allowance for loan losses is considered a reasonable proxy for the credit cost based on the short- term nature of credit card receivables
Conforming residential mortgage loans expected to be sold	Fair value is based upon observable prices for mortgage-backed securities with similar collateral and incorporates adjustments to these prices to account for differences between the securities and the value of the underlying loans, which include credit characteristics, portfolio composition, and liquidity.	Predominantly level 2

Product/instrument	Valuation methodology, inputs and assumptions	Classifications in the valuation hierarchy
Securities	Quoted market prices are used where available.	Level 1
	In the absence of quoted market prices, securities are valued based on:	Level 2 or 3
	• Observable market prices for similar securities
	• Relevant broker quotes
	• Discounted cash flows
	In addition, the following inputs to discounted cash flows are used for the following products:
	Mortgage- and asset-backed securities specific inputs:
	• Collateral characteristics
	• Deal-specific payment and loss allocations
	• Current market assumptions related to yield, prepayment speed, conditional default rates and loss severity
	Collateralized loan obligations (“CLOs”), specific inputs:
	• Collateral characteristics
	• Deal-specific payment and loss allocations
	• Expected prepayment speed, conditional default rates, loss severity
	• Credit spreads
	• Credit rating data
Physical commodities	Valued using observable market prices or data	Level 1 or 2
Derivatives	Exchange-traded derivatives that are actively traded and valued using the exchange price, and over-the-counter contracts where quoted prices are available in an active market.	Level 1
	Derivatives valued using models such as the Black-Scholes option pricing model, simulation models, or a combination of models, that use observable or unobservable valuation inputs (e.g. plain vanilla options and interest rate and credit default swaps). Inputs include:	Level 2 or 3
	• Contractual terms including the period to maturity
	• Readily observable parameters including interest rates and volatility
	• Credit quality of the counterparty and of the Firm
	• Correlation levels
	In addition, the following specific inputs are used for the following derivatives that are valued based on models with significant unobservable inputs:
	Structured credit derivatives specific inputs include:
	• CDS spreads and recovery rates
	• Credit correlation between the underlying debt instruments (levels are modeled on a transaction basis and calibrated to liquid benchmark tranche indices)
	• Actual transactions, where available, are used to regularly recalibrate unobservable parameters
	Certain long-dated equity option specific inputs include:
	• Long-dated equity volatilities
	Certain interest rate and FX exotic options specific inputs include:
	• Interest rate correlation
	• Interest rate spread volatility
	• Foreign exchange correlation
	• Correlation between interest rates and foreign exchange rates
	• Parameters describing the evolution of underlying interest rates
	Certain commodity derivatives specific inputs include:
	• Commodity volatility
	Adjustments to reflect counterparty credit quality (credit valuation adjustments or “CVA”), and the Firms own creditworthiness (debit valuation adjustments or “DVA”), see page 212 of this Note.

Product/instrument	Valuation methodology, inputs and assumptions	Classification in the valuation hierarchy
Mortgage servicing rights (“MSRs”)	See Mortgage servicing rights in Note 17 on pages 292-294 of this Annual Report.	Level 3
Private equity direct investments	Private equity direct investments	Level 3
	Fair value is estimated using all available information and considering the range of potential inputs, including:
	• Transaction prices
	• Trading multiples of comparable public companies
	• Operating performance of the underlying portfolio company
	• Additional available inputs relevant to the investment
	• Adjustments as required, since comparable public companies are not identical to the company being valued, and for company-specific issues and lack of liquidity
	Public investments held in the Private Equity portfolio	Level 1 or 2
	• Valued using observable market prices less adjustments for relevant restrictions, where applicable
Fund investments (i.e., mutual/collective investment funds, private equity funds, hedge funds, and real estate funds)	Net asset value (“NAV”)
	• NAV is validated by sufficient level of observable activity (i.e., purchases and sales)	Level 1
	• Adjustments to the NAV as required, for restrictions on redemption (e.g., lock up periods or withdrawal limitations) or where observable activity is limited	Level 2 or 3
Beneficial interests issued by consolidated VIE	Valued using observable market information, where available	Level 2 or 3
	In the absence of observable market information, valuations are based on the fair value of the underlying assets held by the VIE
Long-term debt, not carried at fair value	Valuations are based on discounted cash flows, which consider:	Predominantly level 2
	• Market rates for respective maturity
	• The Firm’s own creditworthiness (DVA), see page 212 of this Note
Structured notes (included in deposits, other borrowed funds and long-term debt)	Valuations are based on discounted cash flows, which consider:	Level 2 or 3
	• The Firm’s own creditworthiness (DVA), see page 212 of this Note
	• Consideration of derivative features. For further information refer to discussion on derivatives above

