Note 13. Fair Value

Fair Value Measurements:

We carry trading account assets, investment securities available for sale and various types of derivative financial instruments at fair value in our consolidated statement of condition on a recurring basis. Changes in the fair values of these financial assets and liabilities are recorded either as components of our consolidated statement of income or as components of OCI within shareholders' equity in our consolidated statement of condition.

We measure fair value for the above-described financial assets and liabilities in accordance with GAAP that governs the measurement of the fair value of financial instruments. Management believes that its valuation techniques and underlying assumptions used to measure fair value conform to the provisions of GAAP. We categorize the financial assets and liabilities that we carry at fair value based on a prescribed three-level valuation hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to valuation methods using significant unobservable inputs (level 3). If the inputs used to measure a financial asset or liability cross different levels of the hierarchy, categorization is based on the lowest-level input that is most significant to the fair value measurement. Management's assessment of the significance of a particular input to the overall fair value measurement of a financial asset or liability requires judgment, and considers factors specific to that asset or liability. The three valuation levels are described below.

Level 1. Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an active market. Fair value is measured using unadjusted quoted prices in active markets for identical securities. Our level 1 financial assets and liabilities primarily include long and short positions in U.S. government securities and highly liquid U.S. and non-U.S. government fixed-income securities. We carry U.S. government securities in our available-for-sale portfolio in connection with our asset and liability management activities. We carry the long and short positions in highly liquid fixed-income securities in trading account assets and accrued expenses and other liabilities in connection with our trading activities. We assume these long and short positions in our role as a financial intermediary, which includes accommodating our clients' investment and risk management needs. Our level 1 financial assets also include active exchange-traded equity securities.

Level 2. Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include the following:

•

Quoted prices for similar assets or liabilities in active markets;

•

Quoted prices for identical or similar assets or liabilities in non-active markets;

•

Pricing models whose inputs are observable for substantially the full term of the asset or liability; and

•

Pricing models whose inputs are derived principally from, or corroborated by, observable market information through correlation or other means for substantially the full term of the asset or liability.

The fair value of the investment securities in level 2 is measured primarily using information obtained from independent third parties. This third-party information is subject to review by management as part of a validation process, which includes obtaining an understanding of the underlying assumptions and the level of market participant information used to support those assumptions. In addition, management compares significant assumptions used by third parties to available market information. Such information may include known trades or, to the extent that trading activity is limited, comparisons to market research information pertaining to credit expectations, execution prices and the timing of cash flows, and where information is available, back-testing.

The fair value of the derivative instruments categorized in level 2 predominantly represents foreign exchange contracts used in our trading activities, for which fair value is measured using discounted cash flow techniques, with inputs consisting of observable spot and forward points, as well as observable interest rate curves. With respect to derivative instruments, we evaluated the impact on valuation of the credit risk of our counterparties and our own credit risk. We considered factors such as the likelihood of default by us and our counterparties, our current and potential future net exposures and remaining maturities in determining the appropriate measurements of fair value. Valuation adjustments associated with derivative instruments were not significant for the years ended December 31, 2011, 2010 or 2009.

Our level 2 financial assets and liabilities primarily include various types of foreign exchange and interest-rate derivative instruments, as well as trading account assets and fixed-income investment securities.

Level 3. Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both unobservable in the market and significant to the overall fair value measurement. These inputs reflect management's judgment about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best available information, some of which is internally developed. The following provides a more detailed discussion of our financial assets and liabilities that we may categorize in level 3 and the related valuation methodology.

•

For certain investment securities available for sale, fair value is measured using information obtained from third-party sources or through the use of pricing models. Management evaluated its methodologies used to determine fair value, but considered the level of observable market information to be insufficient to categorize the securities in level 2.

•

Foreign exchange contracts carried in other assets and accrued expenses and other liabilities are primarily composed of long- dated forward contracts and options. The fair value of long-dated foreign exchange forward contracts is measured using discounted cash flow techniques. However, in certain circumstances, extrapolation is required to develop certain forward points, which are not observable. The fair value of foreign exchange options is measured using an option pricing model. Because of a limited number of observable transactions, certain model inputs are unobservable, such as volatilities, and are based on historical experience.

