ASSETSCURRENT ASSETS:Cash$55,142,632$54,792,831Accounts receivable3,234,0762,948,984Prepaid expenses and other assets2,657,9143,693,970Total current assets61,034,62261,435,785NONCURRENT ASSETS
roperty, equipment, and software -- net156,767,186159,267,605Other assets576,6591,837,995Total noncurrent assets157,343,845161,105,600Total assets$ 218,378,467$ 222,541,385LIABILITIES AND CUMULATIVE RESULTS OF OPERATIONSCURRENT LIABILITIES:Accounts payable and accrued liabilities$15,403,521$20,765,464Accrued payroll and related taxes21,894,03610,940,984Accrued annual leave26,337,19024,821,044Capital lease payable544,878533,110Unearned revenues and other liabilities556,8462,982,629Total current liabilities64,736,47160,043,231LONG-TERM LIABILITIES:Capital lease payable237,479782,357Accumulated retirement benefit obligation21,979,21913,021,387Accumulated postretirement benefit obligation10,219,6729,304,324Accumulated postemployment benefit obligation13,813,25414,463,965Other long-term liabilities3,545,936415,324Total long-term liabilities49,795,56037,987,357Total liabilities114,532,03198,030,588CUMULATIVE RESULTS OF OPERATIONS:Fund balance118,473,958133,677,902Accumulated other comprehensive income (loss)(14,627,522)(9,167,105)Total cumulative results of operations103,846,436124,510,797TOTAL$ 218,378,467$ 222,541,385See
notes to financial statements.
Board of Governors of the Federal Reserve System Statements of Revenues and Expenses and Changes in Cumulative Results of Operations For the years ended December 31,20102009
BOARD OPERATING REVENUES: Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures$ 422,200,000$ 386,399,900Other revenues8,693,4899,413,565Total operating revenues430,893,489395,813,465
BOARD OPERATING EXPENSES: Salaries268,168,023243,664,276Retirement and insurance56,788,74050,458,964Contractual services and professional fees48,698,91340,065,160Depreciation, amortization, and net gains on disposals15,865,70413,885,165Utilities8,628,3948,676,782Travel10,847,79511,346,880Software8,057,5808,699,031Postage and supplies7,100,3028,157,780Repairs and maintenance3,384,9945,115,155Printing and binding2,240,4892,597,982Other expenses16,316,49913,553,896Total operating expenses446,097,433406,221,071RESULTS OF OPERATIONS(15,203,944)(10,407,606)
CURRENCY COSTS: Assessments levied on Federal Reserve Banks for currency costs622,858,648502,144,883Expenses for costs related to currency622,858,648502,144,883Currency Assessments over (under) Expenses--
BUREAU of CONSUMER FINANCIAL PROTECTION (BUREAU): Assessments levied on Reserve Banks for the Bureau32,770,000-Transfer to the Bureau32,770,000-Bureau assessments over (under) transfers--OFFICE of FINANCIAL RESEARCH (OFFICE):Assessments levied on Reserve Banks for the Office9,515,944-Transfer to the Office9,515,944-Office assessments over (under) transfers--Total Results of Operations(15,203,944)(10,407,606)Cumulative Results of Operations, Beginning of year124,510,797134,811,346OTHER COMPREHENSIVE INCOME
rior service credit (cost) arising during the year-(315,842)Amortization of prior service (credit) cost518,195541,162Amortization of net actuarial (gain) loss576,736353,551Net actuarial gain (loss) arising during the year(6,555,34
(471,814)Total other comprehensive income (loss)(5,460,417)107,057CUMULATIVE RESULTS OF OPERATIONS, End of year$ 103,846,436$ 124,510,797See
notes to financial statements.
Board of Governors of the Federal Reserve System Statements of Cash Flows For the years ended December 31,20102009CASH FLOWS FROM OPERATING ACTIVITIES:Results of operations$ (15,203,944)$ (10,407,606)Adjustments to reconcile results of operations to net cash provided by (used in) operating activities
epreciation15,877,10513,869,221Net loss (gain) on disposal of property and equipment(11,401)15,944Other additional non-cash adjustments to results of operations658,587-(Increase) decrease in assets:Accounts receivable, prepaid expenses and other assets730,1431,499,641Increase (decrease) in liabilities:Accounts payable and accrued liabilities(822,981)1,668,788Accrued payroll and related taxes10,953,0521,627,747Accrued annual leave1,516,1462,586,938Unearned revenues and other liabilities(2,425,783)1,139,571Net retirement benefit obligation3,911,3482,592,406Net postretirement benefit obligation501,415445,903Net postemployment benefit obligation(650,711)563,965Other long-term liabilities3,130,612(233,210)Net cash provided by (used in) operating activities18,163,58815,369,308CASH FLOWS FROM INVESTING ACTIVITIES
roceeds from disposals-866Capital expenditures(17,296,07
(18,346,427)Net cash provided by (used in) investing activities(17,296,07
(18,345,561)CASH FLOWS FROM FINANCING ACTIVITIESCapital lease payments(517,709)(486,906)Net cash provided by (used in) financing activities(517,709)(486,906)NET INCREASE (DECREASE) IN CASH349,801(3,463,159)CASH BALANCE--Beginning of year54,792,83158,255,990CASH BALANCE--End of year$55,142,632$54,792,831See
notes to financial statements.
Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years ended December 31, 2010 and 2009
(1) Structure
The Federal Reserve System (the System) was established by Congress in 1913 and consists of the Board of Governors (the Board), the Federal Open Market Committee, the twelve regional Federal Reserve Banks, the Federal Advisory Council, and the private commercial banks that are members of the System. The Board, unlike the Reserve Banks, was established as a federal government agency and is supported by Washington, D.C. based staff numbering approximately 2,100, as it carries out its responsibilities in conjunction with other components of the Federal Reserve System.
The Board is required by the Federal Reserve Act (the Act) to report its operations to the Speaker of the House of Representatives. The Act also requires the Board, each year, to order a financial audit of each Federal Reserve Bank and to publish each week a statement of the financial condition of each such Reserve Bank and a consolidated statement for all of the Reserve Banks. Accordingly, the Board believes that the best financial disclosure consistent with law is achieved by issuing separate financial statements for the Board and for the Reserve Banks. Therefore, the accompanying financial statements include only the results of operations and activities of the Board. Combined financial statements for the Federal Reserve Banks are included in the Board's annual report to the Speaker of the House of Representatives.
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(2) Operations and Services
The Board's responsibilities require thorough analysis of domestic and international financial and economic developments. The Board carries out those responsibilities in conjunction with other components of the Federal Reserve System. The Board also supervises and regulates the operations of the Federal Reserve Banks, exercises broad responsibility in the nation's payments system, and currently administers most of the nation's laws regarding consumer credit protection. Policy regarding open market operations is established by the Federal Open Market Committee. However, the Board has sole authority over changes in reserve requirements, and it must approve any change in the discount rate initiated by a Federal Reserve Bank. The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are members of the Federal Reserve System, bank holding companies, foreign activities of member banks, and U.S. activities of foreign banks.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which was signed into law and became effective on July 21, 2010, changed the scope of some services performed by the System. Among other things, the Dodd-Frank Act establishes a Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that will have rule-writing authority with respect to most federal financial consumer protection statutes and supervisory authority with respect to these statutes over some institutions previously supervised by the Board. The Dodd-Frank Act will also vest the Board with all supervisory and rule-writing authority for savings and loan holding companies. In addition, the Dodd-Frank Act creates a Financial Stability Oversight Council (FSOC) of which the Chairman of the Board is a member. Some of the FSOC's responsibilities include identifying systemically important nonbank financial companies to be supervised by the Board. The Dodd-Frank Act also establishes the Office of Financial Research (Office) within the U.S. Department of Treasury to provide support to the FSOC and the member agencies.
Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board or the System. The Board has also determined that neither the FSOC nor the Office should be consolidated in the Board's financial statements. Accordingly, the Board's financial statements do not include financial data of the Bureau, the Office, or the FSOC other than the funding that the Board is required by the Dodd-Frank Act to provide. (See
Notes 13 and
14)
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(3) Significant Accounting Policies
Basis of Accounting--The Board prepares its financial statements in accordance with accounting principles generally accepted in the United States (GAAP).
Revenues--The Federal Reserve Act authorizes the Board to levy an assessment on the Reserve Banks to fund its operations. The Board levies the assessment based on each Reserve Bank's capital and surplus balances as of December 31 of the prior year.
Assessments to Fund the Bureau and the Office--The Board assesses the Federal Reserve Banks for the funds transferred to the Bureau and the Office based on each Federal Reserve Bank's capital and surplus balances. These assessments and transfers are reported separately from the Board's operating activities in the Board's Statements of Revenues and Expenses and Changes in Cumulative Results of Operations.
Currency Costs--The Federal Reserve Board issues the nation's currency (in the form of Federal Reserve notes), and the Federal Reserve Banks distribute currency and coin through depository institutions. The Board incurs expenses and assesses the Reserve Banks for the expenses related to producing, issuing, and retiring Federal Reserve notes. The assessment is allocated based on each Reserve Bank's share of the number of notes comprising the Federal Reserve Bank System's net liability for Federal Reserve notes on December 31 of the prior year. These expenses and assessments are reported separately from the Board's operating activities in the Board's Statements of Revenues and Expenses and Changes in Cumulative Results of Operations.
Allowance for Doubtful Accounts--Accounts receivable are shown net of the allowance for doubtful accounts. Accounts receivable considered uncollectible are charged against the allowance account in the year they are deemed uncollectible. The allowance for doubtful accounts is adjusted monthly, based upon a review of outstanding receivables.
Property, Equipment, and Software--The Board's property, buildings, equipment, and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years for furniture and equipment, ten to fifty years for building equipment and structures, and two to ten years for software. Upon the sale or other disposition of a depreciable asset, the cost and related accumulated depreciation or amortization are removed and any gain or loss is recognized.
The Board's internally developed software projects are each recorded at cost and capitalized and amortized over the project's useful life as required by the Internal Use Software Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).
