Investment Securities

9 Months Ended

Sep. 30, 2011

Investment Securities

Investment Securities

Note 3.    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, 2011								December 31, 2010
	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	$	5,287	$	80	$	2	$	5,365	$	7,505	$	74	$	2	$	7,577
Mortgage-backed securities		27,373		660		7		28,026		23,398		325		83		23,640
Asset-backed securities:
Student loans(1)		17,111		80		658		16,533		14,975		92		652		14,415
Credit cards		10,450		60		15		10,495		7,578		56		31		7,603
Sub-prime		1,931		2		447		1,486		2,161		3		346		1,818
Other		3,288		172		122		3,338		2,550		175		156		2,569
Total asset-backed securities		32,780		314		1,242		31,852		27,264		326		1,185		26,405
Non-U.S. debt securities:
Mortgage-backed securities		9,363		99		70		9,392		6,258		82		46		6,294
Asset-backed securities		3,790		2		11		3,781		1,790		13		17		1,786
Government securities		3,014		—		—		3,014		2,915		—		—		2,915
Other		1,066		42		9		1,099		990		34		2		1,022
Total non-U.S. debt securities		17,233		143		90		17,286		11,953		129		65		12,017
State and political subdivisions		6,853		198		155		6,896		6,706		102		204		6,604
Collateralized mortgage obligations		3,105		46		59		3,092		1,828		49		16		1,861
Other U.S. debt securities		3,127		148		14		3,261		2,438		116		18		2,536
U.S. equity securities		606		2		—		608		1,115		—		—		1,115
Non-U.S. equity securities		209		1		1		209		122		5		1		126
Total	$	96,573	$	1,592	$	1,570	$	96,595	$	82,329	$	1,126	$	1,574	$	81,881
Held to maturity:
U.S. Treasury and federal agencies:
Mortgage-backed securities	$	299	$	21			$	320	$	413	$	26			$	439
Asset-backed securities		38		—	$	4		34		64		—	$	5		59
Non-U.S. debt securities:
Mortgage-backed securities		5,174		112		215		5,071		6,332		166		160		6,338
Asset-backed securities		574		16		3		587		646		18		3		661
Government securities		3		—		—		3		—		—		—		—
Other		193		—		16		177		208		—		2		206
Total non-U.S. debt securities		5,944		128		234		5,838		7,186		184		165		7,205
State and political subdivisions		113		3		—		116		134		3		—		137
Collateralized mortgage obligations		3,624		227		57		3,794		4,452		328		44		4,736
Total	$	10,018	$	379	$	295	$	10,102	$	12,249	$	541	$	214	$	12,576

	September 30, 2011								December 31, 2010
	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	$	5,287	$	80	$	2	$	5,365	$	7,505	$	74	$	2	$	7,577
Mortgage-backed securities		27,373		660		7		28,026		23,398		325		83		23,640
Asset-backed securities:
Student loans(1)		17,111		80		658		16,533		14,975		92		652		14,415
Credit cards		10,450		60		15		10,495		7,578		56		31		7,603
Sub-prime		1,931		2		447		1,486		2,161		3		346		1,818
Other		3,288		172		122		3,338		2,550		175		156		2,569
Total asset-backed securities		32,780		314		1,242		31,852		27,264		326		1,185		26,405
Non-U.S. debt securities:
Mortgage-backed securities		9,363		99		70		9,392		6,258		82		46		6,294
Asset-backed securities		3,790		2		11		3,781		1,790		13		17		1,786
Government securities		3,014		—		—		3,014		2,915		—		—		2,915
Other		1,066		42		9		1,099		990		34		2		1,022
Total non-U.S. debt securities		17,233		143		90		17,286		11,953		129		65		12,017
State and political subdivisions		6,853		198		155		6,896		6,706		102		204		6,604
Collateralized mortgage obligations		3,105		46		59		3,092		1,828		49		16		1,861
Other U.S. debt securities		3,127		148		14		3,261		2,438		116		18		2,536
U.S. equity securities		606		2		—		608		1,115		—		—		1,115
Non-U.S. equity securities		209		1		1		209		122		5		1		126
Total	$	96,573	$	1,592	$	1,570	$	96,595	$	82,329	$	1,126	$	1,574	$	81,881
Held to maturity:
U.S. Treasury and federal agencies:
Mortgage-backed securities	$	299	$	21			$	320	$	413	$	26			$	439
Asset-backed securities		38		—	$	4		34		64		—	$	5		59
Non-U.S. debt securities:
Mortgage-backed securities		5,174		112		215		5,071		6,332		166		160		6,338
Asset-backed securities		574		16		3		587		646		18		3		661
Government securities		3		—		—		3		—		—		—		—
Other		193		—		16		177		208		—		2		206
Total non-U.S. debt securities		5,944		128		234		5,838		7,186		184		165		7,205
State and political subdivisions		113		3		—		116		134		3		—		137
Collateralized mortgage obligations		3,624		227		57		3,794		4,452		328		44		4,736
Total	$	10,018	$	379	$	295	$	10,102	$	12,249	$	541	$	214	$	12,576