•

The fair value of certain interest-rate caps with long-dated maturities, also carried in other assets and accrued expenses and other liabilities, is measured using a matrix pricing approach. Observable market prices are not available for these derivatives, so extrapolation is necessary to value these instruments, since they have a strike and/or maturity outside of the matrix.

The following tables present information with respect to our financial assets and liabilities carried at fair value in our consolidated statement of condition as of the dates indicated. No significant transfers of financial assets or liabilities between levels 1 and 2 occurred during 2011 or 2010.

Fair Value Measurements on a Recurring Basis
as of December 31, 2011

(In millions)

Quoted Market
Prices in Active
Markets
(Level 1)

Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)

Pricing Methods
with Significant
Unobservable Market
Inputs
(Level 3)

Impact of
Netting⁽¹⁾

Total Net
Carrying Value
in Consolidated
Statement of
Condition

Assets:

Trading account assets:

U.S. government securities

Non-U.S. government securities

498

Other

138

189

Investment securities available for sale:

U.S. Treasury and federal agencies:

Direct obligations

1,727

1,109

2,836

Mortgage-backed securities

—

28,832

1,189

30,021

Asset-backed securities:

Student loans

—

15,685

860

16,545

Credit cards

—

10,396

10,487

Sub-prime

—

1,404

—

1,404

Other

—

667

2,798

3,465

Total asset-backed securities

—

28,152

3,749

31,901

Non-U.S. debt securities:

Mortgage-backed securities

—

9,418

1,457

10,875

Asset-backed securities

—

2,535

1,768

4,303

Government securities

—

1,671

—

1,671

Other

—

2,754

2,825

Total non-U.S. debt securities

—

16,378

3,296

19,674

State and political subdivisions

—

6,997

7,047

Collateralized mortgage obligations

—

3,753

227

3,980

Other U.S. debt securities

—

3,613

3,615

U.S. equity securities

—

640

—

640

Non-U.S. equity securities

117

—

118

Total investment securities available for sale

1,728

89,591

8,513

99,832

Other assets:

Derivative instruments:

Foreign exchange contracts

—

12,045

168

Interest-rate contracts

—

1,795

Other

—

Total derivative instruments

—

13,841

178

(7,653

)

6,366

Other

110

—

110

Total assets carried at fair value

2,407

103,570

8,691

(7,653

)

107,015

Liabilities:

Accrued expenses and other liabilities:

Derivative instruments:

Foreign exchange contracts

12,191

161

Interest-rate contracts

1,970

Other

Total derivative instruments

14,162

181

(7,653

)

6,690

Other

110

—

130

Total liabilities carried at fair value

110

14,162

201

(7,653

)

6,820

⁽¹⁾	Represents counterparty netting against level 2 financial assets and liabilities, where a legally enforceable master netting agreement exists between State Street and the counterparty. This netting cannot be disaggregated by type of derivative instrument.


	Fair Value Measurements on a Recurring Basis as of December 31, 2010
(In millions)	Quoted Market Prices in Active Markets (Level 1)		Pricing Methods with Significant Observable Market Inputs (Level 2)		Pricing Methods with Significant Unobservable Market Inputs (Level 3)		Impact of Netting⁽¹⁾			Total Net Carrying Value in Consolidated Statement of Condition
Assets:
Trading account assets:
U.S. government securities	$	20								$	20
Non-U.S. government securities		297									297
Other		40	$	122							162
Investment securities available for sale:
U.S. Treasury and federal agencies:
Direct obligations		6,529		1,048							7,577
Mortgage-backed securities		—		22,967	$	673					23,640
Asset-backed securities:
Student loans		—		13,181		1,234					14,415
Credit cards		—		7,560		43					7,603
Sub-prime		—		1,818		—					1,818
Other		—		569		2,000					2,569

