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Fair Value Option
 12 Months Ended
Dec. 31, 2012
Fair Value Option [Abstract]  
FAIR VALUE OPTION
Fair value option
The fair value option provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value.
Elections
Elections were made by the Firm to:
•
Mitigate income statement volatility caused by the differences in the measurement basis of elected instruments (for example, certain instruments elected were previously accounted for on an accrual basis) while the associated risk management arrangements are accounted for on a fair value basis;
•
Eliminate the complexities of applying certain accounting models (e.g., hedge accounting or bifurcation accounting for hybrid instruments); and/or
•
Better reflect those instruments that are managed on a fair value basis.
Elections include the following:
•
Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis.
•
Securities financing arrangements with an embedded derivative and/or a maturity of greater than one year.
•
Owned beneficial interests in securitized financial assets that contain embedded credit derivatives, which would otherwise be required to be separately accounted for as a derivative instrument.
•
Certain investments that receive tax credits and other equity investments acquired as part of the Washington Mutual transaction.
•
Structured notes issued as part of CIB’s client-driven activities. (Structured notes are financial instruments that contain embedded derivatives.)
•
Long-term beneficial interests issued by CIB’s consolidated securitization trusts where the underlying assets are carried at fair value.

Changes in fair value under the fair value option election
The following table presents the changes in fair value included in the Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010, for items for which the fair value option was elected. The profit and loss information presented below only includes the financial instruments that were elected to be measured at fair value; related risk management instruments, which are required to be measured at fair value, are not included in the table.
 
2012
 
2011
 
2010
December 31, (in millions)
Principal transactions
Other income
Total changes in fair value recorded
 
Principal transactions
Other income
Total changes in fair value recorded
 
Principal transactions
Other income
Total changes in fair value recorded
Federal funds sold and securities purchased under resale agreements
$
161

$
—

 
$
161

 
$
270

$
—

 
$
270

 
$
173

$
—

 
$
173

Securities borrowed
10

—

 
10

 
(61
)
—

 
(61
)
 
31

—

 
31

Trading assets:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Debt and equity instruments, excluding loans
513

7

(c) 
520

 
53

(6
)
(c) 
47

 
556

(2
)
(c) 
554

Loans reported as trading assets:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Changes in instrument-specific credit risk
1,489

81

(c) 
1,570

 
934

(174
)
(c) 
760

 
1,279

(6
)
(c) 
1,273

Other changes in fair value
(183
)
7,670

(c) 
7,487

 
127

5,263

(c) 
5,390

 
(312
)
4,449

(c) 
4,137

Loans:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Changes in instrument-specific credit risk
(14
)
—

 
(14
)
 
2

—

 
2

 
95

—

 
95

Other changes in fair value
676

—

 
676

 
535

—

 
535

 
90

—

 
90

Other assets
—

(339
)
(d) 
(339
)
 
(49
)
(19
)
(d) 
(68
)
 
—

(263
)
(d) 
(263
)
Deposits(a)
(188
)
—

 
(188
)
 
(237
)
—

 
(237
)
 
(564
)
—

 
(564
)
Federal funds purchased and securities loaned or sold under repurchase agreements
(25
)
—

 
(25
)
 
(4
)
—

 
(4
)
 
(29
)
—

 
(29
)
Other borrowed funds(a) 
494

—

 
494

 
2,986

—

 
2,986

 
123

—

 
123

Trading liabilities
(41
)
—

 
(41
)
 
(57
)
—

 
(57
)
 
(23
)
—

 
(23
)
Beneficial interests issued by consolidated VIEs
(166
)
—

 
(166
)
 
(83
)
—

 
(83
)
 
(12
)
—

 
(12
)
Other liabilities
—

—

 
—

 
(3
)
(5
)
(d) 
(8
)
 
(9
)
8

(d) 
(1
)
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 

 

 
 
Changes in instrument-specific credit risk(a) 
(835
)
—

 
(835
)
 