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

Assets and liabilities measured at fair value on a recurring basis
	Fair value hierarchy
December 31, 2012 (in millions)	Level 1		Level 2			Level 3			Netting adjustments			Total fair value
Federal funds sold and securities purchased under resale agreements	$	—	$	24,258		$	—		$	—		$	24,258
Securities borrowed	—		10,177			—			—			10,177
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies(a)	—		36,240			498			—			36,738
Residential – nonagency	—		1,509			663			—			2,172
Commercial – nonagency	—		1,565			1,207			—			2,772
Total mortgage-backed securities	—		39,314			2,368			—			41,682
U.S. Treasury and government agencies(a)	12,240		10,185			—			—			22,425
Obligations of U.S. states and municipalities	—		16,726			1,436			—			18,162
Certificates of deposit, bankers’ acceptances and commercial paper	—		4,759			—			—			4,759
Non-U.S. government debt securities	23,500		45,121			67			—			68,688
Corporate debt securities	—		33,384			5,308			—			38,692
Loans(b)	—		30,754			10,787			—			41,541
Asset-backed securities	—		4,182			3,696			—			7,878
Total debt instruments	35,740		184,425			23,662			—			243,827
Equity securities	106,898		2,687			1,114			—			110,699
Physical commodities(c)	10,107		6,066			—			—			16,173
Other	—		3,483			863			—			4,346
Total debt and equity instruments(d)	152,745		196,661			25,639			—			375,045
Derivative receivables:
Interest rate	476		1,322,155			6,617			(1,290,043		)	39,205
Credit	—		93,821			6,489			(98,575		)	1,735
Foreign exchange	450		144,758			3,051			(134,117		)	14,142
Equity	—		36,017			4,921			(31,672		)	9,266
Commodity	316		41,129			2,180			(32,990		)	10,635
Total derivative receivables(e)	1,242		1,637,880			23,258			(1,587,397		)	74,983
Total trading assets	153,987		1,834,541			48,897			(1,587,397		)	450,028
Available-for-sale securities:
Mortgage-backed securities:
U.S. government agencies(a)	—		98,388			—			—			98,388
Residential – nonagency	—		74,189			450			—			74,639
Commercial – nonagency	—		12,948			255			—			13,203
Total mortgage-backed securities	—		185,525			705			—			186,230
U.S. Treasury and government agencies(a)	8,907		3,223			—			—			12,130
Obligations of U.S. states and municipalities	35		21,489			187			—			21,711
Certificates of deposit	—		2,783			—			—			2,783
Non-U.S. government debt securities	41,218		24,826			—			—			66,044
Corporate debt securities	—		38,609			—			—			38,609
Asset-backed securities:
Collateralized loan obligations	—		—			27,896			—			27,896
Other	—		12,843			128			—			12,971
Equity securities	2,733		38			—			—			2,771
Total available-for-sale securities	52,893		289,336			28,916			—			371,145
Loans	—		273			2,282			—			2,555
Mortgage servicing rights	—		—			7,614			—			7,614
Other assets:
Private equity investments(f)	578		—			7,181			—			7,759
All other	4,188		253			4,258			—			8,699
Total other assets	4,766		253			11,439			—			16,458
Total assets measured at fair value on a recurring basis	$	211,646	$	2,158,838	(g)	$	99,148	(g)	$	(1,587,397	)	$	882,235
Deposits	$	—	$	3,750		$	1,983		$	—		$	5,733
Federal funds purchased and securities loaned or sold under repurchase agreements	—		4,388			—			—			4,388
Other borrowed funds	—		9,972			1,619			—			11,591
Trading liabilities:
Debt and equity instruments(d)	46,580		14,477			205			—			61,262
Derivative payables:
Interest rate	490		1,283,829			3,295			(1,262,708		)	24,906
Credit	—		95,411			4,616			(97,523		)	2,504
Foreign exchange	428		156,413			4,801			(143,041		)	18,601
Equity	—		36,083			6,727			(30,991		)	11,819
Commodity	176		45,363			1,926			(34,639		)	12,826
Total derivative payables(e)	1,094		1,617,099			21,365			(1,568,902		)	70,656
Total trading liabilities	47,674		1,631,576			21,570			(1,568,902		)	131,918
Accounts payable and other liabilities	—		—			36			—			36
Beneficial interests issued by consolidated VIEs	—		245			925			—			1,170
Long-term debt	—		22,312			8,476			—			30,788
Total liabilities measured at fair value on a recurring basis	$	47,674	$	1,672,243		$	34,609		$	(1,568,902	)	$	185,624

	Fair value hierarchy
December 31, 2011 (in millions)	Level 1		Level 2			Level 3			Netting adjustments			Total fair value
Federal funds sold and securities purchased under resale agreements	$	—	$	22,191		$	—		$	—		$	22,191
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	$	2,243,022	(g)	$	113,489	(g)	$	(1,792,022	)	$	872,062
Deposits	$	—	$	3,515		$	1,418		$	—		$	4,933
Federal funds purchased and securities loaned or sold under repurchase agreements	—		6,817			—			—			6,817
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	$	1,861,903		$	43,091		$	(1,762,279	)	$	199,042

(a) At December 31, 2012 and 2011, included total U.S. government-sponsored enterprise obligations of $119.4 billion and $122.4 billion respectively, which were predominantly mortgage-related.

(b) At December 31, 2012 and 2011, included within trading loans were $26.4 billion and $20.1 billion, respectively, of residential first-lien mortgages, and $2.2 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 $17.4 billion and $11.0 billion, respectively, and reverse mortgages of $4.0 billion and $4.0 billion, respectively.

(c) Physical commodities inventories are generally accounted for at the lower of cost or market. “Market” is a term defined in U.S. GAAP as an amount not exceeding fair value less costs to sell (“transaction costs”). Transaction costs for the Firm’s physical commodities inventories are either not applicable or immaterial to the value of the inventory. Therefore, market approximates fair value for the Firm’s physical commodities inventories. When fair value hedging has been applied (or when market is below cost), the carrying value of physical commodities approximates fair value, because under fair value hedge accounting, the cost basis is adjusted for changes in fair value. For a further discussion of the Firm’s hedge accounting relationships, see Note 6 on pages 218–227 of this Annual Report. To provide consistent fair value disclosure information, all physical commodities inventories have been included in each period presented.

(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 $8.4 billion and $11.7 billion at December 31, 2012 and 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 segment. The cost basis of the private equity investment portfolio totaled $8.4 billion and $9.5 billion at December 31, 2012 and 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 December 31, 2012 and 2011, the fair value of these investments were $4.9 billion and $5.5 billion, respectively, of which $1.1 billion and $1.2 billion, respectively, in level 2, and $3.8 billion and $4.3 billion, respectively, in level 3.

Transfers between levels for instruments carried at fair value on a recurring basis

For the year ended December 31, 2012, $113.9 billion of settled U.S. government agency mortgage-backed securities were transferred from level 1 to level 2. While the U.S. government agency mortgage-backed securities market remains highly liquid and transparent, the transfer reflects greater market price differentiation between settled securities based on certain underlying loan specific factors. There were no significant transfers from level 2 to level 1 for the year ended December 31, 2012, and no significant transfers between level 1 and level 2 for the year ended December 31, 2011.