Total asset-backed securities		—		23,128		3,277					26,405

Non-U.S. debt securities
Mortgage-backed securities		—		5,898		396					6,294
Asset-backed securities		—		1,046		740					1,786
Government securities		—		2,004		1					2,005
Other		—		1,924		8					1,932

Total non-U.S. debt securities		—		10,872		1,145					12,017

State and political subdivisions		—		6,554		50					6,604
Collateralized mortgage obligations		—		1,502		359					1,861
Other U.S. debt securities		—		2,533		3					2,536
U.S. equity securities		—		1,115		—					1,115
Non-U.S. equity securities		7		119		—					126

Total investment securities available for sale		6,536		69,838		5,507					81,881

Other assets:
Derivative instruments:
Foreign exchange contracts		—		7,804		254
Interest-rate contracts		—		165		—
Other		—		2		—

Total derivative instruments		—		7,971		254	$	(2,970	)		5,255
Other		168		—		—		—			168

Total assets carried at fair value	$	7,061	$	77,931	$	5,761	$	(2,970	)	$	87,783

Liabilities:
Accrued expenses and other liabilities:
Trading account liabilities:
U.S. government securities	$	210								$	210
Non-U.S. government securities		345									345
Derivative instruments:
Foreign exchange contracts		—	$	8,195	$	260
Interest-rate contracts		1		358		—
Other		—		1		9

Total derivative instruments		1		8,554		269	$	(2,970	)		5,854
Other		168		3		—		—			171

Total liabilities carried at fair value	$	724	$	8,557	$	269	$	(2,970	)	$	6,580

⁽¹⁾	Represents counterparty netting against level 2 financial assets and liabilities, where a legally enforceable master netting agreement exists between State Street and the counterparty. This netting cannot be disaggregated by type of derivative instrument.

The following tables present activity related to our financial assets and liabilities categorized in level 3 of the valuation hierarchy during the years indicated. Transfers into and out of level 3 are reported as of the beginning of the period. During 2011 and 2010, transfers out of level 3 were substantially related to certain mortgage- or asset-backed securities and non-U.S. debt securities, for which fair value was measured using prices for which observable market information became available.


	Fair Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2011
								Total Realized Unrealized Gains (Losses)																		Change in Unrealized Gains (Losses) Related to Financial Instruments Held at December 31, 2011
(In millions)	Fair Value at December 31, 2010		Transfers in to Level 3		Transfers out of Level 3			Included in Revenue			Included in Other Comprehensive Income			Purchases		Issuances		Sales			Settlements			Fair Value at December 31, 2011
Assets:
Investment securities available for sale:
U.S. Treasury and federal agencies:
Direct Obligations					$	(40	)							$	40
Mortgage-backed securities	$	673				(936	)				$	1			1,540						$	(89	)	$	1,189
Asset-backed securities:
Student loans		1,234				(785	)	$	3			(21	)		421							8			860
Credit cards		43				(285	)		4			(2	)		301							30			91
Sub-prime		—				—			—			—			—							—			—
Other		2,000	$	114		(245	)		31			6			1,073			$	(49	)		(132	)		2,798

Total asset-backed securities		3,277		114		(1,315	)		38			(17	)		1,795				(49	)		(94	)		3,749

Non-U.S. debt securities
Mortgage-backed securities		396		—		(838	)		—			(9	)		1,920				—			(12	)		1,457
Asset-backed securities		740		—		(939	)		1			7			2,179				(3	)		(217	)		1,768
Government securities		1		—		—			—			—			—				—			(1	)		—
Other		8		—		—			—			—			65				—			(2	)		71

Total non-U.S. debt securities		1,145		—		(1,777	)		1			(2	)		4,164				(3	)		(232	)		3,296

State and political subdivisions		50		1		(3	)		—			—			2				—			—			50
Collateralized mortgage obligations		359		—		(519	)		522			(4	)		428				—			(559	)		227
Other U.S. debt securities		3		—		—			—			—			—				—			(1	)		2

