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Investments in Securities
9 Months Ended
Sep. 30, 2011
Notes to Consolidated Financial Statements 
Investments in Securities

5. Investments in Securities

 

Trading Securities

 

Trading securities are recorded at fair value with subsequent changes in fair value recorded as “Fair value (losses) gains, net” in our condensed consolidated statements of operations and comprehensive loss. The following table displays our investments in trading securities and the cumulative amount of net losses recognized from holding these securities as of September 30, 2011 and December 31, 2010.

 

   As of
   September 30, December 31,
   2011 2010
   (Dollars in millions)
Mortgage-related securities:     
 Fannie Mae$ 7,529 $ 7,398
 Freddie Mac  2,866   1,326
 Ginnie Mae  297   590
 Alt-A private-label securities  1,454   1,683
 Subprime private-label securities  1,318   1,581
 CMBS  10,600   10,764
 Mortgage revenue bonds   718   609
 Other mortgage-related securities  147   152
  Total   24,929   24,103
Non-mortgage-related securities:     
 U.S. Treasury securities  40,755   27,432
 Asset-backed securities   2,465   5,321
  Total   43,220   32,753
Total trading securities $ 68,149 $ 56,856
Losses in trading securities held in our portfolio, net $ 1,986 $ 2,149

The following table displays information about our net trading gains and losses for the three and nine months ended September 30, 2011 and 2010.

    For the Three  For the Nine
    Months Ended  Months Ended
    September 30,  September 30,
   2011 2010 2011 2010
   (Dollars in millions)
Net trading (losses) gains:           
 Mortgage-related securities $ (209) $ 879 $ 151 $ 2,497
 Non-mortgage-related securities   (5)   10   (5)   90
  Total $ (214) $ 889 $ 146 $ 2,587
Net trading (losses) gains recorded in the period related to           
 securities still held at period end:           
 Mortgage-related securities $ (206) $ 872 $ 145 $ 2,368
 Non-mortgage-related securities   -   7   2   71
  Total $ (206) $ 879 $ 147 $ 2,439

Available-for-Sale Securities

 

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

 

The following table displays the gross realized gains, losses and proceeds on sales of AFS securities for the three and nine months ended September 30, 2011 and 2010.

 

  For the Three For the Nine
  Months Ended Months Ended
  September 30, September 30,
  2011 2010 2011 2010
  (Dollars in millions)
Gross realized gains$ 15 $ 170 $ 148 $ 515
Gross realized losses  22   101   75   280
Total proceeds (1)  597   978   1,826   6,552

__________
  
 (1)Excludes proceeds from the initial sale of securities from new portfolio securitizations included in "Note 2, Consolidations and Transfers of Financial Assets." For the nine months ended September 30, 2010, proceeds were increased by $416 million, from what was previously disclosed, related to deconsolidated REMICs that were previously presented as proceeds from issuance of long-term debt of consolidated trusts.

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 September 30, 2011 and December 31, 2010.

 

  As of September 30, 2011
      Gross Gross   
  Total Gross Unrealized Unrealized Total
  Amortized Unrealized  Losses -  Losses -  Fair
  Cost (1)  Gains  OTTI (2) Other (3) Value
  (Dollars in millions)
Fannie Mae$ 17,698 $ 1,559 $ (4) $ (15) $ 19,238
Freddie Mac  12,781   968   -   -   13,749
Ginnie Mae  807   132   -   -   939
Alt-A private-label securities  14,299   215   (1,989)   (238)   12,287
Subprime private-label securities  10,367   3   (2,040)   (443)   7,887
CMBS (4)  14,598   62   -   (270)   14,390
Mortgage revenue bonds   10,635   180   (25)   (183)   10,607
Other mortgage-related securities   3,771   144   (21)   (281)   3,613
Total $ 84,956 $ 3,263 $ (4,079) $ (1,430) $ 82,710