For the years ended December 31, 2012 and 2011, there were no significant transfers from level 2 into level 3. For the year ended December 31, 2012, transfers from level 3 into level 2 included $1.2 billion of derivative payables based on increased observability of certain structured equity derivatives; and $1.8 billion of long-term debt due to a decrease in valuation uncertainty of certain equity structured notes. For the year ended December 31, 2011, transfers from level 3 into level 2 included $2.6 billion of long-term debt due to a decrease in valuation uncertainty of certain structured notes.

All transfers are assumed to occur at the beginning of the reporting period.

During 2012 the liquidity for certain collateralized loan obligations increased and price transparency improved. Accordingly, the Firm incorporated a revised valuation model into its valuation process for CLOs to better calibrate to market data where available. The Firm began to verify fair value estimates from this model to independent sources during the fourth quarter of 2012. Although market liquidity and price transparency have improved, CLO market prices were not yet considered materially observable and therefore CLOs remained in level 3 as of December 31, 2012. The change in the valuation process did not have a significant impact on the fair value of the Firm’s CLO positions.

Level 3 valuations

The Firm has established well-documented processes for determining fair value, including for instruments where fair value is estimated using significant unobservable inputs (level 3). For further information on the Firm’s valuation process and a detailed discussion of the determination of fair value for individual financial instruments, see pages 196–200 of this Note.

Estimating fair value requires the application of judgment. The type and level of judgment required is largely dependent on the amount of observable market information available to the Firm. For instruments valued using internally developed models that use significant unobservable inputs and are therefore classified within level 3 of the fair value hierarchy, judgments used to estimate fair value are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.

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, prepayment speed, default rates, volatilities, correlations, 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 creditworthiness, 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 following table presents the Firm’s primary level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, the significant unobservable inputs, the range of values for those inputs and the weighted averages of such 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 groups of instruments within a product/instrument 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 example, two option contracts may have similar levels of market risk exposure and valuation uncertainty, but may have significantly different implied volatility levels because the option contracts have different underlyings, tenors , or strike prices.

Where provided, the weighted averages of the input values presented in the table are calculated based on the fair value of the instruments that the input is being used to value. In the Firm’s view, the input range and the weighted average value do not reflect the degree of input uncertainty or an assessment of the reasonableness of the Firm’s estimates and assumptions. Rather, they reflect the characteristics of the various instruments held by the Firm and the relative distribution of instruments within the range of characteristics. The input range and weighted average values will therefore vary from period to period and parameter to parameter based on the characteristics of the instruments held by the Firm at each balance sheet date.

Level 3 inputs(a)
December 31, 2012 (in millions, except for ratios and basis points)
Product/Instrument	Fair value			Principal valuation technique	Unobservable inputs	Range of input values				Weighted average
Residential mortgage-backed securities and loans	$	9,836		Discounted cash flows	Yield	4	%	-	20%	7%
					Prepayment speed	0	%	-	40%	6%
					Conditional default rate	0	%	-	100%	10%
					Loss severity	0	%	-	95%	15%
Commercial mortgage-backed securities and loans(b)	1,724			Discounted cash flows	Yield	2	%	-	32%	6%
					Conditional default rate	0	%	-	8%	0%
					Loss severity	0	%	-	40%	35%
Corporate debt securities, obligations of U.S. states and municipalities, and other(c)	19,563			Discounted cash flows	Credit spread	130 bps		-	250 bps	153 bps
					Yield	0	%	-	30%	9%
				Market comparables	Price	25		-	125	87
Net interest rate derivatives	3,322			Option pricing	Interest rate correlation	(75	)%	-	100%
					Interest rate spread volatility	0	%	-	60%
Net credit derivatives(b)	1,873			Discounted cash flows	Credit correlation	27	%	-	90%
Net foreign exchange derivatives	(1,750		)	Option pricing	Foreign exchange correlation	(75	)%	-	45%
Net equity derivatives	(1,806		)	Option pricing	Equity volatility	5	%	-	45%
Net commodity derivatives	254			Option pricing	Commodity volatility	24	%	-	47%
Collateralized loan obligations(d)	29,972			Discounted cash flows	Credit spread	130 bps		-	600 bps	163 bps
					Prepayment speed	15	%	-	20%	19%
					Conditional default rate	2%				2%
					Loss severity	40%				40%
Mortgage servicing rights (“MSRs”)	7,614			Discounted cash flows	Refer to Note 17 on pages 291–295 of this Annual Report.
Private equity direct investments	5,231			Market comparables	EBITDA multiple	2.7x		-	14.6x	8.3x
					Liquidity adjustment	0	%	-	30%	10%
Private equity fund investments	1,950			Net asset value	Net asset value(f)
Long-term debt, other borrowed funds, and deposits(e)	12,078			Option pricing	Interest rate correlation	(75	)%	-	100%
					Foreign exchange correlation	(75	)%	-	45%
					Equity correlation	(40	)%	-	85%
				Discounted cash flows	Credit correlation	27	%	-	84%

(a) The categories presented in the table have been aggregated based upon the product type, which may differ from their classification on the Consolidated Balance Sheet.

(b) The unobservable inputs and associated input ranges for approximately $1.3 billion of credit derivative receivables and $1.2 billion of credit derivative payables with underlying mortgage risk have been included in the inputs and ranges provided for commercial mortgage-backed securities and loans.

(c) Approximately 16% of instruments in this category include price as an unobservable input. This balance includes certain securities and illiquid trading loans, which are generally valued using comparable prices and/or yields for similar instruments.

(d) CLOs are securities backed by corporate loans. At December 31, 2012, $27.9 billion of CLOs were held in the available–for–sale (“AFS”) securities portfolio and $2.1 billion were included in asset-backed securities held in the trading portfolio. Substantially all of the securities are rated “AAA”, “AA” and “A”. The reported range of credit spreads increased from the third quarter to the fourth quarter of 2012, while the reported ranges of other unobservable parameters decreased. This was primarily due to the Firm incorporating a revised valuation model for CLOs, which uses a different combination of valuation parameters as compared with the old model. The change did not have a significant impact on the fair value of the Firm’s CLO positions.

