Investments in Securities

12 Months Ended

Dec. 31, 2012

Investments, Debt and Equity Securities [Abstract]

Investments in Securities

Investments in Securities

Trading Securities

Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value losses, net” in our consolidated statements of operations and comprehensive income (loss). The following table displays our investments in trading securities as of December 31, 2012 and 2011.

	As of December 31,
	2012		2011
	(Dollars in millions)
Mortgage-related securities:
Fannie Mae	$	6,248	$	7,424
Freddie Mac	2,793		2,732
Ginnie Mae	437		287
Alt-A private-label securities	1,330		1,349
Subprime private-label securities	1,319		1,280
CMBS	9,826		10,411
Mortgage revenue bonds	675		724
Other mortgage-related securities	117		143
Total	22,745		24,350
Non-mortgage-related securities:
U.S. Treasury securities	17,950		47,737
Asset-backed securities	—		2,111
Total	17,950		49,848
Total trading securities	$	40,695	$	74,198

The following table displays information about our net trading gains and losses for the years ended December 31, 2012, 2011 and 2010.

	For the Year Ended
	December 31,
	2012				2011			2010
		(Dollars in millions)
Net trading gains (losses):
Mortgage-related securities		$	1,014		$	274			$	2,607
Non-mortgage-related securities		(10		)	(8		)		85
Total		$	1,004		$	266			$	2,692
Net trading gains (losses) recorded in the period related to securities still held at period end:
Mortgage-related securities		$	1,035		$	268			$	2,485
Non-mortgage-related securities		2			(1		)		56
Total		$	1,037		$	267			$	2,541

Available-for-Sale Securities

We measure AFS securities at fair value with unrealized gains and losses recorded net of tax as a component of “Other comprehensive income (loss)” and we record realized gains and losses from the sale of AFS securities in “Investment gains, net” in our consolidated statements of operations and comprehensive income (loss).

The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the years ended December 31, 2012, 2011 and 2010.

	For the Year Ended
	December 31,
	2012		2011		2010
	(Dollars in millions)
Gross realized gains	$	40	$	182	$	566
Gross realized losses	16		90		293
Total proceeds (1)	634		2,152		7,207

__________

s

⁽¹⁾  Excludes proceeds from the initial sale of securities from new portfolio securitizations included in “Note 2, Consolidations and Transfers of Financial Assets.”

The following tables display the amortized cost, gross unrealized gains and losses and fair value by major security type for AFS securities we held as of December 31, 2012 and 2011.

		As of December 31, 2012
	Total Amortized Cost (1)			Gross Unrealized Gains			Gross Unrealized Losses - OTTI (2)				Gross Unrealized Losses - Other (3)				Total Fair Value
		(Dollars in millions)
Fannie Mae		$	9,580		$	871		$	—			$	(16	)	$	10,435
Freddie Mac		8,652			728			—				—			9,380
Ginnie Mae		645			106			—				—			751
Alt-A private-label securities		11,356			452			(637		)		(96		)	11,075
Subprime private-label securities		8,137			217			(669		)		(238		)	7,447
CMBS(4)		12,284			824			—				(11		)	13,097
Mortgage revenue bonds		7,782			157			(45		)		(52		)	7,842
Other mortgage-related securities		3,330			109			(18		)		(267		)	3,154
Total		$	61,766		$	3,464		$	(1,369	)		$	(680	)	$	63,181

		As of December 31, 2011
	Total Amortized Cost (1)			Gross Unrealized Gains			Gross Unrealized Losses - OTTI (2)				Gross Unrealized Losses - Other (3)				Total Fair Value
		(Dollars in millions)
Fannie Mae		$	15,486		$	1,381		$	(3	)		$	(14	)	$	16,850
Freddie Mac		11,906			917			—				—			12,823
Ginnie Mae		775			127			—				—			902
Alt-A private-label securities		13,314			233			(1,618		)		(246		)	11,683
Subprime private-label securities		9,556			17			(1,534		)		(453		)	7,586
CMBS(4)		13,949			181			—				(104		)	14,026
Mortgage revenue bonds		10,172			202			(56		)		(64		)	10,254
Other mortgage-related securities		3,687			92			(39		)		(282		)	3,458
Total		$	78,845		$	3,150		$	(3,250	)		$	(1,163	)	$	77,582

__________

s

⁽¹⁾  Amortized cost consists of unpaid principal balance, unamortized premiums, discounts and other cost basis adjustments as well as the credit component of other-than-temporary impairments (“OTTI”) recognized in our consolidated statements of operations and comprehensive income (loss).