  As of December 31, 2010
      Gross Gross   
  Total Gross Unrealized Unrealized Total
  Amortized Unrealized  Losses -  Losses -  Fair
  Cost (1)  Gains  OTTI (2) Other (3) Value
  (Dollars in millions)
Fannie Mae$ 21,428 $ 1,453 $ (9) $ (44) $ 22,828
Freddie Mac  15,986   1,010   -   -   16,996
Ginnie Mae  909   130   -   -   1,039
Alt-A private-label securities  15,789   177   (1,791)   (285)   13,890
Subprime private-label securities  11,323   54   (997)   (448)   9,932
CMBS (4)  15,273   25   -   (454)   14,844
Mortgage revenue bonds   11,792   47   (64)   (734)   11,041
Other mortgage-related securities   4,098   106   (44)   (338)   3,822
Total $ 96,598 $ 3,002 $ (2,905) $ (2,303) $ 94,392

__________
  
 (1)Amortized cost includes unamortized premiums, discounts and other cost basis adjustments as well as the credit component of other-than-temporary impairments (OTTI) recognized in our condensed consolidated statements of operations and comprehensive loss.
   
 (2)Represents the noncredit component of other-than-temporary impairment losses recorded in "Accumulated other comprehensive loss" as well as cumulative changes in fair value for securities for which we previously recognized the credit component of an other-than-temporary impairment.
   
 (3)Represents the gross unrealized losses on securities for which we have not recognized an other-than-temporary impairment.
   
 (4)Amortized cost includes $725 million and $848 million as of September 30, 2011 and December 31, 2010, respectively, of increase 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 September 30, 2011 and December 31, 2010.

 As of September 30, 2011
 Less Than 12 12 Consecutive
 Consecutive Months Months or Longer
 Gross   Gross  
 Unrealized Fair Unrealized Fair
 Losses Value Losses Value
 (Dollars in millions)
            
Fannie Mae $ (6) $ 758 $ (13) $ 186
Alt-A private-label securities  (157)   1,544   (2,070)   7,072
Subprime private-label securities  (206)   992   (2,277)   6,843
CMBS  (110)   7,572   (160)   2,982
Mortgage revenue bonds   (9)   311   (199)   2,718
Other mortgage-related securities   (12)   264   (290)   1,508
Total$ (500) $ 11,441 $ (5,009) $ 21,309
            
            
            
 As of December 31, 2010
 Less Than 12 12 Consecutive
 Consecutive Months  Months or Longer
 Gross   Gross  
 Unrealized Fair Unrealized Fair
 Losses  Value  Losses  Value
 (Dollars in millions)
            
Fannie Mae $ (35) $ 1,461 $ (18) $ 211
Alt-A private-label securities  (104)   1,915   (1,972)   9,388
Subprime private-label securities  (47)   627   (1,398)   8,493
CMBS  (15)   1,774   (439)   10,396
Mortgage revenue bonds   (206)   5,009   (592)   3,129
Other mortgage-related securities   (2)   262   (380)   2,014
Total$ (409) $ 11,048 $ (4,799) $ 33,631

Other-Than-Temporary Impairments

We recognize the credit component of other-than-temporary impairments of our debt securities in our condensed consolidated statements of operations and comprehensive loss and the noncredit component in “Other comprehensive (loss) income” 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. $5.0 billion of the $5.5 billion of gross unrealized losses on AFS securities as of September 30, 2011 have existed for a period of 12 consecutive months or longer. Gross unrealized losses on AFS securities as of September 30, 2011 include unrealized losses on securities with other-than-temporary impairment in which a portion of the impairment remains in “Accumulated other comprehensive loss. The securities with unrealized losses for 12 consecutive months or longer, on average, had a fair value as of September 30, 2011 that was 81% 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 a portion or the majority of 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 condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2011 and 2010.