Total investment securities available for sale		5,507		115		(4,590	)		561			(22	)		7,969				(52	)		(975	)		8,513

Other assets:
Derivative instruments:
Foreign exchange contracts		254		—		—			(134	)		—			236				—			(188	)		168	$	(68	)
Interest-rate contracts		—		—		—			10			—			7				(7	)		—			10		9

Total derivative instruments		254		—		—			(124	)		—			243				(7	)		(188	)		178		(59	)

Total assets carried at fair value	$	5,761	$	115	$	(4,590	)	$	437		$	(22	)	$	8,212		—	$	(59	)	$	(1,163	)	$	8,691	$	(59	)


	Fair Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2011
							Total Realized Unrealized (Gains} Losses																		Change in Unrealized (Gains) Losses Related to Financial Instruments Held at December 31, 2011
(In millions)	Fair Value at December 31, 2010		Transfers in to Level 3		Transfers out of Level 3		Included in Revenue			Included in Other Comprehensive Income		Purchases			Issuances		Sales			Settlements			Fair Value at December 31, 2011
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts	$	260					$	(122	)						$	219				$	(196	)	$	161	$	(60	)
Interest-rate contracts		—						11				$	(7	)		14	$	(7	)		—			11		10
Other		9						—								—		—			—			9		—

Total derivative instruments		269						(111	)				(7	)		233		(7	)		(196	)		181		(50	)
Other		—						—								20		—			—			20		—

Total liabilities carried at fair value	$	269		—		—	$	(111	)		—	$	(7	)	$	253	$	(7	)	$	(196	)	$	201	$	(50	)


	Fair Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2010
			Total Realized and Unrealized Gains (Losses)						Purchases, Issuances and Settlements, Net			Transfers Into and/or Out of Level 3			Fair Value at December 31, 2010		Change in Unrealized Gains (Losses) Related to Financial Instruments Held at December 31, 2010
(In millions)	Fair Value at December 31, 2009		Recorded in Revenue			Recorded in Other Comprehensive Income			Purchases, Issuances and Settlements, Net			Transfers Into and/or Out of Level 3			Fair Value at December 31, 2010
Assets:
Investment securities available for sale:
U.S. Treasury and federal agencies:
Mortgage-backed securities	$	58	$	(1	)	$	(1	)	$	659		$	(42	)	$	673
Asset-backed securities:
Student loans		3,175		9			81			(317	)		(1,714	)		1,234
Credit cards		312		17			(16	)		(31	)		(239	)		43
Sub-prime		3		1			—			—			(4	)		—
Other		2,507		92			160			(444	)		(315	)		2,000
Total asset-backed securities		5,997		119			225			(792	)		(2,272	)		3,277
Non-U.S. debt securities
Mortgage-backed securities		768		35			7			576			(990	)		396
Asset-backed securities		361		24			31			686			(362	)		740
Government securities		—		—			—			1			—			1
Other		40		(1	)		3			(39	)		5			8
Total non-U.S. debt securities		1,169		58			41			1,224			(1,347	)		1,145
State and political subdivisions		2		—			—			(1	)		49			50
Collateralized mortgage obligations		199		(35	)		6			362			(173	)		359
Other U.S. debt securities		3		—			—			—			—			3
Total investment securities available for sale		7,428		141			271			1,452			(3,785	)		5,507

Other assets:
Derivatives-foreign exchange contracts		128		(55	)		—			181			—			254	$	(41	)
Total assets carried at fair value	$	7,556	$	86		$	271		$	1,633		$	(3,785	)	$	5,761	$	(41	)


	Fair Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2010
			Total Realized and Unrealized (Gains) Losses					Purchases, Issuances and Settlements, Net		Transfers Into and/or Out of Level 3		Fair Value at December 31, 2010		Change in Unrealized (Gains) Losses Related to Financial Instruments Held at December 31, 2010
(In millions)	Fair Value at December 31, 2009		Recorded in Revenue			Recorded in Other Comprehensive Income		Purchases, Issuances and Settlements, Net		Transfers Into and/or Out of Level 3		Fair Value at December 31, 2010
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts	$	138	$	(72	)			$	194			$	260	$	(36	)
Other		9		—					—				9		—