⁽²⁾  Represents the noncredit component of other-than-temporary impairments losses recorded in “Accumulated other comprehensive income (loss)” as well as cumulative changes in fair value of securities for which we previously recognized the credit component of other-than-temporary impairments.

⁽³⁾  Represents the gross unrealized losses on securities for which we have not recognized other-than-temporary impairments.

⁽⁴⁾  Amortized cost includes $527 million and $686 million as of December 31, 2012 and 2011, respectively, of increases to the carrying amount from previous fair value hedge accounting.

The following tables display additional information regarding gross unrealized losses and fair value by major security type for AFS securities in an unrealized loss position that we held as of December 31, 2012 and 2011.

		As of December 31, 2012
	Less Than 12 Consecutive Months						12 Consecutive Months or Longer
	Gross Unrealized Losses				Fair Value		Gross Unrealized Losses				Fair Value
		(Dollars in millions)
Fannie Mae		$	(5	)	$	599		$	(11	)	$	372
Alt-A private-label securities		(18		)	541			(715		)	4,465
Subprime private-label securities		(14		)	243			(893		)	5,058
CMBS		—			—			(11		)	240
Mortgage revenue bonds		(3		)	127			(94		)	1,198
Other mortgage-related securities		(3		)	95			(282		)	1,529
Total		$	(43	)	$	1,605		$	(2,006	)	$	12,862
		As of December 31, 2011
	Less Than 12 Consecutive Months						12 Consecutive Months or Longer
	Gross Unrealized Losses				Fair Value		Gross Unrealized Losses				Fair Value
		(Dollars in millions)
Fannie Mae		$	(4	)	$	519		$	(13	)	$	208
Alt-A private-label securities		(133		)	1,414			(1,731		)	6,525
Subprime private-label securities		(73		)	471			(1,914		)	6,686
CMBS		(20		)	1,458			(84		)	2,790
Mortgage revenue bonds		(4		)	114			(116		)	1,971
Other mortgage-related securities		(21		)	547			(300		)	1,588
Total		$	(255	)	$	4,523		$	(4,158	)	$	19,768

Other-Than-Temporary Impairments

We recognize the credit component of other-than-temporary impairments of our debt securities in “Net other-than-temporary impairments” and the noncredit component in “Other comprehensive income (loss)” in our consolidated statements of operations and comprehensive income (loss) for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery.

The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. As of December 31, 2012, $2.0 billion of gross unrealized losses on AFS securities had existed for a period of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of December 31, 2012 include unrealized losses on securities with other-than-temporary impairment in which a portion of the impairment remains in “Accumulated other comprehensive income (loss).” The securities with unrealized losses for 12 consecutive months or longer, on average, had a fair value as of December 31, 2012 that was 87% of their amortized cost basis. Based on our review for impairments of AFS securities, which includes an evaluation of the collectibility of cash flows and any intent or requirement to sell the securities, we have concluded that we do not have an intent to sell and we believe it is not more likely than not that we will be required to sell the securities. Additionally, our projections of cash flows indicate that we will recover these unrealized losses over the lives of the securities.

The following table displays our net other-than-temporary impairments by major security type recognized in our consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010.

	For the Year Ended
	December 31,
	2012			2011				2010(1)
		(Dollars in millions)
Alt-A private-label securities		$	365		$	563			$	327
Subprime private-label securities		329			(303		)		368
Other		19			48				27
Net other-than-temporary impairments		$	713		$	308			$	722

__________

⁽¹⁾  Certain prior period amounts have been reclassified to conform to the current period presentation.

Net other-than-temporary impairments recorded in the year ended December 31, 2012 increased compared with the year ended December 31, 2011, driven primarily by an update to the assumptions used to project cash flow estimates on our Alt-A and subprime private-label securities. For additional information, refer to “Note 1, Summary of Significant Accounting Policies.”

The following table displays activity related to the unrealized credit component on debt securities held by us and recognized in our consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2012 and 2011. A related unrealized noncredit component has been recognized in “Other comprehensive income (loss).”

	For the Year Ended
	December 31,
	2012			2011
	(Dollars in millions)
Balance, January 1	$	8,915		$	8,215
Additions for the credit component on debt securities for which OTTI was not previously recognized	15			23
Additions for the credit component on debt securities for which OTTI was previously recognized	698			285
Reductions for securities no longer in portfolio at period end	(5		)	(7		)
(Reductions) additions for amortization resulting from changes in cash flows expected to be collected over the remaining life of the securities(1)	(409		)	399
Balance, December 31	$	9,214		$	8,915

__________

⁽¹⁾  Amount includes out-of-period adjustment of $727 million in 2011 due to an overstatement of income and amortized cost.