⁽¹⁾ Substantially composed of securities guaranteed by the federal government with respect to the payment of principal and interest.

Aggregate investment securities carried at $45.02 billion and $44.81 billion at September 30, 2011 and December 31, 2010, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.

The following table presents contractual maturities of debt investment securities as of September 30, 2011:

(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	$	1,966	$	1,095	$	1,589	$	715
Mortgage-backed securities		3		1,672		10,407		15,944
Asset-backed securities:
Student loans		134		4,715		7,883		3,801
Credit cards		1,961		6,294		2,240		—
Sub-prime		781		153		10		542
Other		133		1,730		1,118		357
Total asset-backed securities		3,009		12,892		11,251		4,700
Non-U.S. debt securities:
Mortgage-backed securities		293		1,957		266		6,876
Asset-backed securities		53		949		2,320		459
Government securities		3,014		—		—		—
Other		38		942		118		1
Total non-U.S. debt securities		3,398		3,848		2,704		7,336
State and political subdivisions		467		2,742		2,743		944
Collateralized mortgage obligations		68		1,419		562		1,043
Other U.S. debt securities		242		2,156		824		39
Total	$	9,153	$	25,824	$	30,080	$	30,721
Held to maturity:
U.S. Treasury and federal agencies:
Mortgage-backed securities			$	67	$	73	$	159
Asset-backed securities				—		—		38
Non-U.S. debt securities:
Mortgage-backed securities	$	1,245		558		44		3,327
Asset-backed securities		47		292		235		—
Government securities		3		—		—		—
Other		—		176		—		17
Total non-U.S. debt securities		1,295		1,026		279		3,344
State and political subdivisions		57		56		—		—
Collateralized mortgage obligations		358		1,789		347		1,130
Total	$	1,710	$	2,938	$	699	$	4,671

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

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. Where 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. For debt securities available for sale and held to maturity, other-than-temporary 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 possible 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 collectability of those future cash flows, including information about past events, current conditions and reasonable and supportable forecasts;

• 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 of the issuer 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.

The substantial majority of our investment securities portfolio is composed of debt securities. A critical component of the evaluation for other-than-temporary impairment of our 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 not 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, 2011.

Mortgage- and Asset-Backed Securities

For recent vintages of U.S. mortgage-backed securities (in particular, sub-prime first-lien mortgages, "Alt-A" mortgages and home equity lines of credit (2006 and 2007 originations) that have significant unrealized losses as a percentage of their amortized cost), 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 our specific securities, the underlying collateral type, vintage, borrower profile, third-party guarantees, current levels of subordination, geography and other factors.