Total derivative instruments		147		(72	)		—		194		—		269		(36	)
Total liabilities carried at fair value	$	147	$	(72	)		—	$	194		—	$	269	$	(36	)

The following table presents total realized and unrealized gains and losses for the years indicated that were recorded in revenue for our financial assets and liabilities categorized in level 3:


	Year Ended December 31, 2011						Year Ended December 31, 2010					Year Ended December 31, 2009
(In millions)	Total Realized and Unrealized Gains (Losses) Recorded in Revenue			Change in Unrealized Gains (Losses) Related to Financial Instruments Held at December 31, 2011			Total Realized and Unrealized Gains (Losses) Recorded in Revenue		Change in Unrealized Gains (Losses) Related to Financial Instruments Held at December 31, 2010			Total Realized and Unrealized Gains (Losses) Recorded in Revenue			Change in Unrealized Gains (Losses) Related to Financial Instruments Held at December 31, 2009
Fee revenue:
Trading services	$	(13	)	$	(9	)	$	17	$	(5	)	$	38		$	(5	)
Processing fees and other		—			—			—		—			50			50

Total fee revenue		(13	)		(9	)		17		(5	)		88			45
Net interest revenue		561			—			141		—			(101	)		—

Total revenue	$	548		$	(9	)	$	158	$	(5	)	$	(13	)	$	45

Fair Values of Financial Instruments:

Estimates of fair value for financial instruments not carried at fair value on a recurring basis in our consolidated statement of condition, as defined by GAAP, are generally subjective in nature, and are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Disclosure of fair value estimates is not required by GAAP for certain items, such as lease financing, equity method investments, obligations for pension and other post-retirement plans, premises and equipment, other intangible assets and income tax assets and liabilities. Accordingly, aggregate fair value estimates presented do not purport to represent, and should not be considered representative of, our underlying "market" or franchise value. In addition, because of potential differences in methodologies and assumptions used to estimate fair values, our estimates of fair value should not be compared to those of other financial institutions.

We use the following methods to estimate the fair values of our financial instruments:

•

For financial instruments that have quoted market prices, those quoted prices are used to estimate fair value.

•

For financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, we assume that the fair value of these instruments approximates their reported value, after taking into consideration any applicable credit risk.

•

For financial instruments for which no quoted market prices are available, fair value is estimated using information obtained from independent third parties, or by discounting the expected cash flows using an estimated current market interest rate for the financial instrument.

The generally short duration of certain of our assets and liabilities results in a significant number of financial instruments for which fair value equals or closely approximates the amount reported in our consolidated statement of condition. These financial instruments are reported in the following captions in our consolidated statement of condition: cash and due from banks; interest-bearing deposits with banks; securities purchased under resale agreements; accrued income receivable; deposits; securities sold under repurchase agreements; federal funds purchased; and other short-term borrowings. In addition, due to the relatively short duration of certain of our net loans (excluding leases), we consider fair value for these loans to approximate their reported value. The fair value of other types of loans, such as purchased receivables and CRE loans, is estimated by discounting expected future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. Loan commitments have no reported value because their terms are at prevailing market rates.

The following table presents the reported amounts and estimated fair values of the financial instruments defined by GAAP, excluding the aforementioned short-term financial instruments and financial assets and liabilities carried at fair value on a recurring basis, as of the dates indicated:


	Reported		Fair
(In millions)	Amount		Value
2011:
Financial Assets:
Investment securities held to maturity	$	9,321	$	9,362
Net loans (excluding leases)		8,777		8,752
Financial Liabilities:
Long-term debt		8,131		8,206
2010:
Financial Assets:
Investment securities held to maturity	$	12,249	$	12,576
Net loans (excluding leases)		10,387		10,242
Financial Liabilities:
Long-term debt		8,550		8,498