(e) 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.

(f) The range has not been disclosed due to the wide range of possible values given the diverse nature of the underlying investments.

Changes in and ranges of unobservable inputs

The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation, and the interrelationship between unobservable inputs, where relevant and significant. The impact of changes in inputs may not be independent as a change in one unobservable input may give rise to a change in another unobservable input, and where relationships exist between two unobservable inputs, those relationships are discussed below. Relationships may also exist between observable and unobservable inputs (for example, as observable interest rates rise, unobservable prepayment rates decline). Such relationships have not been included in the discussion below. In addition, for each of the individual relationships described below, the inverse relationship would also generally apply.

In addition, the following discussion provides a description of attributes of the underlying instruments and external market factors that affect the range of inputs used in the valuation of the Firm’s positions.

Discount rates and spreads

Yield – The yield of an asset is the interest rate used to discount future cash flows in a discounted cash flow calculation. An increase in the yield, in isolation, would result in a decrease in a fair value measurement.

Credit spread – The credit spread is the amount of additional annualized return over the market interest rate that a market participant would demand for taking exposure to the credit risk of an instrument. The credit spread for an instrument forms part of the discount rate used in a discounted cash flow calculation. Generally, an increase in the credit spread would result in a decrease in a fair value measurement.

The yield and the credit spread of a particular mortgage-backed security or CLO primarily reflect the risk inherent in the instrument. The yield is also impacted by the absolute level of the coupon paid by the instrument (which may not correspond directly to the level of inherent risk). Therefore, the range of yield and credit spreads reflects the range of risk inherent in various instruments owned by the Firm. The risk inherent in mortgage-backed securities is driven by the subordination of the security being valued and the characteristics of the underlying mortgages within the collateralized pool, including borrower FICO scores, loan to value ratios for residential mortgages and the nature of the property and/or any tenants for commercial mortgages. For CLOs, credit spread reflects the market’s implied risk premium based on several factors including the subordination of the investment, the credit quality of underlying borrowers, the specific terms of the loans within the CLO structure, as well as the supply and demand of the instrument. For corporate debt securities, obligations of U.S. states and municipalities and other similar instruments, credit spreads reflect the credit quality of the obligor and the tenor of the obligation.

Performance rates of underlying collateral in collateralized obligations (e.g., MBS, CLOs, etc.)

Prepayment speed – The prepayment speed is a measure of the voluntary unscheduled principal repayments of a prepayable obligation in a collateralized pool. Prepayment speeds generally decline as borrower delinquencies rise. An increase in prepayment speeds, in isolation, would result in a decrease in a fair value measurement of assets valued at a premium to par and an increase in a fair value measurement of assets valued at a discount to par.

Prepayment speeds may vary from collateral pool-to-collateral pool, and are driven by the type and location of the underlying borrower, the remaining tenor of the obligation as well as the level and type (e.g., fixed or floating) of interest rate being paid by the borrower. Typically collateral pools with higher borrower credit quality have a higher prepayment rate than those with lower borrower credit quality, all other factors being equal.

Conditional default rate – The conditional default rate is a measure of the reduction in the outstanding collateral balance underlying a collateralized obligation as a result of defaults. While there is typically no direct relationship between conditional default rates and prepayment speeds, collateralized obligations for which the underlying collateral have high prepayment speeds will tend to have lower conditional default rates. An increase in conditional default rates would generally be accompanied by an increase in loss severity and an increase in credit spreads. An increase in the conditional default rate, in isolation, would result in a decrease in a fair value measurement. Conditional default rates reflect the quality of the collateral underlying a securitization and the structure of the securitization itself. Based on the types of securities owned in the Firm’s market-making portfolios, conditional default rates are most typically at the lower end of the range presented.

Loss severity – The loss severity (the inverse concept is the recovery rate) is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance. An increase in loss severity is generally accompanied by an increase in conditional default rates. An increase in the loss severity, in isolation, would result in a decrease in a fair value measurement.

The loss severity applied in valuing a mortgage-backed security or a CLO investment depends on a host of factors relating to the underlying obligations (i.e., mortgages or loans). For mortgages, this includes the loan-to-value ratio, the nature of the lender’s charge over the property and various other instrument-specific factors. For CLO investments, loss severity is driven by the characteristics of the underlying loans including the seniority of the loans and the type and amount of any security provided by the obligor.

Correlation – Correlation is a measure of the relationship between the movements of two variables (e.g., how the change in one variable influences the change in the other). Correlation is a pricing input for a derivative product where the payoff is driven by one or more underlying risks. Correlation inputs are related to the type of derivative (e.g., interest rate, credit, equity and foreign exchange) due to the nature of the underlying risks. When parameters are positively correlated, an increase in one parameter will result in an increase in the other parameter. When parameters are negatively correlated, an increase in one parameter will result in a decrease in the other parameter. An increase in correlation can result in an increase or a decrease in a fair value measurement. Given a short correlation position, an increase in correlation, in isolation, would generally result in a decrease in a fair value measurement. Correlation inputs between risks within the same asset class are generally narrower than those between underlying risks across asset classes. In addition the ranges of credit correlation inputs tend to be narrower than those affecting other asset classes.

The level of correlation used in the valuation of derivatives with multiple underlying risks depends on a number of factors including the nature of those risks. For example, the correlation between two credit risk exposures would be different than that between two interest rate risk exposures. Similarly, the tenor of the transaction may also impact the correlation input as the relationship between the underlying risks may be different over different time periods. Furthermore, correlation levels are very much dependent on market conditions and could have a relatively wide range of levels within or across asset classes over time, particularly in volatile market conditions.

For the Firm’s derivatives and structured notes positions classified within level 3, the equity, foreign exchange and interest rate correlation inputs used in estimating fair value were concentrated at the upper end of the range presented, while the credit correlation inputs were distributed across the range presented.

Volatility – Volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Volatility is a pricing input for options, including equity options, commodity options, and interest rate options. Generally, the higher the volatility of the underlying, the riskier the instrument. Given a long position in an option, an increase in volatility, in isolation, would generally result in an increase in a fair value measurement.