Art Collections--The Board has collections of works of art, historical treasures, and similar assets. These collections are maintained and held for public exhibition in furtherance of public service. Proceeds from any sales of collections are used to acquire other items for collections. As permitted by the Revenue Recognition Topic of the ASC, the cost of collections purchased by the Board is charged to expense in the year purchased and donated collection items are not recorded. The value of the Board's collections has not been determined.
Deferred Rent--The leases contain scheduled rent increases over the term of the lease. As required by the Leases Topic of the ASC, rent abatements and scheduled rent increases must be considered in determining the annual rent expense to be recognized. The deferred rent represents the difference between the actual lease payments and the rent expense recognized.
Estimates--The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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(4) Property, Equipment, and Software
The following is a summary of the components of the Board's property, equipment, and software, at cost, net of accumulated depreciation and amortization as of December 31, 2010 and 2009:
As of December 31,20102009Land$ 18,640,314$ 18,640,314Buildings and improvements163,868,033155,403,350Furniture and equipment68,789,40866,411,669Software in use24,244,81116,196,241Software in process1,985,5446,276,842Construction in process4,810,3078,100,559282,338,417271,028,975Less accumulated depreciation and amortization(125,571,231)(111,761,370)Property, equipment, and software -- net$ 156,767,186$ 159,267,605
Construction in process include costs incurred in the current or prior years for long-term projects and building enhancements.
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(5) Leases
Capital Leases--The Board entered into capital leases in 2008 and 2009. Furniture and equipment includes $2,086,000 under capital leases in both 2010 and 2009. Accumulated depreciation includes $1,319,000 and $789,000 under capital leases as of 2010 and 2009, respectively.
The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2010, are as follows:
Years Ending December 31Amount2011$978,3152012421,925Total minimum lease payments1,400,240Less amount representing maintenance(604,906)Net minimum lease payments795,334Less amount representing interest(12,977)Present value of net minimum lease payments782,357Less current maturities of capital lease payments(544,87
Long-term capital lease obligations$ 237,479
Operating Leases--The Board has entered into several operating leases to secure office, training and warehouse space. Minimum annual payments under the operating leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 2010, are as follows:
Years Ending December 312011$6,251,49620126,414,80720136,608,97620146,788,468After 201435,626,043$61,689,790
Rental expenses under the operating leases were $6,882,000 and $3,947,000 for the years ended December 31, 2010 and 2009, respectively. The Board entered into a new operating lease in January 2011. The estimated future minimum lease payments associated with the new lease total $78,702,000 over a ten year period.
The Board leases and subleases space, primarily to other governmental agencies. The revenues collected from these leases are $1,937,000 and $2,504,000 in 2010 and 2009, respectively.
Deferred Rent--The change in deferred rent was $528,000 and $1,666,000 for the years ended December 31, 2010 and 2009, respectively.
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(6) Accumulated Retirement Benefits
Substantially all of the Board's employees participate in the Retirement Plan for Employees of the Federal Reserve System (the System Plan). The System Plan provides retirement benefits to employees of the Board, the Federal Reserve Banks, and the Office of Employee Benefits of the Federal Reserve System (OEB). In addition, under the Dodd-Frank Act, employees of the Bureau can elect to participate in the System Plan; however, there were no Bureau participants in the System Plan as of December 31, 2010. The Federal Reserve Bank of New York (FRBNY), on behalf of the System, recognizes the net assets and costs associated with the System Plan in its financial statements. Costs associated with the System Plan are not redistributed to other participating employers.
Employees of the Board who became employed prior to 1984 are covered by a contributory defined benefits program under the System Plan. Employees of the Board who became employed after 1983 are covered by a non-contributory defined benefits program under the System Plan. Contributions to the System Plan are actuarially determined and funded by participating employers. In 2010, the System made $580 million in contributions to the System Plan; the contributions may be adjusted upon completion of the 2011 actuarial valuation. The Board was not assessed a contribution for 2010.