During the second quarter of 2011, management refined its methodology to evaluate impairment in order to incorporate more detailed information with respect to loan-level performance. Accordingly, the range of estimates pertaining to each collateral type reflects the unique characteristics of the underlying loans, such as payment options and collateral geography, among other factors. The parameters used in the evaluation of 2006-and 2007-vintage U.S. residential mortgage-backed securities in the third quarter of 2011 were as follows:

	Sub-Prime ARM			Alt-A			Non-Agency Prime
September 30, 2011:
Prepayment rate		1-3	%		3-5	%		6-8	%
Cumulative loss estimates		46-54			26-39			10-19
Loss severity(1)		70-72			59-61			52-54
Peak-to-trough housing price decline(2)		36			36			36

Under the old methodology, similar parameters were used to evaluate 2006- and 2007-vintage U.S. residential mortgage-backed securities. Such parameters were as follows:

	Sub-Prime ARM			Alt-A			Non-Agency Prime
December 31, 2010:
Prepayment rate		2-3	%		7	%		7-10	%
Cumulative loss estimates		33			21			13
Loss severity(1)		67			49			49
Peak-to-trough housing price decline(2)		35-40			35-40			35-40

⁽¹⁾  Loss severity rates consider the initial loan-to-value ratio, lien position, geography, expected collateral value and other factors.

⁽²⁾  Management's expectation of the Case-Shiller National Home Price Index.

For securities that relate to these vintages, other-than-temporary impairment has been recorded on certain assets when both fair value was below carrying value and a credit loss existed. During the three and nine months ended September 30, 2011, we recorded credit-related other-than-temporary impairment on securities in these vintages of $1 million and $9 million, respectively. For the three months ended September 30, 2011, none of this impairment related to sub-prime first-lien mortgages or to "Alt-A" mortgages, while $2 million and $3 million related to sub-prime first-lien mortgages and "Alt-A" mortgages, respectively, for the first nine months of 2011. For the same three- and nine-month periods, $1 million and $4 million, respectively, related to non-agency prime mortgages. During the three and nine months ended September 30, 2010, we recorded credit-related other-than-temporary impairment on securities in these vintages of $59 million and $158 million, respectively, with $6 million and $26 million, respectively, related to sub-prime first-lien mortgages, $19 million and $43 million, respectively, related to "Alt-A" mortgages and $34 million and $89 million, respectively, related to non-agency prime mortgages.

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 principal, with additional credit support provided in the form of overcollateralization, subordination and excess spread, which collectively total in excess of 100% of principal and interest. Accordingly, FFELP loan-backed securities are not exposed to traditional consumer credit risk. Other risk factors are considered in our evaluation of other-than-temporary impairment.

Non-U.S. mortgage-backed securities are composed primarily of U.K., Dutch and Australian 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 stressed conditions and the outlook with respect to housing prices for the country in which the collateral resides. Where appropriate, any potential loss after consideration of the above-referenced factors is further evaluated to determine whether any other-than-temporary impairment exists.

In assessing other-than-temporary impairment, we may from time to time place reliance on support from third-party financial guarantors for certain asset-backed and municipal (state and political subdivisions) securities. Factors taken into consideration 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 assumptions presented above are used by management to identify those securities which are subject to further analysis of potential credit losses. Additional analyses are performed using more severe assumptions to further evaluate sensitivity of losses relative to the above 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. Primarily as a result of rising delinquencies and management's continued expectation of declining housing prices, we recorded credit-related other-than-temporary impairment of $10 million and $56 million during the three and nine months ended September 30, 2011, respectively.

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 asset-backed securities and other relevant factors, and excluding the securities for which other-than-temporary impairment was recorded during the nine months ended September 30, 2011, management considers the aggregate decline in fair value of the remaining securities and the resulting gross pre-tax unrealized losses of $1.87 billion related to 1,773 securities as of September 30, 2011 to be temporary and not the result of any material changes in the credit characteristics of the securities.

