|
18. FAIR-VALUE
ELECTIONS
The
Company may elect to report most financial instruments and certain
other items at fair value on an instrument-by-instrument basis with
changes in fair value reported in earnings. After the initial
adoption, the election is made upon the acquisition of an eligible
financial asset, financial liability or firm commitment or when
certain specified reconsideration events occur. The fair-value
election may not be revoked once an election is made.
Additionally,
the transition provisions of ASC 825-10 (SFAS 159) permit a
one-time election for existing positions at the adoption date with
a cumulative-effect adjustment included in opening retained
earnings and future changes in fair value reported in
earnings.
The
Company also has elected to adopt the fair-value accounting
provisions for certain assets and liabilities prospectively. Hybrid
financial instruments, such as structured notes containing embedded
derivatives that otherwise would require bifurcation, as well as
certain interest-only instruments, may be accounted for at fair
value if the Company makes an irrevocable election to do so on an
instrument-by-instrument basis. The changes in fair value are
recorded in current earnings. Additional discussion regarding the
applicable areas in which fair value elections were made is
presented in Note 17 to the Consolidated Financial
Statements.
All
servicing rights must now be recognized initially at fair value. At
its initial adoption, the standard permits a one-time irrevocable
election to re-measure each class of servicing rights at fair
value, with the changes in fair value recorded in current earnings.
The classes of servicing rights are identified based on the
availability of market inputs used in determining their fair values
and the methods for managing their risks. The Company has elected
fair-value accounting for its mortgage and student loan classes of
servicing rights. The impact of adopting this standard was not
material. See Note 15 to the Consolidated Financial Statements
for further discussions regarding the accounting and reporting of
mortgage servicing rights.
The following table
presents, as of September 30, 2009, the fair value of those
positions selected for fair-value accounting, as well as the
changes in fair value for the nine months ended September 30,
2009 and September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
at |
|
Changes in fair value
gains
(losses) for nine months ended
September 30, |
|
| In millions of
dollars |
|
September 30,
2009 |
|
December 31,
2008 |
|
2009 |
|
2008(1) |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities borrowed or
purchased under agreements to resell |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selected portfolios of securities purchased under
agreements to resell, securities borrowed(2) |
|
$ |
87,886 |
|
$ |
70,305 |
|
$ |
(1,284 |
) |
$ |
675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legg Mason convertible preferred equity securities
originally classified as available-for-sale |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(13 |
) |
| |
Selected letters of credit hedged by credit default
swaps or participation notes |
|
|
28 |
|
|
— |
|
|
61 |
|
|
(2 |
) |
| |
Certain credit products |
|
|
16,695 |
|
|
16,254 |
|
|
5,461 |
|
|
(1,143 |
) |
| |
Certain hybrid financial instruments |
|
|
6 |
|
|
33 |
|
|
— |
|
|
3 |
|
| |
Retained interests from asset
securitizations |
|
|
2,153 |
|
|
3,026 |
|
|
1,522 |
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total trading account assets |
|
$ |
18,882 |
|
$ |
19,313 |
|
$ |
7,044 |
|
$ |
(1,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certain investments in private equity and real
estate ventures |
|
$ |
359 |
|
$ |
469 |
|
$ |
(52 |
) |
$ |
(54 |
) |
| |
Other |
|
|
237 |
|
|
295 |
|
|
(83 |
) |
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
596 |
|
$ |
764 |
|
$ |
(135 |
) |
$ |
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certain credit products |
|
$ |
997 |
|
$ |
2,315 |
|
$ |
26 |
|
$ |
(54 |
) |
| |
Certain mortgage loans |
|
|
30 |
|
|
36 |
|
|
(2 |
) |
|
(22 |
) |
| |
Certain hybrid financial instruments |
|
|
478 |
|
|
381 |
|
|
54 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
1,505 |
|
$ |
2,732 |
|
$ |
78 |
|
$ |
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Mortgage servicing rights |
|
$ |
6,228 |
|
$ |
5,657 |
|
$ |
996 |
|
$ |
568 |
|
| |
Certain mortgage loans |
|
|
2,857 |
|
|
4,273 |
|
|
81 |
|
|
21 |
|
| |
Certain equity method investments |
|
|
769 |
|
|
936 |
|
|
174 |