Effective January 1, 1996, Board employees covered under the System Plan are also covered under a Benefits Equalization Plan (BEP). Benefits paid under the BEP are limited to those benefits that cannot be paid from the System Plan due to limitations imposed by Sections 401(a)(17), 415(b) and 415(e) of the Internal Revenue Code of 1986. Activity for the BEP as of December 31, 2010 and 2009, is summarized in the following tables:
As of December 31,20102009Change in projected benefit obligation:Benefit obligation -- beginning of year$ 5,900,567$ 4,591,374Service cost1,359,828712,515Interest cost545,688307,501Plan participants' contributionsActuarial (gain) loss4,155,013(175,635)Gross benefits paid(27,661)(27,649)Plan amendments492,461Benefit obligation -- end of year$ 11,933,435$ 5,900,567Accumulated benefit obligation -- end of year$ 1,686,998$ 1,245,465Weighted-average assumptions used to determine benefit obligation as of December 31
iscount rate5.50 %6.00 %Rate of compensation increase5.00 %5.00 %Change in plan assets:Fair value of plan assets -- beginning of year$ -$ -Employer contributions27,66127,649Plan participants' contributionsGross benefits paid(27,661)(27,649)Fair value of plan assets -- end of year$ -$ -Funded status:Reconciliation of funded status -- end of year:Fair value of plan assets$ -$ -Benefit obligations11,933,4355,900,567Funded status(11,933,435)(5,900,567)Amount recognized -- end of year$ (11,933,435)$ (5,900,567)Amounts recognized in the statements of financial position consist of:Asset$ -$ -Liability(11,933,435)(5,900,567)Net amount recognized$ (11,933,435)$ (5,900,567)Amounts recognized in accumulated other comprehensive income consist of:Net actuarial loss (gain)$ 5,575,910$ 1,708,854Prior service cost (credit)701,833714,123$6,277,743$2,422,977Expected cash flows:Expected employer contributions -- 2011$203,387Expected benefit payments:
*2011$203,3872012245,7262013270,6972014288,8712015317,4112016-20202,036,841Components of net periodic benefit cost:Service cost$ 1,359,828$ 712,515Interest cost545,688307,501Expected return on plan assetsAmortization:Actuarial (gain) loss287,957146,780Prior service (credit) cost12,29035,257Net periodic benefit cost (credit)$2,205,763$1,202,053Weighted-average assumptions used to determine net periodic benefit cost
iscount rate6.00 %6.00 %Rate of compensation increase5.00 %5.00 %Other changes in plan assets and benefit obligations recognized in other comprehensive income:Current year prior service (credit) cost$ -$ 492,461Current year actuarial (gain) loss4,155,013(175,635)Amortization of prior service credit (cost)(12,290)(35,257)Amortization of actuarial gain (loss)(287,957)(146,780)Total recognized in other comprehensive income$3,854,766$134,789Total recognized in net periodic benefit cost and other comprehensive income$6,060,529$1,336,842*. Expected benefit payments to be made from System assets.
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Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2011 are shown below:
Net actuarial (gain) loss$446,472Prior service (credit) cost1,881Total$448,353
On October 30, 2008, the Board approved a non-qualified plan for Officers of the Board. The retirement benefits covered under the Board Officer Pension Enhancement (BOPE) increases the pension benefit calculation from 1.8% above the Social Security integration level to 2.0%. Activity for the BOPE as of December 31, 2010 and 2009, is summarized in the following tables:
As of December 31,20102009Change in projected benefit obligation:Benefit obligation -- beginning of year$7,120,820$6,275,285Service cost409,007333,034Interest cost493,780402,680Plan participants' contributionsActuarial (gain) loss1,935,668286,440Gross benefits paid(9,63
Plan amendments-(176,619)Benefit obligation -- end of year$9,949,637$7,120,820Accumulated benefit obligation -- end of year$7,063,653$5,175,331Weighted-average assumptions used to determine benefit obligation as of December 31
iscount rate5.50 %6.00 %Rate of compensation increase5.00 %5.00 %Change in plan assets:Fair value of plan assets -- beginning of year$ -$ -Employer contributions9,638Plan participants' contributionsGross benefits paid(9,63
Fair value of plan assets -- end of year$ -$ -Funded status:Reconciliation of funded status -- end of year:Fair value of plan assets$ -$ -Benefit obligations9,949,6377,120,820Funded status(9,949,637)(7,120,820)Amount recognized -- end of year$ (9,949,637)$ (7,120,820)Amounts recognized in the statements of financial position consist of:Asset$ -$ -Liability(9,949,637)(7,120,820)Net amount recognized$ (9,949,637)$ (7,120,820)Amounts recognized in accumulated other comprehensive income consist of:Net actuarial loss (gain)$3,465,859$1,742,746Prior service cost (credit)3,243,2783,774,673$6,709,137$5,517,419Expected cash flows:Expected employer contributions -- 2011$57,224Expected benefit payments:
*2011$57,2242012101,5772013152,5692014211,8292015275,7882016-20202,463,754Components of net periodic benefit cost:Service cost$ 409,007$ 333,034Interest cost493,780402,680Expected return on plan assetsAmortization:Actuarial (gain) loss212,555150,893Prior service (credit) cost531,395531,395Net periodic benefit cost (credit)$1,646,737$1,418,002Weighted-average assumptions used to determine net periodic benefit cost
iscount rate6.00 %6.00 %Rate of compensation increase5.00 %5.00 %Other changes in plan assets and benefit obligations recognized in other comprehensive income:Current year prior service (credit) cost$ -$(176,619)Current year actuarial (gain) loss1,935,668286,440Amortization of prior service credit (cost)(531,395)(531,395)Amortization of actuarial gain (loss)(212,555)(150,893)Total recognized in other comprehensive income$ 1,191,718$ (572,467)Total recognized in net periodic benefit cost and other comprehensive income$2,838,455$845,535*. Expected benefit payments to be made from System assets.