As of December 31, 2012, those debt securities with other-than-temporary impairment for which we recognized the credit component of other-than-temporary impairments in our consolidated statements of operations and comprehensive income (loss) consisted predominantly of Alt-A and subprime private-label securities. We evaluate Alt-A (including option adjustable rate mortgage (“ARM”)) and subprime private-label securities for other-than-temporary impairment by discounting the projected cash flows from econometric models to estimate the portion of loss in value attributable to credit. Separate components of a third-party model project regional home prices, unemployment and interest rates. The model combines these factors with available current information regarding attributes of loans in pools backing the private-label mortgage-related securities to project prepayment speeds, conditional default rates, loss severities and delinquency rates. It incorporates detailed information on security-level subordination levels and cash flow priority of payments to project security level cash flows. We have recorded other-than-temporary impairments for the year ended December 31, 2012 based on this analysis. For securities we determined were not other-than-temporarily impaired, we concluded that either the bond had no projected credit loss or if we projected a loss, that the present value of expected cash flows was greater than the security’s cost basis.

The following table displays the modeled attributes, including default rates and severities, which are used to determine whether our senior interests in certain non-agency mortgage-related securities will experience a cash shortfall as of December 31, 2012. Assumption of voluntary prepayment rates is also an input to the present value of expected losses.

	As of December 31, 2012
				Alt-A
	Subprime			Option ARM				Fixed Rate				Variable Rate				Hybrid Rate
	(Dollars in millions)
Vintage Year
2004 & Prior:
Unpaid principal balance	$	1,404			$	438			$	2,836			$	431			$	1,955
Weighted average collateral default(1)	39.9		%		37.3		%		12.8		%		26.6		%		16.3		%
Weighted average collateral severities(2)	69.0				60.0				53.7				53.0				47.1
Weighted average voluntary prepayment rates(3)	6.6				6.2				12.1				6.5				9.4
Average credit enhancement(4)	51.9				11.4				12.1				23.0				9.2
2005
Unpaid principal balance	$	136			$	1,171			$	1,015			$	467			$	2,058
Weighted average collateral default(1)	66.5		%		51.0		%		36.6		%		46.7		%		33.3		%
Weighted average collateral severities(2)	74.3				66.1				64.5				62.7				54.7
Weighted average voluntary prepayment rates(3)	2.6				4.8				7.3				5.4				6.0
Average credit enhancement(4)	65.3				17.1				0.8				11.8				3.9
2006
Unpaid principal balance	$	10,543			$	995			$	464			$	1,400			$	1,434
Weighted average collateral default(1)	69.2		%		65.2		%		38.3		%		51.8		%		30.9		%
Weighted average collateral severities(2)	76.4				67.4				66.4				63.4				55.3
Weighted average voluntary prepayment rates(3)	2.4				3.6				5.8				4.2				6.0
Average credit enhancement(4)	13.1				11.2				0.2				0.6				—
2007 & After:
Unpaid principal balance	$	570			$	—			$	—			$	—			$	101
Weighted average collateral default(1)	64.6		%		N/A				N/A				N/A				37.1		%
Weighted average collateral severities(2)	66.9				N/A				N/A				N/A				57.2
Weighted average voluntary prepayment rates(3)	1.9				N/A				N/A				N/A				6.9
Average credit enhancement(4)	27.4				N/A				N/A				N/A				21.7
Total
Unpaid principal balance	$	12,653			$	2,604			$	4,315			$	2,298			$	5,548
Weighted average collateral default(1)	65.8		%		54.1		%		21.1		%		46.0		%		26.8		%
Weighted average collateral severities(2)	75.2				65.6				57.6				61.3				52.2
Weighted average voluntary prepayment rates(3)	2.8				4.6				10.3				4.9				7.2
Average credit enhancement(4)	18.6				13.9				8.2				7.1				5.1

__________

⁽¹⁾  The expected remaining cumulative default rate of the collateral pool backing the securities, as a percentage of the current collateral unpaid principal balance, weighted by security unpaid principal balance.

⁽²⁾  The expected remaining loss given default of the collateral pool backing the securities, calculated as the ratio of remaining cumulative loss divided by cumulative defaults, weighted by security unpaid principal balance.

⁽³⁾  The average monthly voluntary prepayment rate, weighted by security unpaid principal balance.

⁽⁴⁾  The average percent current credit enhancement provided by subordination of other securities. Excludes excess interest projections and monoline bond insurance.