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
9,854 |
|
$ |
10,866 |
|
$ |
1,251 |
|
$ |
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118,723 |
|
$ |
103,980 |
|
$ |
6,954 |
|
$ |
(751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certain structured liabilities |
|
$ |
234 |
|
$ |
320 |
|
$ |
— |
|
$ |
— |
|
| |
Certain hybrid financial instruments |
|
|
1,795 |
|
|
2,286 |
|
|
(562 |
) |
|
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
$ |
2,029 |
|
$ |
2,606 |
|
$ |
(562 |
) |
$ |
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities loaned or
sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selected portfolios of securities sold under
agreements to repurchase, securities loaned(2) |
|
$ |
116,693 |
|
$ |
138,866 |
|
$ |
213 |
|
$ |
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Trading account liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selected letters of credit hedged by credit default
swaps or participation notes |
|
$ |
— |
|
$ |
72 |
|
$ |
37 |
|
$ |
— |
|
| |
Certain hybrid financial instruments |
|
|
5,980 |
|
|
4,679 |
|
|
(1,798 |
) |
|
2,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading account liabilities |
|
$ |
5,980 |
|
$ |
4,751 |
|
$ |
(1,761 |
) |
$ |
2,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certain non-collateralized short-term
borrowings |
|
$ |
188 |
|
$ |
2,303 |
|
$ |
50 |
|
$ |
45 |
|
| |
Certain hybrid financial instruments |
|
|
523 |
|
|
2,112 |
|
|
(84 |
) |
|
176 |
|
| |
Certain structured liabilities |
|
|
3 |
|
|
3 |
|
|
— |
|
|
10 |
|
| |
Certain non-structured liabilities |
|
|
729 |
|
|
13,189 |
|
|
(33 |
) |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
$ |
1,443 |
|
$ |
17,607 |
|
$ |
(67 |
) |
$ |
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certain structured liabilities |
|
$ |
3,395 |
|
$ |
3,083 |
|
$ |
(64 |
) |
$ |
446 |
|
| |
Certain non-structured liabilities |
|
|
7,510 |
|
|
7,189 |
|
|
(102 |
) |
|
3,441 |
|
| |
Certain hybrid financial instruments |
|
|
16,281 |
|
|
16,991 |
|
|
(1,572 |
) |
|
2,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
27,186 |
|
$ |
27,263 |
|
$ |
(1,738 |
) |
$ |
6,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
153,331 |
|
$ |
191,093 |
|
$ |
(3,915 |
) |
$ |
9,584 |
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
- Reclassified to
conform to current period's presentation.
-
(2)
- Reflects netting of
the amounts due from securities purchased under agreements to
resell and the amounts owed under securities sold under agreements
to repurchase.
Own-Credit
Valuation Adjustment
The
fair value of debt liabilities for which the fair-value option was
elected (other than non-recourse and similar liabilities) was
impacted by the narrowing of the Company's credit spread. The
estimated change in the fair value of these debt liabilities due to
such changes in the Company's own credit risk (or
instrument-specific credit risk) was a loss of $1.019 billion
and a gain of $1.525 billion for the three months ended
September 30, 2009 and September 30, 2008, respectively,
and a loss of $2.447 billion and a gain of $2.577 billion
for the nine months ended September 30, 2009 and
September 30, 2008, respectively. Changes in fair value
resulting from changes in instrument-specific credit risk were
estimated by incorporating the Company's current observable credit
spreads into the relevant valuation technique used to value each
liability as described above.
During
the fourth quarter of 2008, the Company changed the source of its
credit spreads from those observed in the credit default swap
market to those observed in the bond market. Had this modification
been in place since the beginning of 2008, the change in the
Company's own credit spread would have resulted in a gain of
$2.48 billion and a gain of $3.53 billion for the three
and nine months ended September 30, 2008,
respectively.
The Fair-Value
Option for Financial Assets and Financial
Liabilities
Legg Mason
convertible preferred equity securities
The
Legg Mason convertible preferred equity securities (Legg shares)
were acquired in connection with the sale of Citigroup's Asset
Management business in December 2005. Prior to the election of
fair-value option accounting, the shares were classified as
available-for-sale securities with the unrealized loss of
$232 million as of December 31, 2006 included in
Accumulated other comprehensive income
(loss). This unrealized loss was recorded
upon election of a fair value as a reduction of January 1,
2007 Retained earnings
as part of the cumulative-effect
adjustment.