The level of volatility used in the valuation of a particular option-based derivative depends on a number of factors, including the nature of the risk underlying the option (e.g., the volatility of a particular equity security may be significantly different from that of a particular commodity index), the tenor of the derivative as well as the strike price of the option.

For the Firm’s derivatives and structured notes positions classified within level 3, the equity and interest rate volatility inputs used in estimating fair value were concentrated at the upper end of the range presented, while commodities volatilities were concentrated at the lower end of the range.

EBITDA multiple – EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected earnings before interest, taxes, depreciation and amortization (“EBITDA”) of a company in order to estimate the company’s value. An increase in the EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.

Net asset value – Net asset value is the total value of a fund’s assets less liabilities. An increase in net asset value would result in an increase in a fair value measurement.

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 years ended December 31, 2012, 2011 and 2010. 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
Year ended December 31, 2012 (in millions)	Fair value at January 1, 2012			Total realized/unrealized gains/(losses)															Transfers into and/or out of level 3(h)			Fair value at Dec. 31, 2012			Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2012
								Purchases(g)			Sales					Settlements
Assets:
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies	$	86		$	(44	)		$	575		$	(103	)			$	(16	)	$	—		$	498		$	(21	)
Residential – nonagency	796			151				417			(533		)			(145		)	(23		)	663			74
Commercial – nonagency	1,758			(159		)		287			(475		)			(104		)	(100		)	1,207			(145		)
Total mortgage-backed securities	2,640			(52		)		1,279			(1,111		)			(265		)	(123		)	2,368			(92		)
Obligations of U.S. states and municipalities	1,619			37				336			(552		)			(4		)	—			1,436			(15		)
Non-U.S. government debt securities	104			(6		)		661			(668		)			(24		)	—			67			(5		)
Corporate debt securities	6,373			187				8,391			(6,186		)			(3,045		)	(412		)	5,308			689
Loans	12,209			836				5,342			(3,269		)			(3,801		)	(530		)	10,787			411
Asset-backed securities	7,965			272				2,550			(6,468		)			(614		)	(9		)	3,696			184
Total debt instruments	30,910			1,274				18,559			(18,254		)			(7,753		)	(1,074		)	23,662			1,172
Equity securities	1,177			(209		)		460			(379		)			(12		)	77			1,114			(112		)
Other	880			186				68			(108		)			(163		)	—			863			180
Total trading assets – debt and equity instruments	32,967			1,251			(c)	19,087			(18,741		)			(7,928		)	(997		)	25,639			1,240			(c)
Net derivative receivables:(a)
Interest rate	3,561			6,930				406			(194		)			(7,071		)	(310		)	3,322			905
Credit	7,732			(4,487		)		124			(84		)			(1,416		)	4			1,873			(3,271		)
Foreign exchange	(1,263		)	(800		)		112			(184		)			436			(51		)	(1,750		)	(957		)
Equity	(3,105		)	168				1,676			(2,579		)			899			1,135			(1,806		)	580
Commodity	(687		)	(673		)		74			64					1,278			198			254			(160		)
Total net derivative receivables	6,238			1,138			(c)	2,392			(2,977		)			(5,874		)	976			1,893			(2,903		)	(c)
Available-for-sale securities:
Asset-backed securities	24,958			135				9,280			(3,361		)			(3,104		)	116			28,024			118
Other	528			55				667			(113		)			(245		)	—			892			59
Total available-for-sale securities	25,486			190			(d)	9,947			(3,474		)			(3,349		)	116			28,916			177			(d)
Loans	1,647			695			(c)	1,536			(22		)			(1,718		)	144			2,282			12			(c)
Mortgage servicing rights	7,223			(635		)	(e)	2,833			(579		)			(1,228		)	—			7,614			(635		)	(e)
Other assets:
Private equity investments	6,751			420			(c)	1,545			(512		)			(977		)	(46		)	7,181			333			(c)
All other	4,374			(195		)	(f)	818			(238		)			(501		)	—			4,258			(200		)	(f)
	Fair value measurements using significant unobservable inputs
Year ended December 31, 2012 (in millions)	Fair value at January 1, 2012			Total realized/unrealized (gains)/losses															Transfers into and/or out of level 3(h)			Fair value at Dec. 31, 2012			Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2012
								Purchases(g)			Sales			Issuances		Settlements
Liabilities:(b)
Deposits	$	1,418		$	212		(c)	$	—		$	—		$	1,236	$	(380	)	$	(503	)	$	1,983		$	185		(c)
Other borrowed funds	1,507			148			(c)	—			—			1,646		(1,774		)	92			1,619			72			(c)
Trading liabilities – debt and equity instruments	211			(16		)	(c)	(2,875		)	2,940			—		(50		)	(5		)	205			(12		)	(c)
Accounts payable and other liabilities	51			1			(f)	—			—			—		(16		)	—			36			1			(f)
Beneficial interests issued by consolidated VIEs	791			181			(c)	—			—			221		(268		)	—			925			143			(c)
Long-term debt	10,310			328			(c)	—			—			3,662		(4,511		)	(1,313		)	8,476			(101		)	(c)

