To reduce credit risk, the Corporation requires collateral, principally
U.S. Government and agencies securities, on certain derivative transactions.
Presented below is a summary of counterparty credit ratings for the
replacement cost (net of $2,186 collateral) of trading derivatives in a gain
position by maturity at December 29, 1995.
| Years to Maturity | ||||||
|---|---|---|---|---|---|---|
| Cross- | ||||||
| maturity | ||||||
| 0-3 | 3-5 | 5-7 | Over 7 | netting(1) | Total | |
| Credit | ||||||
| Rating(2) | ||||||
| AAA | $ 446 | $ 130 | $ 137 | $ 461 | $ (95) | $ 1,079 |
| AA+/AA | 1,250 | 158 | 102 | 302 | (316) | 1,496 |
| AA- | 1,434 | 590 | 373 | 604 | (550) | 2,451 |
| A+/A | 1,807 | 759 | 316 | 260 | (481) | 2,661 |
| A- | 1,254 | 546 | 265 | 132 | (332) | 1,865 |
| BBB | 700 | 194 | 85 | 70 | (125) | 924 |
| BB+ | 360 | 247 | 64 | 25 | (58) | 638 |
| Other | 416 | 63 | 21 | 21 | (23) | 498 |
| Total | $7,667 | $2,687 | $1,363 | $1,875 | $(1,980) | $11,612 |
(1) Represents netting of payable balances with receivable balances for the same
counterparty across maturity categories. Receivable and payable balances
with the same counterparty in the same maturity category, however, are net
within the maturity category.
(2) Represents rating agency equivalent.
The Corporation is also exposed to off-balance-sheet credit and market risk
from various commitments and guarantees. In the normal course of business, the
Corporation enters into commitments to extend credit, predominantly at variable
interest rates, in connection with certain merchant banking and loan syndication
transactions. Customers may also be extended lines of credit collateralized by
first and second mortgages on real estate, certain liquid assets of small
businesses, or securities. The Corporation also issues various guarantees to
counterparties in connection with certain leasing, agency securities lending,
securitization, and other transactions. These commitments and guarantees usually
have a fixed expiration date and are contingent on certain contractual
conditions that may require payment of a fee by the counterparty. Once
commitments are drawn upon or guarantees are issued, the Corporation may require
the counterparty to post collateral depending upon creditworthiness and market
conditions.
The contractual amounts of these commitments and guarantees represent the
amounts at risk should the contract be fully drawn upon, the client default, and
the value of the existing collateral become worthless. The total amount of
outstanding commitments and guarantees may not represent future cash
requirements as guarantees and commitments may expire without being drawn
upon.
At December 29, 1995 and December 30, 1994, the Corporation had the
following commitments and guarantees:
| 1995 | 1994 | |
|---|---|---|
| Commitments to extend credit | $3,555 | $2,072 |
| Third party guarantees | 887 | 520 |
The fair value of the outstanding guarantees was $31 and $22 at
December 29, 1995 and December 30, 1994, respectively.
Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities failed-to-receive) are recorded at the amount for which the
securities were acquired and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed-to-receive, the
Corporation may purchase the underlying security in the market and seek
reimbursement for losses from the counterparty.
The Corporation borrows and lends securities to finance securities
transactions and to facilitate the settlement process, utilizing both securities
owned by the Corporation and securities owned by customers collateralizing
margin debt. In addition, securities transactions are financed through resale
and repurchase agreements, generally collateralized by U.S. Government and
agencies securities, medium-term notes, asset-backed securities, or certain
non-U.S. governments and agencies securities.
The market value of securities owned by the Corporation that have been
loaned or were collateralizing either repurchase agreements or obligations
associated with various settlement processes at December 29, 1995 and
December 30, 1994, were $37,074 and $34,921, respectively.
At December 29, 1995, the Corporation's most significant concentration of
credit risk was with the U.S. Government and its agencies. This concentration,
which arises from taking trading asset and investment security positions and
holding collateral on resale agreements, totaled $35,769 at December 29, 1995
and $40,018 at December 30, 1994.
At December 29, 1995, the Corporation had concentrations of credit risk
with other counterparties, including an Asian and a European sovereign rated
AA+ or above by a recognized credit rating agency. The total exposure to these
counterparties, excluding collateral held, was $3,642 or 2.1% of total assets.
At December 30, 1994, the Corporation had concentrations of credit risk with an
Asian and two European sovereigns totaling $2,615 or 1.6% of total assets,
excluding collateral held.
The Corporation's most significant industry credit concentration is
with domestic and foreign financial institutions. Financial institutions include
other brokers and dealers, commercial banks, automobile financing companies,
insurance companies, and mutual funds. This concentration arises in the normal
course of the Corporation's brokerage, trading, financing, and underwriting
activities. The Corporation also monitors credit exposures worldwide by region.
Within these regions, sovereign governments represent the most significant
concentration, followed by financial institutions and non-financial
institutions.
In connection with its mortgage trading activities, the Corporation held
whole loans with market values of $2,127 and $2,111 at December 29, 1995 and
December 30, 1994, respectively, as collateral for resale agreements with
financial institutions totaling $1,840 and $1,888, respectively.