During
the first quarter of 2008, the Company sold the remaining
8.4 million Legg shares at a pretax loss of $10.3 million
($6.7 million after-tax).
Selected
portfolios of securities purchased under agreements to resell,
securities borrowed, securities sold under agreements to
repurchase, securities loaned and certain non-collateralized
short-term borrowings
The
Company elected the fair-value option retrospectively for our
United States and United Kingdom portfolios of fixed-income
securities purchased under agreements to resell and fixed-income
securities sold under agreements to repurchase (and certain
non-collateralized short-term borrowings). The fair-value option
was also elected prospectively in the second quarter of 2007 for
certain portfolios of fixed-income securities lending and borrowing
transactions based in Japan. In each case, the election was made
because the related interest-rate risk is managed on a portfolio
basis, primarily with derivative instruments that are accounted for
at fair value through earnings. Previously, these positions were
accounted for on an accrual basis.
Changes
in fair value for transactions in these portfolios are recorded
in Principal
transactions. The related interest
revenue and interest expense are measured based on the contractual
rates specified in the transactions and are reported as interest
revenue and expense in the Consolidated Statement of
Income.
Selected letters
of credit and revolving loans hedged by credit default swaps or
participation notes
The
Company has elected the fair-value option for certain letters of
credit that are hedged with derivative instruments or participation
notes. Upon electing the fair-value option, the related portions of
the allowance for loan losses and the allowance for unfunded
lending commitments were reversed. Citigroup elected the fair-value
option for these transactions because the risk is managed on a
fair-value basis and to mitigate accounting mismatches.
The
notional amount of these unfunded letters of credit was
$1.8 billion as of September 30, 2009 and
$1.4 billion as of December 31, 2008. The amount funded
was insignificant with no amounts 90 days or more past due or
on a non-accrual status at September 30, 2009 and
December 31, 2008.
These
items have been classified in Trading
account assets or
Trading account liabilities
on the Consolidated Balance Sheet. Changes in fair
value of these items are classified in
Principal transactions
in the Company's Consolidated Statement of
Income.
Certain credit
products
Citigroup
has elected the fair-value option for certain originated and
purchased loans, including certain unfunded loan products, such as
guarantees and letters of credit, executed by Citigroup's trading
businesses. None of these credit products is a highly leveraged
financing commitment. Significant groups of transactions include
loans and unfunded loan products that are expected to be either
sold or securitized in the near term, or transactions where the
economic risks are hedged with derivative instruments such as
purchased credit default swaps or total return swaps where the
Company pays the total return on the underlying loans to a third
party. Citigroup has elected the fair-value option to mitigate
accounting mismatches in cases where hedge accounting is complex
and to achieve operational simplifications. Fair value was not
elected for most lending transactions across the Company, including
where those management objectives would not be met.
The
following table provides information about certain credit products
carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2009 |
|
December 31,
2008(1) |
|
| In millions of
dollars |
|
Trading
assets |
|
Loans |
|
Trading
assets |
|
Loans |
|
|
Carrying amount reported on the Consolidated Balance
Sheet |
|
$ |
16,695 |
|
$ |
997 |
|
$ |
16,254 |
|
$ |
2,315 |
|
|
Aggregate unpaid principal balance in excess of fair
value |
|
$ |
1,016 |
|
$ |
(38 |
) |
$ |
6,501 |
|
$ |
3 |
|
|
Balance of non-accrual loans or loans more than
90 days past due |
|
$ |
794 |
|
$ |
— |
|
$ |
77 |
|
$ |
— |
|
|
Aggregate unpaid principal balance in excess of fair
value for non-accrual loans or loans more than 90 days past
due |
|
$ |
461 |
|
$ |
— |
|
$ |
190 |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
-
(1)
- Reclassified to
conform to current period's presentation.
In
addition to the amounts reported above, $200 million and
$72 million of unfunded loan commitments related to certain
credit products selected for fair-value accounting were outstanding
as of September 30, 2009 and December 31, 2008,
respectively.