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Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2011 are shown below:
Net actuarial (gain) loss$ 287,715Prior service (credit) cost531,395Total$819,110
The total accumulated retirement benefit obligation includes a liability for a supplemental retirement agreement and a benefits equalization plan under the Federal Reserve System's Thrift Plan. The total obligation as of December 31, 2010 and 2009 is summarized in the following table:
20102009Accumulated retirement benefit obligation:Benefit obligation -- BEP$11,933,435$5,900,567Benefit obligation -- BOPE9,949,6377,120,820Additional benefit obligation96,147-Total accumulated retirement benefit obligation$ 21,979,219$ 13,021,387
A relatively small number of Board employees participate in the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). These defined benefit plans are administered by the U.S. Office of Personnel Management, which determines the required employer contribution levels. The Board's contributions to these plans totaled $452,000 and $329,000 in 2010 and 2009, respectively. The Board has no liability for future payments to retirees under these programs and is not accountable for the assets of the plans.
Employees of the Board may also participate in the Federal Reserve System's Thrift Plan or Roth 401(k). Board contributions to members' accounts were $16,695,000 and $14,342,000 in 2010 and 2009, respectively.
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(7) Accumulated Postretirement Benefits
The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2010 and 2009, is summarized in the following tables:
As of December 31,20102009Change in projected benefit obligation:Benefit obligation -- beginning of year$ 9,304,324$ 8,527,800Service cost188,357169,687Interest cost532,592516,194Plan participants' contributions--Actuarial (gain) loss464,667361,009Gross benefits paid(270,26
(270,366)Curtailments--Benefit obligation -- end of year$ 10,219,672$ 9,304,324Weighted-average assumptions used to determine benefit obligation as of December 31 -- discount rate5.25 %5.75 %Change in plan assets:Fair value of plan assets -- beginning of year$ -$ -Employer contributions270,268270,366Gross benefits paid(270,26
(270,366)Fair value of plan assets -- end of year$ -$ -Funded status:Reconciliation of funded status -- end of year:Fair value of plan assets$ -$ -Benefit obligations10,219,6729,304,324Funded status(10,219,672)(9,304,324)Amount recognized -- end of year$ (10,219,672)$ (9,304,324)Amounts recognized in the statements of financial position consist of:Asset$ -$ -Liability(10,219,672)(9,304,324)Net amount recognized$ (10,219,672)$ (9,304,324)Amounts recognized in accumulated other comprehensive income consist of:Net actuarial loss (gain)$ 1,917,176$ 1,528,733Prior service cost (credit)(276,534)(302,024)$ 1,640,642$ 1,226,709Expected cash flows:Expected employer contributions -- 2011$ 337,952Expected benefit payments:
*2011$337,9522012354,9712013383,0102014411,4142015439,3872016-20202,623,724Components of net periodic benefit cost:Service cost$ 188,357$ 169,687Interest cost532,592516,194Expected return on plan assets--Amortization:Actuarial (gain) loss76,22455,878Prior service (credit) cost(25,490)(25,490)Net periodic benefit cost (credit)$ 771,683$ 716,269Weighted-average assumptions used to determine net periodic benefit cost -- discount rate5.75 %6.00 %Other changes in plan assets and benefit obligations recognized in other comprehensive income:Current year actuarial (gain) loss$ 464,667$ 361,009Amortization of prior service credit (cost)25,49025,490Amortization of actuarial gain (loss)$ (76,224)$ (55,87
Total recognized in other comprehensive income$ 413,933$ 330,621Total recognized in net periodic benefit cost and other comprehensive income$ 1,185,616$ 1,046,890*. Expected benefit payments to be made from System assets.
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Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2011 are shown below:
Net actuarial (gain) loss$ 110,901Prior service (credit) cost(25,490)Total$ 85,411
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( Accumulated Postemployment Benefits
The Board provides certain postemployment benefits to eligible former or inactive employees and their dependents during the period subsequent to employment but prior to retirement. Postemployment costs were actuarially determined using a December 31 measurement date and discount rates of 3.50% and 4.00% as of December 31, 2010 and 2009, respectively. The accrued postemployment benefit costs recognized by the Board as of December 31, 2010 and 2009, were $701,000 and $1,754,000, respectively.
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(9) Accumulated Other Comprehensive Income (Loss)
A reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) for the years ended December 31, 2010 and 2009, is as follows:
Amount Related to Defined Benefit Retirement PlansAmount Related to Postretirement Benefits Other Than PensionsTotal Accumulated Other Comprehensive Income (Loss)Balance -- January 1, 2009$ 8,378,074$ 896,088$ (9,274,162)Change in funded status of benefit plans
rior service (credit) cost arising during the year315,842-(315,842)Amortization of prior service credit (costs)(566,652)25,490541,162Amortization of net actuarial gain (loss)(297,673)(55,87
353,551Net actuarial (gain) loss arising during the year110,805361,009(471,814)Change in funded status of benefit plans -- other comprehensive income (loss)(437,67
330,621107,057Balance -- December 31, 20097,940,3961,226,709(9,167,105)Change in funded status of benefit plans
rior service (credit) cost arising during the yearAmortization of prior service credit (costs)(543,685)25,490518,195Amortization of net actuarial gain (loss)(500,512)(76,224)576,736Net actuarial (gain) loss arising during the year6,090,681464,667(6,555,34
Change in funded status of benefit plans --other comprehensive income (loss)5,046,484413,933(5,460,417)Balance -- December 31, 2010$ 12,986,880$ 1,640,642$ (14,627,522)
Additional detail regarding the classification of accumulated other comprehensive income (loss) is included in Notes 6 and 7.