	Fair value measurements using significant unobservable inputs
Year ended December 31, 2011 (in millions)	Fair value at January 1, 2011			Total realized/unrealized gains/(losses)															Transfers into and/or out of level 3(h)			Fair value at Dec. 31, 2011			Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2011
								Purchases(g)			Sales					Settlements
Assets:
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies	$	174		$	24			$	28		$	(39	)			$	(43	)	$	(58	)	$	86		$	(51	)
Residential – nonagency	687			109				708			(432		)			(221		)	(55		)	796			(9		)
Commercial – nonagency	2,069			37				796			(973		)			(171		)	—			1,758			33
Total mortgage-backed securities	2,930			170				1,532			(1,444		)			(435		)	(113		)	2,640			(27		)
Obligations of U.S. states and municipalities	2,257			9				807			(1,465		)			(1		)	12			1,619			(11		)
Non-U.S. government debt securities	202			35				552			(531		)			(80		)	(74		)	104			38
Corporate debt securities	4,946			32				8,080			(5,939		)			(1,005		)	259			6,373			26
Loans	13,144			329				5,532			(3,873		)			(2,691		)	(232		)	12,209			142
Asset-backed securities	8,460			90				4,185			(4,368		)			(424		)	22			7,965			(217		)
Total debt instruments	31,939			665				20,688			(17,620		)			(4,636		)	(126		)	30,910			(49		)
Equity securities	1,685			267				180			(541		)			(352		)	(62		)	1,177			278
Other	930			48				36			(39		)			(95		)	—			880			79
Total trading assets – debt and equity instruments	34,554			980			(c)	20,904			(18,200		)			(5,083		)	(188		)	32,967			308			(c)
Net derivative receivables:(a)
Interest rate	2,836			5,205				511			(219		)			(4,534		)	(238		)	3,561			1,497
Credit	5,386			2,240				22			(13		)			116			(19		)	7,732			2,744
Foreign exchange	(614		)	(1,913		)		191			(20		)			886			207			(1,263		)	(1,878		)
Equity	(2,446		)	(60		)		715			(1,449		)			37			98			(3,105		)	(132		)
Commodity	(805		)	596				328			(350		)			(294		)	(162		)	(687		)	208
Total net derivative receivables	4,357			6,068			(c)	1,767			(2,051		)			(3,789		)	(114		)	6,238			2,439			(c)
Available-for-sale securities:
Asset-backed securities	13,775			(95		)		15,268			(1,461		)			(2,529		)	—			24,958			(106		)
Other	512			—				57			(15		)			(26		)	—			528			8
Total available-for-sale securities	14,287			(95		)	(d)	15,325			(1,476		)			(2,555		)	—			25,486			(98		)	(d)
Loans	1,466			504			(c)	326			(9		)			(639		)	(1		)	1,647			484			(c)
Mortgage servicing rights	13,649			(7,119		)	(e)	2,603			—					(1,910		)	—			7,223			(7,119		)	(e)
Other assets:
Private equity investments	7,862			943			(c)	1,452			(2,746		)			(594		)	(166		)	6,751			(242		)	(c)
All other	4,179			(54		)	(f)	938			(139		)			(521		)	(29		)	4,374			(83		)	(f)
	Fair value measurements using significant unobservable inputs
Year ended December 31, 2011 (in millions)	Fair value at January 1, 2011			Total realized/unrealized (gains)/losses															Transfers into and/or out of level 3(h)			Fair value at Dec. 31, 2011			Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2011
								Purchases(g)			Sales			Issuances		Settlements
Liabilities:(b)
Deposits	$	773		$	15		(c)	$	—		$	—		$	433	$	(386	)	$	583		$	1,418		$	4		(c)
Other borrowed funds	1,384			(244		)	(c)	—			—			1,597		(834		)	(396		)	1,507			(85		)	(c)
Trading liabilities – debt and equity instruments	54			17			(c)	(533		)	778			—		(109		)	4			211			(7		)	(c)
Accounts payable and other liabilities	236			(61		)	(f)	—			—			—		(124		)	—			51			5			(f)
Beneficial interests issued by consolidated VIEs	873			17			(c)	—			—			580		(679		)	—			791			(15		)	(c)
Long-term debt	13,044			60			(c)	—			—			2,564		(3,218		)	(2,140		)	10,310			288			(c)

	Fair value measurements using significant unobservable inputs
Year ended December 31, 2010 (in millions)	Fair value at January 1, 2010			Total realized/ unrealized gains/(losses)				Purchases, issuances, settlements, net			Transfers into and/or out of level 3(h)			Fair value at Dec. 31, 2010			Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2010
Assets:
Trading assets:
Debt instruments:
Mortgage-backed securities:
U.S. government agencies	$	260		$	24			$	(107	)	$	(3	)	$	174		$	(31	)
Residential – nonagency	1,115			178				(564		)	(42		)	687			110
Commercial – nonagency	1,770			230				(33		)	102			2,069			130
Total mortgage-backed securities	3,145			432				(704		)	57			2,930			209
Obligations of U.S. states and municipalities	1,971			2				142			142			2,257			(30		)
Non-U.S. government debt securities	89			(36		)		194			(45		)	202			(8		)
Corporate debt securities	5,241			(325		)		115			(85		)	4,946			28
Loans	13,218			(40		)		1,296			(1,330		)	13,144			(385		)
Asset-backed securities	8,620			237				(408		)	11			8,460			195
Total debt instruments	32,284			270				635			(1,250		)	31,939			9
Equity securities	1,956			133				(351		)	(53		)	1,685			199
Other	1,441			211				(801		)	79			930			299
Total trading assets – debt and equity instruments	35,681			614			(c)	(517		)	(1,224		)	34,554			507			(c)
Net derivative receivables:(a)
Interest rate	2,040			3,057				(2,520		)	259			2,836			487
Credit	10,350			(1,757		)		(3,102		)	(105		)	5,386			(1,048		)
Foreign exchange	1,082			(913		)		(434		)	(349		)	(614		)	(464		)
Equity	(2,306		)	(194		)		(82		)	136			(2,446		)	(212		)
Commodity	(329		)	(700		)		134			90			(805		)	(76		)
Total net derivative receivables	10,837			(507		)	(c)	(6,004		)	31			4,357			(1,313		)	(c)
Available-for-sale securities:
Asset-backed securities	12,732			(146		)		1,189			—			13,775			(129		)
Other	461			(49		)		37			63			512			18
Total available-for-sale securities	13,193			(195		)	(d)	1,226			63			14,287			(111		)	(d)
Loans	990			145			(c)	323			8			1,466			37			(c)
Mortgage servicing rights	15,531			(2,268		)	(e)	386			—			13,649			(2,268		)	(e)
Other assets:
Private equity investments	6,563			1,038			(c)	715			(454		)	7,862			688			(c)
All other	9,521			(113		)	(f)	(5,132		)	(97		)	4,179			37			(f)
	Fair value measurements using significant unobservable inputs
Year ended December 31, 2010 (in millions)	Fair value at January 1, 2010			Total realized/ unrealized (gains)/losses				Purchases, issuances, settlements, net			Transfers into and/or out of level 3(h)			Fair value at Dec. 31, 2010			Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2010
Liabilities:(b)
Deposits	$	476		$	54		(c)	$	(86	)	$	329		$	773		$	(77	)	(c)
Other borrowed funds	542			(242		)	(c)	1,326			(242		)	1,384			445			(c)
Trading liabilities – debt and equity instruments	10			2			(c)	19			23			54			—
Accounts payable and other liabilities	355			(138		)	(f)	19			—			236			37			(f)
Beneficial interests issued by consolidated VIEs	625			(7		)	(c)	87			168			873			(76		)	(c)
Long-term debt	18,287			(532		)	(c)	(4,796		)	85			13,044			662			(c)