927

—

 
927

 
400

—

 
400

Other changes in fair value(b)
(1,025
)
—

 
(1,025
)
 
322

—

 
322

 
1,297

—

 
1,297

(a)
Total changes in instrument-specific credit risk related to structured notes were $(340) million, $899 million, and $468 million for the years ended December 31, 2012, 2011 and 2010, respectively. These totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt.
(b)
Structured notes are debt instruments with embedded derivatives that are tailored to meet a client’s need. The embedded derivative is the primary driver of risk. Although the risk associated with the structured notes is actively managed, the gains/(losses) reported in this table do not include the income statement impact of such risk management instruments.
(c)
Reported in mortgage fees and related income.
(d)
Reported in other income.
Determination of instrument-specific credit risk for items for which a fair value election was made
The following describes how the gains and losses included in earnings during 2012, 2011 and 2010, which were attributable to changes in instrument-specific credit risk, were determined.
•
Loans and lending-related commitments: For floating-rate instruments, all changes in value are attributed to instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate-related and changes in value that are credit-related. Allocations are generally based on an analysis of borrower-specific credit spread and recovery information, where available, or benchmarking to similar entities or industries.
•
Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in the Firm’s credit spread.
•
Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment or an immaterial adjustment for instrument-specific credit risk related to these agreements.


Difference between aggregate fair value and aggregate remaining contractual principal balance outstanding
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of December 31, 2012 and 2011, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.
 
2012
 
2011
December 31, (in millions)
Contractual principal outstanding
 
Fair value
Fair value over/(under) contractual principal outstanding
 
Contractual principal outstanding
 
Fair value
Fair value over/(under) contractual principal outstanding
Loans(a)
 
 
 
 
 
 
 
 
 
Nonaccrual loans
 
 
 
 
 
 
 
 
 
Loans reported as trading assets
$
4,217

 
$
960

$
(3,257
)
 
$
4,875

 
$
1,141

$
(3,734
)
Loans
116

 
64

(52
)
 
820

 
56

(764
)
Subtotal
4,333

 
1,024

(3,309
)
 
5,695

 
1,197

(4,498
)
All other performing loans
 
 
 
 
 
 
 
 
 
Loans reported as trading assets
44,084

 
40,581

(3,503
)
 
37,481

 
32,657

(4,824
)
Loans
2,211

 
2,099

(112
)
 
2,136

 
1,601

(535
)
Total loans
$
50,628

 
$
43,704

$
(6,924
)
 
$
45,312

 
$
35,455

$
(9,857
)
Long-term debt
 
 
 
 
 
 
 
 
 
Principal-protected debt
$
16,541

(c) 
$
16,391

$
(150
)
 
$
19,417

(c) 
$
19,890

$
473

Nonprincipal-protected debt(b)
NA

 
14,397

NA

 
NA

 
14,830

NA

Total long-term debt
NA

 
$
30,788

NA

 
NA

 
$
34,720

NA

Long-term beneficial interests
 
 
 
 
 
 
 
 
 
Nonprincipal-protected debt(b)
NA

 
$
1,170

NA

 
NA

 
$
1,250

NA

Total long-term beneficial interests
NA

 
$
1,170

NA

 
NA

 
$
1,250

NA

(a)
There were no performing loans which were ninety days or more past due as of December 31, 2012 and 2011, respectively.
(b)
Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected structured notes, for which the Firm is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected structured notes do not obligate the Firm to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying variable or derivative feature embedded in the note.
(c)
Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflected as the remaining contractual principal is the final principal payment at maturity.
At December 31, 2012 and 2011, the contractual amount of letters of credit for which the fair value option was elected was $4.5 billion and $3.9 billion, respectively, with a corresponding fair value of $(75) million and $(5) million, respectively. For further information regarding off-balance sheet lending-related financial instruments, see Note 29 on pages 308–315 of this Annual Report.