Changes
in fair value of funded and unfunded credit products are classified
in Principal transactions
in the Company's Consolidated Statement of Income.
Related interest revenue is measured based on the contractual
interest rates and reported as Interest
revenue on trading account assets or
loans depending on their balance sheet classifications. The changes
in fair value for the nine months ended September 30, 2009 and
2008 due to instrument-specific credit risk totaled to a loss of
$32 million and $32 million, respectively.
Certain
investments in private equity and real estate ventures and certain
equity method investments
Citigroup
invests in private equity and real estate ventures for the purpose
of earning investment returns and for capital appreciation. The
Company has elected the fair-value option for certain of these
ventures, because such investments are considered similar to many
private equity or hedge fund activities in our investment
companies, which are reported at fair value. The fair-value option
brings consistency in the accounting and evaluation of certain of
these investments. All investments (debt and equity) in such
private equity and real estate entities are accounted for at fair
value. These investments are classified as
Investments on
Citigroup's Consolidated Balance Sheet.
Citigroup
also holds various non-strategic investments in leveraged buyout
funds and other hedge funds that previously were required to be
accounted for under the equity method. The Company elected
fair-value accounting to reduce operational and accounting
complexity. Since the funds account for all of their underlying
assets at fair value, the impact of applying the equity method to
Citigroup's investment in these funds was equivalent to fair-value
accounting. Thus, this fair-value election had no impact on
opening Retained
earnings. These investments are
classified as Other assets
on Citigroup's Consolidated Balance
Sheet.
Changes
in the fair values of these investments are classified in
Other revenue in the
Company's Consolidated Statement of Income.
Certain
structured liabilities
The
Company has elected the fair-value option for certain structured
liabilities whose performance is linked to structured interest
rates, inflation or currency risks ("structured liabilities"). The
Company elected the fair-value option, because these exposures are
considered to be trading-related positions and, therefore, are
managed on a fair-value basis. These positions will continue to be
classified as debt, deposits or derivatives
(Trading account
liabilities) on the Company's
Consolidated Balance Sheet according to their legal
form.
For
those structured liabilities classified as
Long-term debt for
which the fair-value option has been elected, the aggregate unpaid
principal balance exceeded the aggregate fair value by
$208 million and $671 million as of September 30,
2009 and December 31, 2008, respectively.
The
change in fair value for these structured liabilities is reported
in Principal transactions
in the Company's Consolidated Statement of
Income.
Related
interest expense is measured based on the contractual interest
rates and reported as such in the Consolidated Income
Statement.
Certain
non-structured liabilities
The
Company has elected the fair-value option for certain
non-structured liabilities with fixed and floating interest rates
("non-structured liabilities"). The Company has elected the
fair-value option where the interest-rate risk of such liabilities
is economically hedged with derivative contracts or the proceeds
are used to purchase financial assets that will also be accounted
for at fair value through earnings. The election has been made to
mitigate accounting mismatches and to achieve operational
simplifications. These positions are reported in
Short-term borrowings
and Long-term
debt on the Company's Consolidated
Balance Sheet.
For
those non-structured liabilities classified as
Short-term borrowings
for which the fair-value option has been elected,
the aggregate unpaid principal balance exceeded the aggregate fair
value of such instruments by $41 million and $220 million
as of September 30, 2009 and December 31, 2008,
respectively.
For
non-structured liabilities classified as
Long-term debt for
which the fair-value option has been elected, the aggregate unpaid
principal balance exceeded the aggregate fair value by
$637 million and $856 million as of September 30,
2009 and December 31, 2008, respectively. The change in fair
value for these non-structured liabilities is reported in
Principal transactions
in the Company's Consolidated Statement of
Income.
Related
interest expense continues to be measured based on the contractual
interest rates and reported as such in the Consolidated Income
Statement.
Certain mortgage
loans
Citigroup
has elected the fair-value option for certain purchased and
originated prime fixed-rate and conforming adjustable-rate first
mortgage loans held-for-sale. These loans are intended for sale or
securitization and are hedged with derivative instruments. The
Company has elected the fair-value option to mitigate accounting
mismatches in cases where hedge accounting is complex and to
achieve operational simplifications. The fair-value option was not
elected for loans held-for-investment, as those loans are not
hedged with derivative instruments. This election was effective for
applicable instruments originated or purchased on or after
September 1, 2007.
