American Express 2009 Annual Report Download - page 80

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the years ended December 31, 2009 and 2008, including realized and unrealized gains
(losses) included in earnings and accumulated other comprehensive (loss) income:
(Millions) 2009 2008
Investments-
Retained
Subordinated
Securities
Other Assets-
Interest-Only
Strip
Investments-
Retained
Subordinated
Securities
Other Assets-
Interest-Only
Strip
Beginning fair value, January 1 $ 744 $ 32 $ 78 $ 223
Increases in securitized loans(a) 1,760 — 1,250 —
Unrealized and realized gains (losses) 1,095(b) (12)(c) (584)(b) (191)(c)
Ending fair value, December 31 $3,599 $ 20 $ 744 $ 32
(a) Represents cost basis of securitized loans.
(b) Included in accumulated other comprehensive (loss) income.
(c) Included in securitization income, net.
VALUATION TECHNIQUES USED IN MEASURING
FAIR VALUE
GAAP requires disclosure of the estimated fair value of all
financial instruments. A financial instrument is defined as
cash, evidence of an ownership in an entity, or a contract
between two entities to deliver cash or another financial
instrument or to exchange other financial instruments. The
disclosure requirements for the fair value of financial
instruments exclude leases, equity method investments,
affiliate investments, pension and benefit obligations,
insurance contracts and all non-financial instruments.
For the financial assets and liabilities measured at fair
value on a recurring basis, summarized in the valuation
hierarchy table above, the Company applies the following
valuation techniques to measure fair value:
Investment Securities (Excluding Retained Subordinated
Securities and the Interest-only Strip)
폷When available, quoted market prices in active markets are
used to determine fair value. Such investment securities are
classified within Level 1 of the fair value hierarchy.
폷When quoted prices in an active market are not available,
the fair values for the Company’s investment securities are
obtained primarily from pricing services engaged by the
Company, and the Company receives one price for each
security. The fair values provided by the pricing services are
estimated by using pricing models, where the inputs to
those models are based on observable market inputs. The
inputs to the valuation techniques applied by the pricing
services vary depending on the type of security being priced
but are typically benchmark yields, benchmark security
prices, credit spreads, prepayment speeds, reported trades
and broker-dealer quotes, all with reasonable levels of
transparency. The pricing services did not apply any
adjustments to the pricing models used. In addition, the
Company did not apply any adjustments to prices received
from the pricing services. The Company classifies the prices
obtained from the pricing services within Level 2 of the fair
value hierarchy because the underlying inputs are directly
observable from active markets or recent trades of similar
securities in inactive markets. However, the pricing models
used do entail a certain amount of subjectivity and
therefore differing judgments in how the underlying inputs
are modeled could result in different estimates of fair value.
The Company has reaffirmed its understanding of the
valuation techniques used by its pricing services. In addition,
the Company corroborates the prices provided by its pricing
services to test their reasonableness by comparing their prices
to valuations from different pricing sources as well as
comparing prices to the sale prices received from sold
securities. Refer to Note 6 for additional fair value
information.
Retained Subordinated Securities
The Company determines the fair value of its retained
subordinated securities using discounted cash flow models.
The discount rate used is based on an interest rate curve that
is observable in the marketplace plus an unobservable credit
spread commensurate with the risk of these securities and
similar financial instruments. The Company classifies such
securities in Level 3 of the fair value hierarchy because the
applicable credit spreads are not observable due to the
illiquidity in the market with respect to these securities and
similar financial instruments. Refer to Note 7 for additional
fair value information.
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