(a) All level 3 derivatives are presented on a net basis, irrespective of underlying counterparty.

(b) 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%, 22% and 23% at December 31, 2012, 2011 and 2010, respectively.

(c) Predominantly reported in principal transactions revenue, except for changes in fair value for Consumer & Community Banking (“CCB”) mortgage loans and lending-related commitments originated with the intent to sell, which are reported in mortgage fees and related income.

(d) Realized gains/(losses) on 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 $145 million, $(240) million, and $(66) million for the years ended December 31, 2012, 2011 and 2010, respectively. Unrealized gains/(losses) recorded on AFS securities in OCI were $45 million, $145 million and $(129) million for the years ended December 31, 2012, 2011 and 2010, respectively.

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

(f) Largely reported in other income.

(g) Loan originations are included in purchases.

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

Level 3 analysis

Consolidated Balance Sheets changes

Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 4.4% of total Firm assets at December 31, 2012. The following describes significant changes to level 3 assets since December 31, 2011, for those items measured at fair value on a recurring basis. For further information on changes impacting items measured at fair value on a nonrecurring basis, see Assets and liabilities measured at fair value on a nonrecurring basis on page 212 of this Annual Report.

For the year ended December 31, 2012

Level 3 assets were $99.1 billion at December 31, 2012, reflecting a decrease of $14.3 billion from December 31, 2011, due to the following:

• $11.8 billion decrease in gross derivative receivables, predominantly driven by a $10.6 billion decrease from the impact of tightening reference entity credit spreads and risk reductions of credit derivatives and $1.6 billion decrease due to fluctuation in foreign exchange rates;

• $7.3 billion decrease in trading assets – debt and equity instruments, predominantly driven by sales and settlements of ABS, trading loans, and corporate debt securities.

The decreases above are partially offset by:

• $3.1 billion increase in asset-backed AFS securities, predominantly driven by purchases of CLOs.

Gains and Losses

The following describes significant components of total realized/unrealized gains/(losses) for instruments measured at fair value on a recurring basis for the years ended 2012, 2011 and 2010. For further information on these instruments, see Changes in level 3 recurring fair value measurements rollforward tables on pages 207–210 of this Annual Report.

2012

• $1.3 billion of net gains on trading assets - debt and equity instruments, largely driven by tightening of credit spreads and fluctuation in foreign exchange rates; and

• $1.1 billion of net gains on derivatives, driven by $6.9 billion of net gains predominantly on interest rate lock commitments due to increased volumes and lower interest rates, partially offset by $4.5 billion of net losses on credit derivatives largely as a result of tightening of reference entity credit spreads.

2011

• $7.1 billion of losses on MSRs. For further discussion of the change, refer to Note 17 on pages 291–295 of this Annual Report; and

• $6.1 billion of net gains on derivatives, related to declining interest rates and widening of reference entity credit spreads, partially offset by losses due to fluctuation in foreign exchange rates.

2010

• $2.3 billion of losses on MSRs; For further discussion of the change, refer to Note 17 on pages 291–295 of this Annual Report; and

• $1.0 billion gain in private equity largely driven by gains on investments in the portfolio.

Credit adjustments

When determining the fair value of an instrument, it may be necessary to record adjustments to the Firm’s estimates of fair value in order to reflect the counterparty credit quality and Firm’s own creditworthiness:

• Credit valuation adjustments (“CVA”) are taken to reflect the credit quality of a counterparty in the valuation of derivatives. CVA adjustments are necessary when the market price (or parameter) is not indicative of the credit quality of the counterparty. As few classes of derivative contracts are listed on an exchange, derivative positions are predominantly valued using models that use as their basis observable market parameters. An adjustment is necessary to reflect the credit quality of each derivative counterparty to arrive at fair value. The adjustment also takes into account contractual factors designed to reduce the Firm’s credit exposure to each counterparty, such as collateral and legal rights of offset.

• Debit valuation adjustments (“DVA”) are taken to reflect the credit quality of the Firm in the valuation of liabilities measured at fair value. The methodology to determine the adjustment is generally consistent with CVA and incorporates JPMorgan Chase’s credit spread as observed through the credit default swap (“CDS”) market.

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.

December 31, (in millions)	2012			2011
Derivative receivables balance (net of derivatives CVA)	$	74,983		$	92,477
Derivatives CVA(a)	(4,238		)	(6,936		)
Derivative payables balance (net of derivatives DVA)	70,656			74,977
Derivatives DVA	(830		)	(1,420		)
Structured notes balance (net of structured notes DVA)(b)(c)	48,112			49,229
Structured notes DVA	(1,712		)	(2,052		)

(a) Derivatives CVA, gross of hedges, includes results managed by the credit portfolio and other lines of business within the Corporate & Investment Bank (“CIB”).

(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 214–216 of this Annual Report.

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

Year ended December 31, (in millions)	2012			2011			2010
Credit adjustments:
Derivative CVA(a)	$	2,698		$	(2,574	)	$	(665	)
Derivative DVA	(590		)	538			41
Structured notes DVA(b)	(340		)	899			468

(a) Derivatives CVA, gross of hedges, includes results managed by the credit portfolio and other lines of business within the CIB.