 

 

 For the Three For the Nine
 Months Ended Months Ended
 September 30, September 30,
 2011 2010(1) 2011 2010(1)
 (Dollars in millions)
Alt-A private-label securities$ 238 $ 153 $ 329 $ 310
Subprime private-label securities  2   171   2   365
Other  22   2   31   24
Net other-than-temporary impairments$ 262 $ 326 $ 362 $ 699

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

For the three and nine months ended September 30, 2011, we recorded net other-than-temporary impairment of $262 million and $362 million, respectively. The net other-than-temporary impairment charges recorded in the three month period ended September 30, 2011 were primarily driven by an increase in collateral losses on certain Alt-A private-label securities, which resulted in a decrease in the present value of our cash flow projections on these Alt-A private-label securities.

 

The following table displays activity related to the unrealized credit component on debt securities held by us and recognized in earnings for the three and nine months ended September 30, 2011 and 2010.  A related unrealized non-credit component has been recognized in “Accumulated other comprehensive loss.”

 

  For the Three Months For the Nine Months
  Ended September 30, Ended September 30,
  2011 2010  2011 2010
  (Dollars in millions)
Balance, beginning of period$ 7,876 $ 8,181 $ 8,215 $ 8,191
Additions for the credit component on debt securities for which OTTI           
 was not previously recognized  -   6   8   21
Additions for credit losses on debt securities for which OTTI was           
 previously recognized  262   320   354   678
Reductions for securities no longer in portfolio at period end  (5)   (102)   (5)   (154)
Reductions for amortization resulting from increases in cash flows           
 expected to be collected over the remaining life of the securities  (253)   (137)   (692)   (468)
Balance, end of period$ 7,880 $ 8,268 $ 7,880 $ 8,268

As of September 30, 2011, those debt securities with other-than-temporary impairment for which we recognized in our condensed consolidated statements of operations and comprehensive loss only the amount of loss related to credit consisted predominantly of Alt-A and subprime 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 model securities assuming the benefit of those external financial guarantees that we determined are creditworthy. We have recorded other-than-temporary impairments for the three and nine months ended September 30, 2011 based on this analysis, with amounts related to credit loss recognized in our condensed consolidated statements of operations and comprehensive loss. 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. Assumption of voluntary prepayment rates is also an input to the present value of expected losses.

 

   As of September 30, 2011
      Alt-A
   Subprime Option ARM Fixed Rate Variable Rate Hybrid Rate
   (Dollars in millions)
Vintage Year                   
2004 & Prior:                   
 Unpaid principal balance$1,699  $487  $3,497  $501  $2,311 
 Weighted average collateral default(1) 36.6%   36.6%   10.5%   31.4%   16.0%
 Weighted average collateral severities(2) 59.8    51.9    47.0    41.1    38.6 
 Weighted average voluntary prepayment rates(3) 6.9    11.6    12.7    9.2    12.5 
 Average credit enhancement(4) 51.1    16.3    12.1    22.3    10.5 
2005                   
 Unpaid principal balance$179  $1,324  $1,202  $540  $2,389 
 Weighted average collateral default(1)  71.2%   56.3%   38.3%   53.5%   37.8%
 Weighted average collateral severities(2)  72.1    59.8    62.1    57.0    46.8 
 Weighted average voluntary prepayment rates(3)  2.5    6.4    9.3    7.4    9.1 
 Average credit enhancement(4)  65.3    24.8    1.4    17.9    5.1 
2006                   
 Unpaid principal balance$11,792  $1,241  $533  $1,619  $1,716 
 Weighted average collateral default(1)  76.3%   70.9%   38.6%   58.3%   31.0%
 Weighted average collateral severities(2)  72.2    62.6    64.6    57.8    49.8 
 Weighted average voluntary prepayment rates(3)  2.5    3.4    8.4    6.5    9.8 
 Average credit enhancement(4)  17.5    17.0    2.3    0.2    0.6 
2007 & After:                   
 Unpaid principal balance$609  $-  $-  $-  $120 
 Weighted average collateral default(1)  78.8%  N/A   N/A   N/A    40.9%
 Weighted average collateral severities(2)  68.7   N/A   N/A   N/A    57.7 
 Weighted average voluntary prepayment rates(3)  2.0   N/A   N/A   N/A    9.0 
 Average credit enhancement(4)  33.7   N/A   N/A   N/A    26.1 
Total                   
 Unpaid principal balance$14,279  $3,052  $5,232  $2,660  $6,536 
 Weighted average collateral default(1)  71.6%   59.1%   19.7%   52.2%   28.4%
 Weighted average collateral severities(2)  70.6    59.7    52.3    54.5    44.9 
 Weighted average voluntary prepayment rates(3)  3.0    6.0    11.5    7.2    10.5 
 Average credit enhancement(4)  22.8    20.3    8.6    7.9    6.2 

