Investment Securities

9 Months Ended

Sep. 30, 2012

Investments, Debt and Equity Securities [Abstract]

Investment Securities

Investment Securities

The following table presents the amortized cost and fair value, and associated unrealized gains and losses, of investment securities as of the dates indicated:

	September 30, 2012								December 31, 2011
	Amortized Cost		Gross Unrealized				Fair Value		Amortized Cost		Gross Unrealized				Fair Value
(In millions)			Gains		Losses						Gains		Losses
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations	$	852	$	19	$	1	$	870	$	2,798	$	39	$	1	$	2,836
Mortgage-backed securities	31,355		672		24		32,003		29,511		538		28		30,021
Asset-backed securities:
Student loans(1)	17,039		89		591		16,537		17,187		69		711		16,545
Credit cards	9,906		64		4		9,966		10,448		53		14		10,487
Sub-prime	1,618		3		242		1,379		1,849		2		447		1,404
Other	4,067		145		86		4,126		3,421		169		125		3,465
Total asset-backed securities	32,630		301		923		32,008		32,905		293		1,297		31,901
Non-U.S. debt securities:
Mortgage-backed securities	10,770		304		30		11,044		10,890		92		107		10,875
Asset-backed securities	5,896		28		4		5,920		4,318		2		17		4,303
Government securities	2,985		1		—		2,986		1,671		—		—		1,671
Other	3,955		80		1		4,034		2,797		41		13		2,825
Total non-U.S. debt securities	23,606		413		35		23,984		19,676		135		137		19,674
State and political subdivisions	7,127		258		81		7,304		6,924		244		121		7,047
Collateralized mortgage obligations	4,703		160		18		4,845		3,971		62		53		3,980
Other U.S. debt securities	4,861		251		8		5,104		3,471		159		15		3,615
U.S. equity securities	877		4		—		881		639		1		—		640
Non-U.S. equity securities	130		—		—		130		118		—		—		118
Total	$	106,141	$	2,078	$	1,090	$	107,129	$	100,013	$	1,471	$	1,652	$	99,832
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations	$	1,500					$	1,500
Mortgage-backed securities	180		$	13			193		$	265	$	18			$	283
Asset-backed securities	8		—				8		31		—		$	2	29
Non-U.S. debt securities:
Mortgage-backed securities	3,409		71		$	93	3,387		4,973		87		224		4,836
Asset-backed securities	441		14		2		453		436		16		3		449
Government securities	3		—		—		3		3		—		—		3
Other	165		—		3		162		172		—		17		155
Total non-U.S. debt securities	4,018		85		98		4,005		5,584		103		244		5,443
State and political subdivisions	80		2		—		82		107		3		—		110
Collateralized mortgage obligations	2,574		272		12		2,834		3,334		220		57		3,497
Total	$	8,360	$	372	$	110	$	8,622	$	9,321	$	344	$	303	$	9,362

⁽¹⁾ Substantially composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and accrued interest on the underlying loans.

Aggregate investment securities carried at $43.07 billion and $44.66 billion as of September 30, 2012 and December 31, 2011, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.

The following tables present the aggregate fair values of investment securities that have been in a continuous unrealized loss position for less than 12 months, and those that have been in a continuous unrealized loss position for 12 months or longer, as of the dates indicated:

	Less than 12 months				12 months or longer				Total
September 30, 2012	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations					$	140	$	1	$	140	$	1
Mortgage-backed securities	$	3,440	$	21	570		3		4,010		24
Asset-backed securities:
Student loans	619		4		11,012		587		11,631		591
Credit cards	660		4		109		—		769		4
Sub-prime	—		—		1,341		242		1,341		242
Other	769		21		1,072		65		1,841		86
Total asset-backed securities	2,048		29		13,534		894		15,582		923
Non-U.S. debt securities:
Mortgage-backed securities	146		1		714		29		860		30
Asset-backed securities	467		1		65		3		532		4
Other	209		1		25		—		234		1
Total non-U.S. debt securities	822		3		804		32		1,626		35
State and political subdivisions	163		1		1,371		80		1,534		81
Collateralized mortgage obligations	245		2		633		16		878		18
Other U.S. debt securities	—		—		32		8		32		8
Total	$	6,718	$	56	$	17,084	$	1,034	$	23,802	$	1,090
Held to maturity:
Non-U.S. debt securities:
Mortgage-backed securities	$	178	$	2	$	973	$	91	$	1,151	$	93
Asset-backed securities	—		—		81		2		81		2
Other	—		—		151		3		151		3
Total non-U.S. debt securities	178		2		1,205		96		1,383		98
Collateralized mortgage obligations	—		—		155		12		155		12
Total	$	178	$	2	$	1,360	$	108	$	1,538	$	110

	Less than 12 months				12 months or longer				Total
December 31, 2011	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations	$	1,373	$	1					$	1,373	$	1
Mortgage-backed securities	4,714		26		$	370	$	2	5,084		28
Asset-backed securities:
Student loans	2,642		23		10,706		688		13,348		711
Credit cards	2,581		6		1,461		8		4,042		14
Sub-prime	16		1		1,360		446		1,376		447
Other	1,482		19		1,122		106		2,604		125
Total asset-backed securities	6,721		49		14,649		1,248		21,370		1,297
Non-U.S. debt securities:
Mortgage-backed securities	6,069		55		1,151		52		7,220		107
Asset-backed securities	2,205		14		108		3		2,313		17
Other	1,543		13		—		—		1,543		13
Total non-U.S. debt securities	9,817		82		1,259		55		11,076		137
State and political subdivisions	171		3		1,446		118		1,617		121
Collateralized mortgage obligations	2,024		43		68		10		2,092		53
Other U.S. debt securities	220		2		57		13		277		15
Total	$	25,040	$	206	$	17,849	$	1,446	$	42,889	$	1,652
Held to maturity:
Asset-backed securities					$	29	$	2	$	29	$	2
Non-U.S. debt securities:
Mortgage-backed securities	$	341	$	6	1,382		218		1,723		224
Asset-backed securities	9		1		70		2		79		3
Other	—		—		138		17		138		17
Total non-U.S. debt securities	350		7		1,590		237		1,940		244
Collateralized mortgage obligations	649		32		231		25		880		57
Total	$	999	$	39	$	1,850	$	264	$	2,849	$	303

The following table presents contractual maturities of debt investment securities as of September 30, 2012:

(In millions)	Under 1 Year		1 to 5 Years		6 to 10 Years		Over 10 Years
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations			$	52	$	60	$	758
Mortgage-backed securities	$	13	1,447		8,858		21,685
Asset-backed securities:
Student loans	316		6,573		6,261		3,387
Credit cards	986		6,432		2,548		—
Sub-prime	109		52		4		1,214
Other	76		2,268		1,479		303
Total asset-backed securities	1,487		15,325		10,292		4,904
Non-U.S. debt securities:
Mortgage-backed securities	159		4,602		523		5,760
Asset-backed securities	313		4,198		1,131		278
Government securities	1,726		1,260		—		—
Other	1,475		2,178		381		—
Total non-U.S. debt securities	3,673		12,238		2,035		6,038
State and political subdivisions	640		3,086		2,835		743
Collateralized mortgage obligations	151		2,412		1,064		1,218
Other U.S. debt securities	315		3,556		1,202		31
Total	$	6,279	$	38,116	$	26,346	$	35,377
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations							$	1,500
Mortgage-backed securities			$	43	$	36	101
Asset-backed securities			—		—		8
Non-U.S. debt securities:
Mortgage-backed securities	$	256	—		—		3,153
Asset-backed securities	75		320		46		—
Government securities	3		—		—		—
Other	—		154		—		11
Total non-U.S. debt securities	334		474		46		3,164
State and political subdivisions	50		30		—		—
Collateralized mortgage obligations	382		1,274		119		799
Total	$	766	$	1,821	$	201	$	5,572

The maturities of asset-backed securities, mortgage-backed securities and collateralized mortgage obligations are based on expected principal payments.