In conjunction with its investment and merchant banking activities, the
Corporation provides extensions of credit and makes equity investments to
facilitate leveraged transactions. In the normal course of business, the
Corporation also purchases, sells, and makes markets in non-investment grade
securities. These activities expose the Corporation to a higher degree of credit
risk than is associated with investing, extending credit, underwriting, and
trading in investment grade instruments. At December 29, 1995, the Corporation's
aggregate exposure to credit risk (both on- and off-balance-sheet) associated
with non-investment grade securities and highly leveraged transactions amounted
to $7,073. See "Non-Investment Grade Holdings and Highly Leveraged Transactions"
in Management's Discussion and Analysis (unaudited) for further information.
The table below presents the average fair values of the Corporation's
trading derivatives for 1995 and 1994, calculated on a monthly basis:
| Average Fair Value | ||||
|---|---|---|---|---|
| 1995 | 1994 | |||
| Assets | Liabilities | Assets | Liabilities | |
| Swap agreements | $10,264 | $9,072 | $8,349 | $7,023 |
| Forward contracts | 1,543 | 1,915 | 1,358 | 1,365 |
| Options | 2,957 | 1,939 | 1,714 | 1,643 |
| December 29, 1995 | December 30, 1994 | |||
|---|---|---|---|---|
| Carrying | Fair | Carrying | Fair | |
| Value | Value | Value | Value | |
| Long-term borrowings | $ 17,340 | $ 17,901 | $ 14,863 | $ 14,368 |
| Related derivative: | ||||
| Assets | (260) | (781) | (133) | (168) |
| Liabilities | 176 | 154 | 66 | 547 |
| Total | $17,256 | $17,274 | $14,796 | $14,747 |
| Commercial paper | $16,969 | $16,972 | $14,759 | $14,755 |
| Related derivative: | ||||
| Assets | (16) | (17) | - | - |
| Liabilities | - | 1 | - | 6 |
| Total | $16,953 | $16,956 | $14,759 | $14,761 |
| Other non-trading liabilities | $ 1,554 | $ 1,572 | $ 1,635 | $ 1,606 |
| Related derivative: | ||||
| Assets | (3) | (4) | - | (4) |
| Liabilities | - | 2 | (3) | 23 |
| Total | $ 1,551 | $ 1,570 | $ 1,632 | $ 1,625 |
Short-term financial instruments are carried at amounts which approximate
fair value. Such instruments include cash and cash equivalents, cash and
securities segregated for regulatory purposes or deposited with clearing
organizations, repurchase and resale agreements, securities borrowed,
receivables, commercial paper and other short-term borrowings, payables to
customers and brokers and dealers, and insurance and other liabilities.
Marketable investment securities and certain investments of insurance
subsidiaries and other investments are carried as held-to-maturity, trading, or
available-for-sale securities as described in Note 1. These securities are
predominantly carried at fair value or amounts that approximate fair value as
disclosed in Note 7.
Other financial instruments with carrying values different than fair values
are presented below:
| December 29, 1995 | December 30, 1994 | |||
|---|---|---|---|---|
| Carrying | Fair | Carrying | Fair | |
| Value | Value | Value | Value | |
| Merchant banking equity and debt portfolio | $ 394 | $ 595 | $ 556 | $ 764 |
| Loans, notes, and mortgages(1) | 2,082 | 2,149 | 1,417 | 1,428 |
| Capitalized mortgage servicing rights | 136 | 184 | 107 | 154 |
In connection with its merchant banking activities, the Corporation holds
certain equity instruments, including partnership interests (both included in
Other Investments in the Consolidated Balance Sheets), and loans consisting
primarily of senior and subordinated debt. Fair value for equity instruments is
estimated using a number of methods, including earnings multiples, cash flow
analyses, and review of underlying financial conditions and other market
factors. These instruments may be subject to restrictions (e.g., minority
ownership, consent of other investors) that may limit the Corporation's ability
to realize currently the estimated fair value. Accordingly, the Corporation's
current estimate of fair value and its ultimate realization on these instruments
may differ. Loans made in connection with merchant banking activities are
carried at unpaid principal balances less a reserve for estimated losses. Fair
value is estimated using discounted cash flows.
The Corporation's estimate of fair value for its loans, notes, and
mortgages (excluding loans made in connection with merchant banking activities)
is determined based on loan characteristics. For certain homogeneous categories
of loans, including residential mortgages and home equity loans, fair value is
estimated using market price quotations or previously executed transactions for
securities backed by similar loans, adjusted for credit risk and other
individual loan characteristics. For the Corporation's variable-rate loan
receivables, carrying value approximates fair value.
Capitalized mortgage servicing rights, which represent the present value of
estimated future net servicing revenues for mortgages securitized by the
Corporation, are included in Other Assets on the Consolidated Balance Sheets.
Fair value is computed based on the present value of estimated future servicing
revenues (net of servicing expenses), using current market assumptions for
discount rates, prepayment speeds, default estimates, and interest rates.
The Corporation holds a passive minority interest in a privately held
limited partnership that provides information services. Due to the lack of a
ready market for this investment and contractual restrictions on the disposition
of the Corporation's interest, the fair value of this investment is not readily
determinable as of December 29, 1995. It is the opinion of management, however,
that the fair value of this investment significantly exceeds the carrying value
of $39.
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