__________
  (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.

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 September 30, 2011. 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 September 30, 2011
           After One Year After Five Years   
 Total  Total One Year or Less Through Five Years Through Ten Years After Ten Years
 Amortized  Fair Amortized  Fair Amortized  Fair Amortized  Fair Amortized  Fair
 Cost  Value Cost  Value Cost  Value Cost  Value Cost  Value
  (Dollars in millions)
Fannie Mae $ 17,698  $ 19,238 $ -  $ - $ 6  $ 6 $ 2,645  $ 2,832 $ 15,047  $ 16,400
Freddie Mac  12,781    13,749   1    1   46    48   1,331    1,439   11,403    12,261
Ginnie Mae  807    939   -    -   -    -   5    6   802    933
Alt-A private-label securities  14,299    12,287   -    -   1    1   249    252   14,049    12,034
Subprime private-label securities  10,367    7,887   -    -   -    -   -    -   10,367    7,887
CMBS  14,598    14,390   62    63   5,255    5,244   8,678    8,500   603    583
Mortgage revenue bonds  10,635    10,607   59    59   366    377   743    756   9,467    9,415
Other mortgage-related securities  3,771    3,613   -    -   -    -   -    14   3,771    3,599
Total$ 84,956  $ 82,710 $ 122  $ 123 $ 5,674  $ 5,676 $ 13,651  $ 13,799 $ 65,509  $ 63,112
                                   

Accumulated Other Comprehensive Loss

The following table displays our accumulated other comprehensive loss by major categories as of September 30, 2011 and December 31, 2010.

 

  As of
  September 30, December 31,
  2011 2010
  (Dollars in millions)
Net unrealized gains on available-for-sale securities for which     
 we have not recorded other-than-temporary impairment, net of tax$ 1,049 $ 304
Net unrealized losses on available-for-sale securities for which we have     
  recorded other-than-temporary impairment, net of tax  (2,509)   (1,736)
Other losses  (236)   (250)
 Accumulated other comprehensive loss$ (1,696) $ (1,682)

The following table displays the activity in other comprehensive (loss) income, net of tax, by major categories for the three and nine months ended September 30, 2011 and 2010.

     For the Three For the Nine
     Months Ended Months Ended
     September 30,  September 30,
     2011 2010 2011 2010
     (Dollars in millions)
Comprehensive loss:           
 Net loss$ (5,085) $ (1,331) $ (14,448) $ (14,083)
 Other comprehensive (loss) income, net of tax:           
  Changes in net unrealized losses on available-for-sale           
   securities (net of tax benefit of $210 and tax of $380,           
   respectively, for the three months ended and net of            
   tax benefit of $142 and tax of $1,889, respectively, for the nine months ended)  (391)   705   (264)   3,507
  Reclassification adjustment for other-than-temporary           
   impairments recognized in net loss (net of tax of $92           
   and $113, respectively, for the three months ended and           
   net of tax of $120 and $239, respectively, for the nine months ended)  170   213   242   460
  Reclassification adjustment for losses (gains) included in            
   net loss (net of tax benefit of $10 and tax of $10, respectively, for the three months ended and net of tax           
   of $1 and $16, respectively, for the nine months ended)  23   (17)   2   (29)
  Other  1   1   6   6
 Other comprehensive (loss) income   (197)   902   (14)   3,944
 Total comprehensive loss$ (5,282) $ (429) $ (14,462) $ (10,139)