Bank of America 2007 Annual Report Download - page 82

securities. In the case of default we first look to the underlying securities
and then to recovery on the purchased insurance. See page 53 for dis-
cussion on credit protection purchased on our CDO exposure.
We also have indirect exposure as we invest in securities where the
issuers have purchased wraps (i.e., insurance). For example, municipal-
ities and corporations purchase protection in order to enhance their pricing
power which has the effect of reducing their cost of borrowings. If the rat-
ing agencies downgrade the monolines, the credit rating of the bond may
fall and may have an adverse impact on the market value of the security.
We have further exposure related to our public finance business
where we are the lead manager or remarketing agent for transactions that
are wrapped including auction rate securities (ARS), tender option munici-
pal bonds (TOBs), and variable rate demand bonds (VRDBs). We are the
lead manager on municipal and, to a lesser extent, student loan ARS
where a high percentage of the programs are wrapped by either monolines
or other financial guarantors. However, we are only the remarketing agent
on TOBs and VRDBs transactions. Recent concerns about monoline down-
grades or insolvency has caused disruptions in each of these markets as
investor concerns have impacted overall market liquidity and bond prices.
We continue to have liquidity exposure to these markets and instruments,
and as market conditions continue to evolve, these conditions may impact
our results. For information on our liquidity exposure to our public finance
business, see the municipal bond trusts and corporate SPEs discussion
beginning on page 62.
Credit protection is purchased to cover the funded portion as well as
the unfunded portion of certain credit exposure. To lessen the cost of
obtaining our desired credit protection levels, credit exposure may be
added within an industry, borrower or counterparty group by selling pro-
tection. Since December 31, 2006, our net credit default protection pur-
chased has been reduced by $1.1 billion to $7.1 billion as we continue to
reposition the level of purchased protection based on our current view of
the underlying credit risk in the portfolio.
At December 31, 2007 and 2006, we had net notional credit default
protection purchased in our credit derivatives portfolio of $7.1 billion and
$8.3 billion. The net mark-to-market impacts, including the cost of credit
default protection, resulted in net gains of $160 million in 2007 compared
to net losses of $241 million in 2006. The average VAR for these credit
derivative hedges was $22 million and $54 million for the twelve months
ended December 31, 2007 and 2006. The decrease in VAR was driven by
a reduction in the average amount of credit protection outstanding during
the year. There is a diversification effect between the credit derivative
hedges and the market-based trading portfolio such that their combined
average VAR was $55 million and $57 million for the twelve months ended
December 31, 2007 and 2006. Refer to the Trading Risk Management
discussion beginning on page 87 for a description of our VAR calculation
for the market-based trading portfolio.
Table 21 Commercial Credit Exposure by Industry (1, 2)
December 31
Commercial Utilized Total Commercial Committed
(Dollars in millions) 2007 2006 2007 2006
Real estate
(3)
$ 81,260 $ 49,259 $111,742 $ 73,544
Diversified financials 37,872 24,813 86,118 67,038
Government and public education 31,743 22,495 57,437 39,254
Retailing 33,280 27,226 55,184 44,064
Capital goods 25,908 16,830 52,356 37,363
Healthcare equipment and services 24,337 15,881 40,962 31,189
Materials 22,176 15,978 38,717 28,789
Consumer services 23,382 19,191 38,650 32,734
Banks 21,261 26,405 35,323 36,735
Individuals and trusts 22,323 18,792 32,425 29,167
Commercial services and supplies 21,175 15,224 31,858 23,532
Food, beverage and tobacco 13,919 11,384 25,701 21,124
Energy 12,772 9,505 23,510 18,460
Media 7,901 8,784 19,343 19,181
Utilities 6,438 6,624 19,281 17,222
Transportation 12,803 11,637 18,824 17,375
Insurance 7,162 6,759 16,014 14,122
Religious and social organizations 8,208 7,840 10,982 10,507
Consumer durables and apparel 5,802 4,827 10,907 9,124
Technology hardware and equipment 4,615 3,326 10,239 8,093
Software and services 4,739 2,763 10,128 6,212
Pharmaceuticals and biotechnology 4,349 2,530 8,563 6,289
Telecommunication services 3,475 3,565 8,235 7,981
Automobiles and components 2,648 1,584 6,960 5,153
Food and staples retailing 2,732 2,153 5,318 4,222
Household and personal products 889 779 2,776 2,264
Semiconductors and semiconductor equipment 1,140 802 1,734 1,364
Other 8,407 7,346 8,505 7,775
Total commercial credit exposure by industry $452,716 $344,302 $787,792 $619,877
Net credit default protection purchased on total commitments
(4)
$ (7,146) $ (8,260)
(1) Total commercial utilized and total commercial committed exposure includes loans and letters of credit measured at fair value in accordance with SFAS 159 and are comprised of loans outstanding of $4.59 billion and issued
letters of credit at notional value of $1.1 billion at December 31, 2007. In addition, total commercial committed exposure includes unfunded loan commitments at notional value of $19.8 billion at December 31, 2007.
(2) Includes small business commercial – domestic exposure.
(3) Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based upon the borrowers’ or counterparties’ primary business activity using
operating cash flow and primary source of repayment as key factors.
(4) Represents net notional credit protection purchased.
80 Bank of America 2007