(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 214–216 of this Annual Report.

Assets and liabilities measured at fair value on a nonrecurring basis

At December 31, 2012 and 2011, assets measured at fair value on a nonrecurring basis were $5.1 billion and $5.3 billion, respectively, comprised predominantly of loans. At December 31, 2012, $667 million and $4.4 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 December 31, 2012 and 2011. For the years ended December 31, 2012 and 2011, there were no significant transfers between levels 1, 2, and 3.

Of the $5.1 billion of assets measured at fair value on a nonrecurring basis, $4.0 billion related to residential real estate loans at the net realizable value of the underlying collateral (i.e., collateral dependent loans). These amounts are classified as level 3, as they are valued using a broker’s price opinion and discounted based upon the Firm’s experience with actual liquidation values. These discounts to the broker price opinions ranged from 22% to 66%, with a weighted average of 29%.

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 years ended December 31, 2012, 2011 and 2010, related to financial instruments held at those dates were losses of $1.6 billion, $2.2 billion and $3.6 billion, respectively; these losses were predominantly associated with loans. The changes reported for the year ended December 31, 2012, included the impact of charge-offs recognized on residential real estate loans discharged under Chapter 7 bankruptcy, as described in Note 14 on page 259 of this Annual Report.

For further 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 250–275 of this Annual Report.

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

U.S. GAAP requires disclosure of the estimated fair value of certain financial instruments, and the methods and significant assumptions used to estimate their fair value. Financial instruments within the scope of these disclosure requirements are included in the following table. However, certain financial instruments and all nonfinancial instruments are excluded from the scope of these disclosure requirements. Accordingly, the fair value disclosures provided in the following table include only a partial estimate of the fair value of JPMorgan Chase’s assets and liabilities. For example, the Firm has developed long-term relationships with its customers through its deposit base and credit card accounts, commonly referred to as core deposit intangibles and credit card relationships. In the opinion of management, these items, in the aggregate, add significant value to JPMorgan Chase, but their fair value is not disclosed in this Note.

Financial instruments for which carrying value approximates fair value

Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and due from banks; deposits with banks; federal funds sold; securities purchased under resale agreements and securities borrowed with short-dated maturities; short-term receivables and accrued interest receivable; commercial paper; federal funds purchased; securities loaned and sold under repurchase agreements with short-dated maturities; other borrowed funds; accounts payable; and accrued liabilities. In addition, U.S. GAAP requires that the fair value for deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to their carrying value; recognition of the inherent funding value of these instruments is not permitted.

The following table presents the carrying values and estimated fair values at December 31, 2012 and 2011, of financial assets and liabilities that are not carried on the Firm’s Consolidated Balance Sheets at fair value (i.e. excluding financial instruments which are carried at fair value on a recurring basis. At December 31, 2012, 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 pages 196–200 of this Note.

	2012										2011
			Estimated fair value hierarchy
December 31, (in billions)	Carrying value		Level 1		Level 2		Level 3		Total estimated fair value		Carrying value		Estimated fair value
Financial assets
Cash and due from banks	$	53.7	$	53.7	$	—	$	—	$	53.7	$	59.6	$	59.6
Deposits with banks	121.8		114.1		7.7		—		121.8		85.3		85.3
Accrued interest and accounts receivable	60.9		—		60.3		0.6		60.9		61.5		61.5
Federal funds sold and securities purchased under resale agreements	272.0		—		272.0		—		272.0		213.1		213.1
Securities borrowed	108.8		—		108.8		—		108.8		127.2		127.2
Loans, net of allowance for loan losses(a)	709.3		—		26.4		685.4		711.8		694.0		693.7
Other	49.7		—		42.7		7.4		50.1		49.8		50.3
Financial liabilities
Deposits	$	1,187.9	$	—	$	1,187.2	$	1.2	$	1,188.4	$	1,122.9	$	1,123.4
Federal funds purchased and securities loaned or sold under repurchase agreements	235.7		—		235.7		—		235.7		206.7		206.7
Commercial paper	55.4		—		55.4		—		55.4		51.6		51.6
Other borrowed funds	15.0		—		15.0		—		15.0		12.3		12.3
Accounts payable and other liabilities	156.5		—		153.8		2.5		156.3		166.9		166.8
Beneficial interests issued by consolidated VIEs	62.0		—		57.7		4.4		62.1		64.7		64.9
Long-term debt and junior subordinated deferrable interest debentures	218.2		—		220.0		5.4		225.4		222.1		219.5

(a) 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 the allowance for loan loss 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 page 198 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.

	2012										2011
			Estimated fair value hierarchy
December 31, (in billions)	Carrying value(a)		Level 1		Level 2		Level 3		Total estimated fair value		Carrying value(a)		Estimated fair value
Wholesale lending-related commitments	$	0.7	$	—	$	—	$	1.9	$	1.9	$	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.

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 page 198 of this Note.

Trading assets and liabilities

Trading assets include debt and equity instruments owned by JPMorgan Chase (“long” positions) that are held for client market-making and client-driven activities, as well as for certain risk management activities, certain loans managed on a fair value basis and for which the Firm has elected the fair value option, and physical commodities inventories that are generally accounted for at the lower of cost or market (market approximates fair value). Trading liabilities include debt and equity instruments that the Firm has sold to other parties but does not own (“short” positions). The Firm is obligated to purchase instruments at a future date to cover the short positions. Included in trading assets and trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. Trading assets and liabilities are carried at fair value on the Consolidated Balance Sheets. 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”).

Trading assets and liabilities – average balances

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

Year ended December 31, (in millions)	2012		2011		2010
Trading assets – debt and equity instruments(a)	$	349,337	$	393,890	$	354,441
Trading assets – derivative receivables	85,744		90,003		84,676
Trading liabilities – debt and equity instruments(a)(b)	69,001		81,916		78,159
Trading liabilities – derivative payables	76,162		71,539		65,714

(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.