The following table presents realized gains and losses related to investment securities for the periods indicated:

	Three Months Ended September 30						Nine Months Ended September 30,
(In millions)	2012			2011			2012			2011
Gross realized gains from sales of available-for-sale securities	$	24		$	24		$	75		$	93
Gross realized losses from sales of available-for-sale securities (1)	—			(9		)	(46		)	(12		)
Gross losses from other-than-temporary impairment	(4		)	(25		)	(50		)	(104		)
Losses not related to credit (2)	(2		)	15			23			48
Net impairment losses	(6		)	(10		)	(27		)	(56		)
Gains (losses) related to investment securities, net	$	18		$	5		$	2		$	25
Impairment associated with expected credit losses	$	(1	)	$	(7	)	$	(14	)	$	(36	)
Impairment associated with management's intent to sell the impaired securities prior to their recovery in value	—			—			—			(8		)
Impairment associated with adverse changes in timing of expected future cash flows	(5		)	(3		)	(13		)	(12		)
Net impairment losses	$	(6	)	$	(10	)	$	(27	)	$	(56	)

⁽¹⁾Loss for the nine months ended September 30, 2012 resulted from the sale of all of our Greek securities in the three months ended June 30, 2012, which were previously classified as held to maturity. The sale was undertaken as a result of the effect of significant deterioration in the creditworthiness of the underlying collateral, including significant downgrades of the securities' published credit ratings.

⁽²⁾ Amount for the three months ended September 30, 2012 represented reversals of other-than-temporary impairment, or OTTI, not related to credit, previously recorded and recognized as a component of other comprehensive income, or OCI, which exceeded OTTI related to credit for the current period.

The following table presents activity with respect to net impairment losses related to credit for the periods indicated:

	Nine Months Ended September 30,
(In millions)	2012			2011
Beginning balance	$	113		$	63
Plus losses for which other-than-temporary impairment was not previously recognized	2			9
Plus losses for which other-than-temporary impairment was previously recognized	25			39
Less previously recognized losses related to securities sold	(21		)	(13		)
Less losses related to securities intended or required to be sold	—			(2		)
Ending balance	$	119		$	96

Impairment

We conduct periodic reviews of individual securities to assess whether other-than-temporary impairment exists. Impairment exists when the current fair value of an individual security is below its amortized cost basis. When the decline in the security's fair value is deemed to be other than temporary, the loss is recorded in our consolidated statement of income. In addition, for debt securities available for sale and held to maturity, impairment is recorded in our consolidated statement of income when management intends to sell (or may be required to sell) the securities before they recover in value, or when management expects the present value of cash flows expected to be collected from the securities to be less than the amortized cost of the impaired security (a credit loss).

Our review of impaired securities generally includes:

• the identification and evaluation of securities that have indications of potential other-than-temporary impairment, such as issuer-specific concerns, including deteriorating financial condition or bankruptcy;

• the analysis of expected future cash flows of securities, based on quantitative and qualitative factors;

• the analysis of the collectibility of those future cash flows, including information about past events, current conditions and reasonable and supportable forecasts;

• the analysis of the underlying collateral for mortgage- and asset-backed securities;

• the analysis of individual impaired securities, including consideration of the length of time the security has been in an unrealized loss position, the anticipated recovery period, and the magnitude of the overall price decline;

• discussion and evaluation of factors or triggers that could cause individual securities to be deemed other-than- temporarily impaired and those that would not support other-than-temporary impairment; and

• documentation of the results of these analyses.