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(10) Federal Reserve Banks
The Board performs certain functions for the Reserve Banks in conjunction with its responsibilities for the System, and the Reserve Banks provide certain administrative functions for the Board. Activity related to the Board and Reserve Banks as of December 31, 2010 and 2009, is summarized in the following table:
As of December 31,20102009Reserve Bank expenses charged to the Board
ata processing and communication$ 919,889$ 776,835Contingency site1,254,3311,171,808Total Reserve Bank expenses charged to the Board$ 2,174,220$ 1,948,643Board expenses charged to the Reserve Banks:Assessments for currency costs
rinting$ 598,238,821$ 479,255,288Shipping16,900,58415,367,546Retirement3,513,5383,608,937Research and development4,205,7053,913,112Assessments for operating expenses of the Board422,200,000386,399,900Data processing483,512635,235Total Board expenses charged to the Reserve Banks$ 1,045,542,160$ 889,180,018Accounts receivable due from the Reserve Banks$ 856,685$ 1,071,932
The Board contracted for audit services on behalf of entities that are included in the combined financial statements of the Federal Reserve Banks. The entities reimburse the Board for the cost of the audit services. The Board accrued liabilities of $322,000 and $138,000 in audit services and recorded receivables of $322,000 and $138,000 from the entities as of December 31, 2010 and 2009, respectively.
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(11) Federal Financial Institutions Examination Council
The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the Council), and currently performs certain management functions for the Council. The five agencies that are represented on the Council are the Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision.
The Board's financial statements do not include financial data for the Council. Activity related to the Board and Council, as of December 31, 2010 and 2009, is summarized in the following table:
As of December 31,20102009Council expenses charged to the Board:Assessments for operating expenses$126,469$67,998Assessments for examiner education672,153734,359Central Data Repository1,202,7041,522,597Uniform Bank Performance Report154,877210,293Total Council expenses charged to the Board$2,156,203$2,535,247Board expenses charged to the Council
ata processing related services$4,897,107$4,884,868Administrative services245,000245,000Total Board expenses charged to the Council$5,142,107$5,129,868Accounts receivable due from the Council$579,792$618,861Accounts payable due to the Council290,047209,922
In 2007, the Council began a rewrite of the Home Mortgage Disclosure Act processing system, for which the Board provides data processing services. The total cost of the rewrite for the Council is $2.7 million of which the Board expense to support this effort was $464,000 through December 31, 2010.
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(12) The Office of Employee Benefits of the Federal Reserve System
The Office of Employee Benefits of the Federal Reserve System (OEB) administers certain System benefit programs on behalf of the Board and the Reserve Banks, and costs associated with the OEB's activities are assessed to the Board and Reserve Banks. The Board was assessed $2,371,000 and $2,166,000 as of December 31, 2010 and 2009, respectively.
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(13) The Bureau of Consumer Financial Protection
Sec. 1017 of the Dodd-Frank Act requires the Board to fund the Bureau the amount needed to carry out the authorities granted to the Bureau under Federal consumer financial law. Beginning July 2011, the Act limits the amount to be transferred each fiscal year to a fixed percentage of the System's total operating expenses. During 2010, the Board received and processed funding requests for the Bureau totaling $32,770,000.
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(14) The Office of Financial Research
Sec. 155(c) of the Dodd-Frank Act requires the Board to provide an amount sufficient to cover the expenses of the Office for the 2-year period following the date of the enactment (July 21, 2010). The expenses of the FSOC are included in the expenses of the Office. During 2010, the Board received and processed funding requests for the Office totaling $9,515,944.
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(15) Bureau of Engraving and Printing
The Bureau of Engraving and Printing is the sole supplier for currency printing and also provides retirement services. The currency costs incurred as of December 31, 2010 and 2009, are reflected in the following table:
As of December 31,20102009Currency expenses charged to the Board
rinting$ 598,238,821$ 479,255,288Retirement3,513,5383,608,937Total currency expenses charged to the Board$ 601,752,359$ 482,864,225
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(16) Commitments and Contingencies
Commitments--The Board has entered into an agreement with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, through the Council, to fund a portion of the enhancements and maintenance fees for a central data repository project through 2010 with an option to extend maintenance through 2013. The estimated Board expense to support this effort is $7.9 million for the base period and $2.6 million for the option period.
Litigation and Contingent Liabilities--The Board is subject to contingent liabilities which arise from litigation cases and various business contracts. These contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. Based on information currently available to management, it is management's opinion that the expected outcome of these matters, in the aggregate, will not have a materially adverse effect on the financial statements.
Civil cases against the Board arising out of The Freedom of Information Act permits recovery of attorneys fees in civil cases where the plaintiff "substantially prevails". There are two pending cases in which it is possible that the Board could be required to pay fees in excess of $205,000 per case.
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(17) Subsequent Events
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2010. Subsequent events were evaluated through February 28, 2011, which is the date the financial statements were available to be issued.
INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
To the Board of Governors of the Federal Reserve System:
We have audited the financial statements of the Board of Governors of the Federal Reserve System (the "Board") as of and for the year ended December 31, 2010, and have issued our report thereon dated February 28, 2011. We conducted our audit in accordance generally accepted auditing standards as established by the Auditing Standards Board (United States), auditing standards of the Public Company Accounting Oversight Board (United States), and the standards applicable to financial audits contained in
Government Auditing Standards, issued by the Comptroller General of the United States.
Internal Control over Financial Reporting
In accordance with standards of the Public Company Accounting Oversight Board (United States) and
Government Auditing Standards, we have also issued our report dated February 28, 2011, on our tests of the Board's internal control over financial reporting. The purpose of that report is to describe the scope and the results of that testing. That report is an integral part of an audit performed in accordance with standards of the Public Company Accounting Oversight Board (United States) and
Government Auditing Standardsand should be considered in assessing the results of our audit.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Board's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under
Government Auditing Standards.
Distribution
This report is intended solely for the information and use of the Board, management, and others within the organization, Office of Inspector General, the United States Congress, and is not intended to be and should not be used by anyone other than these specified parties.
February 28, 2011
McLean, VA
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Federal Reserve Banks Combined Financial Statements
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The combined financial statement of the Federal Reserve Banks were audited by Deloitte & Touche LLP, independent auditors, for the years ended December 31, 2010 and 2009.
INDEPENDENT AUDITOR'S REPORT
To the Board of Governors of the Federal Reserve System and the Boards of Directors of the Federal Reserve Banks:
We have audited the accompanying Combined Statements of Condition of the Federal Reserve Banks (the "Reserve Banks") as of December 31, 2010 and 2009 and the related Combined Statements of Income and Comprehensive Income, and of Changes in Capital for the years then ended, which have been prepared in conformity with accounting principles established by the Board of Governors of the Federal Reserve System. These Combined Financial Statements are the responsibility of the Division of Reserve Bank Operations and Payment System's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Reserve Banks are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Reserve Bank's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 4 to the Combined Financial Statements, the Reserve Banks have prepared these Combined Financial Statements in conformity with accounting principles established by the Board of Governors of the Federal Reserve System, as set forth in the
Financial Accounting Manual for Federal Reserve Banks, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. The effects on such Combined Financial Statements of the differences between the accounting principles established by the Board of Governors of the Federal Reserve System and accounting principles generally accepted in the United States of America are also described in Note 4.
In our opinion, such Combined Financial Statements referred to above present fairly, in all material respects, the combined financial position of the Reserve Banks as of December 31, 2010 and 2009, and the combined results of their operations for the years then ended, on the basis of accounting described in Note 4.
March 22, 2011
Washington, DC
The Federal Reserve Banks
Abbreviations
ABCPAsset-backed commercial paperABSAsset-backed securitiesACHAutomated clearinghouseAIAAmerican International Assurance Company Ltd.AIGAmerican International Group, Inc.AIG TrustAIG Credit Facility TrustAIGFPAIG Financial Products Corp.ALICOAmerican Life Insurance CompanyAMLFAsset-Backed Commercial Paper Money Market Mutual Fund Liquidity FacilityARMAdjustable rate mortgageASCAccounting Standards CodificationBEPBenefit Equalization Retirement PlanBureauBureau of Consumer Financial ProtectionCDOCollateralized debt obligationCDSCredit default swapsCIPCommittee on Investment Performance (related to System Retirement Plan)CMBSCommercial mortgage-backed securitiesCPFFCommercial Paper Funding FacilityESFExchange Stabilization FundFAM
Financial Accounting Manual for Federal Reserve BanksFASBFinancial Accounting Standards BoardFDICFederal Deposit Insurance CorporationFFCBFederal Farm Credit BanksFHLBFederal Home Loan BanksFannie MaeFederal National Mortgage AssociationFreddie MacFederal Home Loan Mortgage CorporationFOMCFederal Open Market CommitteeFRBAFederal Reserve Bank of AtlantaFRBCFederal Reserve Bank of ChicagoFRBNYFederal Reserve Bank of New YorkFRBRFederal Reserve Bank of RichmondFRBSFFederal Reserve Bank of San FranciscoGAAPAccounting principles generally accepted in the United States of AmericaGSEGovernment-sponsored enterpriseIMFInternational Monetary FundIRSInterest rate swapsJPMCJPMorgan Chase & Co.LiborLondon interbank offered rateLLCLimited liability companyMBSMortgage-backed securitiesMLMaiden Lane LLCML IIMaiden Lane II LLCML IIIMaiden Lane III LLCMTMMark-to-marketOEBOffice of Employee Benefits of the Federal Reserve SystemOFROffice of Financial ResearchOISOvernight indexed swapPDCFPrimary Dealer Credit FacilityRMBSResidential mortgage-backed securitiesSBASmall Business AdministrationSDRSpecial drawing rightsSERPSupplemental Retirement Plan for Select Officers of the Federal Reserve BanksSFASStatement of Financial Accounting StandardsSOMASystem Open Market AccountSTRIPSeparate Trading of Registered Interest and Principal of SecuritiesTAFTerm Auction FacilityTALFTerm Asset-Backed Securities Loan FacilityTARPTroubled Asset Relief ProgramTBATo be announcedTCETransitional Credit ExtensionTDFTerm Deposit FacilityTIPSTreasury Inflation-Protected SecuritiesTRSTotal return swap agreementTOPTerm Securities Lending Facility Options ProgramTSLFTerm Securities Lending FacilityVIEVariable interest entity