The
following table provides information about certain mortgage loans
carried at fair value:
|
|
|
|
|
|
|
|
| In millions of
dollars |
|
September 30,
2009 |
|
December 31,
2008 |
|
|
Carrying amount reported on the Consolidated Balance
Sheet |
|
$ |
2,857 |
|
$ |
4,273 |
|
|
Aggregate fair value in excess of unpaid principal
balance |
|
$ |
87 |
|
$ |
138 |
|
|
Balance of non-accrual loans or loans more than
90 days past due |
|
$ |
8 |
|
$ |
9 |
|
|
Aggregate unpaid principal balance in excess of fair
value for non-accrual loans or loans more than 90 days past
due |
|
$ |
6 |
|
$ |
2 |
|
| |
|
|
|
|
|
The
changes in fair values of these mortgage loans is reported
in Other revenue
in the Company's Consolidated Statement of Income.
The changes in fair value during the nine months ended
September 30, 2009 and September 30, 2008 due to
instrument-specific credit risk resulted in a $6 million loss
and $6 million loss, respectively. Related interest income
continues to be measured based on the contractual interest rates
and reported as such in the Consolidated Statement of
Income.
Items selected for
fair-value accounting
Certain hybrid
financial instruments
The
Company has elected to apply fair-value accounting for certain
hybrid financial assets and liabilities whose performance is linked
to risks other than interest rate, foreign exchange or inflation
(e.g., equity, credit or commodity risks). In addition, the
Company has elected fair-value accounting for residual interests
retained from securitizing certain financial assets.
The
Company has elected fair-value accounting for these instruments
because these exposures are considered to be trading-related
positions and, therefore, are managed on a fair-value basis. In
addition, the accounting for these instruments is simplified under
a fair-value approach as it eliminates the complicated operational
requirements of bifurcating the embedded derivatives from the host
contracts and accounting for each separately. The hybrid financial
instruments are classified as Trading
account assets, Loans,
Deposits,
Trading account
liabilities (for prepaid
derivatives), Short-term
borrowings or
Long-Term Debt on the
Company's Consolidated Balance Sheet according to their legal form,
while residual interests in certain securitizations are classified
as Trading account
assets.
For
hybrid financial instruments for which fair-value accounting has
been elected and that are classified as
Long-term debt, the
aggregate unpaid principal exceeded the aggregate fair value by
$2.4 billion and $4.1 billion as of September 30,
2009 and December 31, 2008, respectively. The difference for
those instruments classified as
Loans is
immaterial.
Changes
in fair value for hybrid financial instruments, which in most cases
includes a component for accrued interest, are recorded in
Principal transactions
in the Company's Consolidated Statement of Income.
Interest accruals for certain hybrid instruments classified as
trading assets are recorded separately from the change in fair
value as Interest revenue
in the Company's Consolidated Statement of
Income.
Mortgage
servicing rights
The
Company accounts for mortgage servicing rights (MSRs) at fair
value. Fair value for MSRs is determined using an option-adjusted
spread valuation approach. This approach consists of projecting
servicing cash flows under multiple interest-rate scenarios and
discounting these cash flows using risk-adjusted rates. The model
assumptions used in the valuation of MSRs include mortgage
prepayment speeds and discount rates. The fair value of MSRs is
primarily affected by changes in prepayments that result from
shifts in mortgage interest rates. In managing this risk, the
Company hedges a significant portion of the values of its MSRs
through the use of interest-rate derivative contracts,
forward-purchase commitments of mortgage-backed securities, and
purchased securities classified as trading. See Note 15 to the
Consolidated Financial Statements for further discussions regarding
the accounting and reporting of MSRs.
These
MSRs, which totaled $6.2 billion and $5.7 billion as of
September 30, 2009 and December 31, 2008, respectively,
are classified as Mortgage servicing rights on Citigroup's
Consolidated Balance Sheet. Changes in fair value of MSRs are
recorded in Commissions and
fees in the Company's Consolidated
Statement of Income.
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