Factors considered in determining whether impairment is other than temporary include:

• the length of time the security has been impaired;

• the severity of the impairment;

• the cause of the impairment and the financial condition and near-term prospects of the issuer;

• activity in the market with respect to the issuer's securities, which may indicate adverse credit conditions; and

• our intention not to sell, and the likelihood that we will not be required to sell, the security for a period of time sufficient to allow for recovery in value.

Substantially all of our investment securities portfolio is composed of debt securities. A critical component of the evaluation for other-than-temporary impairment of these debt securities is the identification of credit-impaired securities for which management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security.

Debt securities that are not deemed to be credit-impaired are subject to additional management analysis to assess whether management intends to sell, or, more likely than not, would be required to sell, the security before the expected recovery to its amortized cost basis.

The following describes our process for identifying credit impairment in security types with the most significant unrealized losses as of September 30, 2012.

U.S. Non-Agency Residential Mortgage-Backed Securities

For U.S. non-agency residential mortgage-backed securities, other-than-temporary impairment related to credit is assessed using cash flow models, tailored for each security, that estimate the future cash flows from the underlying mortgages, using the security-specific collateral and transaction structure. Estimates of future cash flows are subject to management judgment. The future cash flows and performance of our portfolio of U.S. mortgage-backed securities are a function of a number of factors, including, but not limited to, the condition of the U.S. economy, the condition of the U.S. residential mortgage markets, and the level of loan defaults, prepayments and loss severities. Management's estimates of future losses for each security also consider the underwriting and historical performance of each specific security, the underlying collateral type, vintage, borrower profile, third-party guarantees, current levels of subordination, geography and other factors.

We recorded other-than-temporary impairment of $1 million and $8 million in our consolidated statement of income in the three and nine months ended September 30, 2012, respectively, all associated with expected credit losses, primarily as a result of rising delinquencies and loss severities for certain securities, as well as management's continued expectation of a slow U.S. national housing market. Such losses were $7 million and $36 million, all associated with expected credit losses, in the three and nine months ended September 30, 2011, respectively.

Asset-Backed Securities - Student Loans

Asset-backed securities collateralized by student loans are primarily composed of securities collateralized by Federal Family Education Loan Program, or FFELP, loans. FFELP loans benefit from a federal government guarantee of at least 97% of defaulted principal and accrued interest, with additional credit support provided in the form of overcollateralization, subordination and excess spread, which collectively total in excess of 100%. Accordingly, the vast majority of FFELP loan-backed securities are not exposed to traditional consumer credit risk. Our total exposure to private student loan-backed securities was less than $1 billion as of September 30, 2012; our evaluation of impairment considers, among other factors, the impact of high unemployment rates on the collateral performance of private student loans.

Non-U.S. Mortgage- and Asset-Backed Securities

Non-U.S. mortgage- and asset-backed securities are primarily composed of U.K., Australian and Netherlands securities collateralized by residential mortgages. Our evaluation of impairment considers the location of the underlying collateral, collateral enhancement and structural features, expected credit losses under base-case and stressed conditions and the macroeconomic outlook for the country in which the collateral is located, including housing prices and unemployment. Where appropriate, any potential loss after consideration of the above-referenced factors is further evaluated to determine whether any other-than-temporary impairment exists.

During the three months ended September 30, 2012, we recorded other-than-temporary impairment of $5 million, substantially related to non-U.S. mortgage-backed securities, due to adverse changes in the timing of expected future cash flows from the securities. During the nine months ended September 30, 2012, we recorded other-than-temporary impairment $19 million, substantially related to non-U.S. mortgage-backed securities, of which $6 million was associated with expected credit losses and $13 million was associated with adverse changes in the timing of expected future cash flows from the securities. During the three and nine months ended September 30, 2011, we recorded other-than-temporary impairment of $3 million and $12 million, respectively, substantially related to non-U.S. mortgage-backed securities, all associated with adverse changes in the timing of expected future cash flows from the securities.