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

	Less than 12 months				12 months or longer				Total
September 30, 2011 (In millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations	$	1,873	$	1	$	75	$	1	$	1,948	$	2
Mortgage-backed securities		1,716		5		388		2		2,104		7
Asset-backed securities:
Student loans		2,258		14		10,360		644		12,618		658
Credit cards		2,336		7		1,530		8		3,866		15
Sub-prime		17		2		1,440		445		1,457		447
Other		939		16		1,146		106		2,085		122
Total asset-backed securities		5,550		39		14,476		1,203		20,026		1,242
Non-U.S. debt securities:
Mortgage-backed securities		4,769		38		1,050		32		5,819		70
Asset-backed securities		2,118		5		47		6		2,165		11
Other		243		9		—		—		243		9
Total non-U.S. debt securities		7,130		52		1,097		38		8,227		90
State and political subdivisions		463		6		1,524		149		1,987		155
Collateralized mortgage obligations		1,670		53		32		6		1,702		59
Other U.S. debt securities		331		4		61		10		392		14
Non-U.S. equity securities		5		1		—		—		5		1
Total	$	18,738	$	161	$	17,653	$	1,409	$	36,391	$	1,570
Held to maturity:
Asset-backed securities					$	34	$	4	$	34	$	4
Non-U.S. debt securities:
Mortgage-backed securities	$	245	$	14		1,319		201		1,564		215
Asset-backed securities		—		—		65		3		65		3
Other		—		—		145		16		145		16
Total non-U.S. debt securities		245		14		1,529		220		1,774		234
Collateralized mortgage obligations		770		38		234		19		1,004		57
Total	$	1,015	$	52	$	1,797	$	243	$	2,812	$	295

	Less than 12 months				12 months or longer				Total
December 31, 2010 (In millions)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations					$	153	$	2	$	153	$	2
Mortgage-backed securities	$	6,639	$	81		431		2		7,070		83
Asset-backed securities:
Student loans		1,980		25		8,457		627		10,437		652
Credit cards		1,268		5		2,396		26		3,664		31
Sub-prime		—		—		1,769		346		1,769		346
Other		269		3		1,122		153		1,391		156
Total asset-backed securities		3,517		33		13,744		1,152		17,261		1,185
Non-U.S. debt securities:
Mortgage-backed securities		2,621		22		370		24		2,991		46
Asset-backed securities		—		—		54		17		54		17
Other		348		2		—		—		348		2
Total non-U.S. debt securities		2,969		24		424		41		3,393		65
State and political subdivisions		1,097		19		1,967		185		3,064		204
Collateralized mortgage obligations		494		5		109		11		603		16
Other U.S. debt securities		330		7		61		11		391		18
Non-U.S. equity securities		8		1		—		—		8		1
Total	$	15,054	$	170	$	16,889	$	1,404	$	31,943	$	1,574
Held to maturity:
Asset-backed securities					$	53	$	5	$	53	$	5
Non-U.S. debt securities:
Mortgage-backed securities	$	1,445	$	72		862		88		2,307		160
Asset-backed securities		—		—		68		3		68		3
Other		206		2		—		—		206		2
Total non-U.S. debt securities		1,651		74		930		91		2,581		165
Collateralized mortgage obligations		125		2		575		42		700		44
Total	$	1,776	$	76	$	1,558	$	138	$	3,334	$	214

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)	2011			2010			2011			2010
Gross realized gains from sales of available-for-sale securities	$	24		$	110		$	93		$	313
Gross realized losses from sales of available-for-sale securities		(9)			(19	)		(12)			(27	)
Gross losses from other-than-temporary impairment		(25	)		(132	)		(104	)		(612	)
Losses not related to credit		15			58			48			388
Net impairment losses		(10	)		(74	)		(56	)		(224	)
Gains related to investment securities, net	$	5		$	17		$	25		$	62
Impairment associated with expected credit losses	$	(7	)	$	(71	)	$	(36	)	$	(201	)
Impairment associated with management's intent to sell the impaired securities prior to their recovery in value		—			(1	)		(8	)		(1	)
Impairment associated with adverse changes in timing of expected future cash flows		(3	)		(2	)		(12	)		(22	)
Net impairment losses	$	(10	)	$	(74	)	$	(56	)	$	(224	)

The following table presents activity with respect to credit-related losses recognized in our consolidated statement of income associated with securities considered other-than-temporarily impaired during the nine months ended September 30:

(In millions)	2011			2010
Beginning balance	$	63		$	175
Plus expected credit-related losses for which other-than-temporary impairment was not previously recognized		9			87
Plus expected credit-related losses for which other-than-temporary impairment was previously recognized		39			136
Less losses realized for securities sold		(13	)		(8	)
Less losses related to securities intended or required to be sold		(2	)		(1	)
Ending balance	$	96		$	389

The impairment losses were largely related to non-agency securities collateralized by mortgages, which management concluded had experienced credit losses based on the present value of the securities' expected future cash flows.