For mortgage revenue bonds, where we cannot utilize credit-sensitized cash flows, we perform a qualitative and quantitative analysis to assess whether a bond is other-than-temporarily impaired. If a bond is deemed to be other-than-temporarily impaired, the projected contractual cash flows of the security are reduced by a default loss amount based on the security’s lowest credit rating as provided by the major nationally recognized statistical rating organizations. The lower the security’s credit rating, the larger the amount by which the contractual cash flows are reduced. These adjusted cash flows are then used in the present value calculation to determine the credit portion of other-than-temporary impairments. While we have recognized other-than-temporary impairments on these bonds, we expect to realize no credit losses on the vast majority of our holdings due to the inherent financial strength of the issuers, or in some cases, the amount of external credit support from mortgage collateral or financial guarantees. The fair values of these bonds are impacted by the low levels of market liquidity and greater expected yield, which has led to unrealized losses in the portfolio that we deem to be temporary.

Other mortgage-related securities include manufactured housing securities, some of which have been other-than-temporarily impaired in 2012. For manufactured housing securities, we utilize models that incorporate recent historical performance information and other relevant public data to run cash flows and assess for other-than-temporary impairments. Given the significant seasoning of these securities we expect that the future performance will be in line with how the securities are currently performing. We model securities assuming the benefit of those external financial guarantees that are deemed creditworthy. If we determined that securities were not other-than-temporarily impaired, we concluded that either the bond had no projected credit loss or, if a loss was projected, that present value of expected cash flows was greater than the security’s cost basis.

We analyzed commercial mortgage-backed securities (“CMBS”) using a CMBS loss forecast model that incorporates a loan level loss forecast. This forecast takes into account loan performance, loan status, loan attributes, structures, metropolitan area, property type and macroeconomic expectations. Given the current high level of credit enhancement and collateral loss expectations, no single bond is expected to experience a principal write-down or interest shortfall. Our CMBS loss forecast expectations may change as macroeconomic conditions and the commercial real estate market evolve. As of December 31, 2012, we had no other-than-temporary impairments in our holdings of CMBS as we projected the remaining subordination to be more than sufficient to absorb the level of projected losses. While downgrades have occurred in this sector, all of our holdings remained investment grade as of December 31, 2012.

Maturity Information

The following table displays the amortized cost and fair value of our AFS securities by major security type and remaining maturity, assuming no principal prepayments, as of December 31, 2012. Contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligations at any time.

		As of December 31, 2012
	Total Amortized Cost				Total Fair Value		One Year or Less						After One Year Through Five Years						After Five Years Through Ten Years						After Ten Years
							Amortized Cost				Fair Value		Amortized Cost				Fair Value		Amortized Cost				Fair Value		Amortized Cost				Fair Value
	(Dollars in millions)
Fannie Mae		$	9,580		$	10,435		$	—		$	—		$	85		$	90		$	847		$	899		$	8,648		$	9,446
Freddie Mac		8,652			9,380			2			2			79			83			786			845			7,785			8,450
Ginnie Mae		645			751			—			—			2			2			7			8			636			741
Alt-A private-label securities		11,356			11,075			—			—			—			—			178			183			11,178			10,892
Subprime private-label securities		8,137			7,447			—			—			—			—			—			—			8,137			7,447
CMBS		12,284			13,097			—			—			11,892			12,699			149			164			243			234
Mortgage revenue bonds		7,782			7,842			46			48			309			319			647			657			6,780			6,818
Other mortgage-related securities		3,330			3,154			—			—			—			8			2			2			3,328			3,144
Total		$	61,766		$	63,181		$	48		$	50		$	12,367		$	13,201		$	2,616		$	2,758		$	46,735		$	47,172
Weighted average yield(1)		4.64		%				4.25		%				3.87		%				5.03		%				4.82		%

__________

⁽¹⁾  Yields are determined by dividing interest income (including amortization and accretion of premiums, discounts and other cost basis adjustments) by amortized cost balances as of year-end. Yields on tax exempt obligations have been computed on a tax equivalent basis.

Accumulated Other Comprehensive Income (Loss)

The following table displays our accumulated other comprehensive income (loss) by major categories as of December 31, 2012, 2011 and 2010.

	As of December 31,
	2012			2011				2010(1)
	(Dollars in millions)
Net unrealized gains on available-for-sale securities for which we have not recorded OTTI, net of tax	$	1,399			$	1,152		$	304
Net unrealized losses on available-for-sale securities for which we have recorded OTTI, net of tax	(465		)		(1,953		)	(1,736		)
Prior service cost and actuarial gains, net of amortization for defined benefit plans, net of tax	(505		)		(389		)	(214		)
Other losses	(45		)		(45		)	(36		)
Accumulated other comprehensive income (loss)	$	384			$	(1,235	)	$	(1,682	)

__________

⁽¹⁾  Includes a net increase of $3.4 billion from the adoption of the consolidation accounting guidance.