Our aggregate exposure to Spain, Italy, Ireland and Portugal totaled approximately $693 million as of September 30, 2012. We had no direct sovereign debt exposure to any of these countries as of that date, but we had indirect exposure consisting of mortgage- and asset-backed securities, composed of $267 million in Spain, $238 million in Italy, $110 million in Ireland and $78 million in Portugal. These securities had an aggregate pre-tax gross unrealized loss of approximately $43 million as of September 30, 2012. We recorded no other-than-temporary impairment on these securities in the three months ended September 30, 2012. We recorded $6 million of other-than-temporary impairment on these securities in the nine months ended September 30, 2012, all in the three months ended June 30, 2012, associated with expected credit losses. We recorded no other-than-temporary impairment on these securities in the three and nine months ended September 30, 2011. We had no such exposure to Greece as of September 30, 2012.

Our evaluation of potential other-than-temporary impairment of these securities assumes a negative baseline macroeconomic environment for this region, due to the continued sovereign debt crisis, and the combination of slower economic growth and continued government austerity measures. Our baseline view assumes a recessionary period characterized by higher unemployment and by additional housing price declines of between 9% and 20% across these four countries. Our evaluation of other-than-temporary impairment in our base case does not assume a disorderly sovereign debt restructuring or a break-up of the Eurozone. In addition, stress testing and sensitivity analysis is performed in order to understand the impact of more severe assumptions on potential other-than-temporary impairment.

State and Political Subdivisions

In assessing other-than-temporary impairment, we may from time to time rely on support from third-party financial guarantors for certain asset-backed and municipal (state and political subdivisions) securities. Factors considered when determining the level of support include the guarantor's credit rating and management's assessment of the guarantor's financial condition. For those guarantors that management deems to be under financial duress, we assume an immediate default by those guarantors, with a modest recovery of claimed amounts (up to 20%). In addition, for various forms of collateralized securities, management considers the liquidation value of the underlying collateral based on expected housing prices and other relevant factors.

*****

The estimates, assumptions and other risk factors utilized in our evaluation of impairment as described above are used by management to identify securities which are subject to further analysis of potential credit losses. Additional analyses are performed using more severe assumptions to further evaluate the sensitivity of losses relative to the above-described factors. However, since the assumptions are based on the unique characteristics of each security, management uses a range of point estimates for prepayment speeds and housing prices that reflect the collateral profile of the securities within each asset class. In addition, in measuring expected credit losses, the individual characteristics of each security are examined to determine whether any additional factors would increase or mitigate the expected loss. Once losses are determined, the timing of the loss will also affect the ultimate other-than-temporary impairment, since the loss is ultimately subject to a discount commensurate with the purchase yield of the security.

In the aggregate, we recorded credit-related other-than-temporary impairment of $6 million and $27 million during the three and nine months ended September 30, 2012, respectively, compared to $10 million and $56 million during the three and nine months ended September 30, 2011, respectively. Of the $6 million and $27 million recorded during the three and nine months ended September 30, 2012, $1 million and $14 million, respectively, related to expected credit losses, and $5 million and $13 million, respectively, resulted from adverse changes in the timing of expected future cash flows from the securities. Of the $10 million and $56 million recorded in the three and nine months ended September 30, 2011, respectively, $7 million and $36 million, respectively, related to expected credit losses, $8 million in the nine months ended September 30, 2011 resulted from changes in management's intent to sell the impaired securities prior to their recovery in value, and $3 million and $12 million, respectively, resulted from adverse changes in the timing of expected future cash flows from the securities.

After a review of the investment portfolio, taking into consideration current economic conditions, adverse situations that might affect our ability to fully collect principal and interest, the timing of future payments, the credit quality and performance of the collateral underlying mortgage- and asset-backed securities and other relevant factors, and excluding other-than-temporary impairment recorded during the three and nine months ended September 30, 2012, management considers the aggregate decline in fair value of the investment securities portfolio and the resulting gross pre-tax unrealized losses of $1.2 billion related to 1,164 securities as of September 30, 2012 to be temporary and not the result of any material changes in the credit characteristics of the securities.