Federal Reserve Banks Combined Statements of Condition as of December 31, 2010 and December 31, 2009
(in millions)20102009AssetsGold certificates$ 11,037$ 11,037Special drawing rights certificates5,2005,200Coin2,1802,053Items in process of collection374507Loans
epository institutions22196,618Term Asset-Backed Securities Loan Facility (measured at fair value)24,85348,183American International Group, Inc., net20,60321,250System Open Market Account:Treasury securities, net1,066,952805,972Government-sponsored enterprise debt securities, net152,972167,362Federal agency and government-sponsored enterprise mortgage-backed securities, net1,004,695918,927Foreign currency denominated assets, net26,04925,272Central bank liquidity swaps7510,272Other investments-5Consolidated variable interest entities:Investments held by consolidated variable interest entities (of which $68,469 and $71,648 is measured at fair value as of December 31, 2010 and 2009, respectively)68,66681,380Preferred interests26,38525,106Accrued interest receivable14,23112,641Bank premises and equipment, net2,6132,624Other assets738638Total assets$ 2,427,844$ 2,235,047Liabilities and CapitalFederal Reserve notes outstanding, net$ 941,561$ 887,846System Open Market Account:Securities sold under agreements to repurchase59,70377,732Other liabilities-601Consolidated variable interest entities:Beneficial interest in consolidated variable interest entities (measured at fair value)10,0515,095Other liabilities (of which $203 and $143 is measured at fair value as of December 31, 2010 and 2009, respectively)9211,316Deposits
epository institutions968,052976,988Treasury, general account140,773186,632Treasury, supplementary financing account199,9645,001Other deposits16,96736,228Funds from American International Group, Inc. asset dispositions, held as agent26,896-Interest payable to depository institutions113113Accrued benefit costs2,5972,631Deferred credit items1,7942,103Accrued interest on Federal Reserve notes5,1241,191Other liabilities280290Total liabilities2,374,7962,183,767Capital paid-in26,52425,640Surplus (including accumulated other comprehensive loss of $3,630 and $3,676 at December 31, 2010 and 2009, respectively)26,52425,640Total capital53,04851,280Total liabilities and capital$ 2,427,844$ 2,235,047
The accompanying notes are an integral part of these combined financial statements.
Federal Reserve Banks Combined Statements of Income and Comprehensive Income for the years ended December 31, 2010 and December 31, 2009
(in millions)20102009Interest IncomeLoans
epository institutions$ 50$ 990Term Asset-Backed Securities Loan Facility750414American International Group, Inc., net2,7283,996Other-109System Open Market Account:Securities purchased under agreements to resell-13Treasury securities, net26,37322,873Government-sponsored enterprise debt securities, net3,5102,048Federal agency and government-sponsored enterprise mortgage-backed securities, net44,83920,407Foreign currency denominated assets, net223296Central bank liquidity swaps122,168Other investments-1Investments held by consolidated variable interest entities4,4409,820Total interest income82,92563,135Interest ExpenseSystem Open Market Account:Securities sold under agreements to repurchase9498Beneficial interest in consolidated variable interest entities277267Deposits
epository institutions2,6802,183Term Deposit Facility4-Total interest expense3,0552,548Provision for loan restructuring-(2,621)Net interest income after provision for loan restructuring79,87057,966Non-Interest Income (Loss)Term Asset-Backed Securities Loan Facility, unrealized (losses) gains(436)557System Open Market Account:Federal agency and government-sponsored enterprise mortgage-backed securities gains, net782879Foreign currency gains, net554172Consolidated variable interest entities:Investments held by consolidated variable interest entities gains (losses), net8,180(1,937)Beneficial interest in consolidated variable interest entities (losses), net(4,679)(1,903)Dividends on preferred interests1,279106Income from services567663Reimbursable services to government agencies457450Other income187443Total non-interest income (loss)6,891(570)Operating ExpensesSalaries and benefits2,7222,802Occupancy297280Equipment180183Assessments:Board of Governors operating expenses and currency costs1,045888Bureau of Consumer Financial Protection33-Office of Financial Research10-Professional fees related to consolidated variable interest entities104125Other681702Total operating expenses5,0724,980Net income prior to distribution81,68952,416Change in funded status of benefit plans461,007Comprehensive income prior to distribution$ 81,735$ 53,423Distribution of comprehensive income
ividends paid to member banks$ 1,583$ 1,428Transferred to surplus and change in accumulated other comprehensive loss8844,564Payments to Treasury as interest on Federal Reserve notes79,26847,431Total distribution$ 81,735$ 53,423
The accompanying notes are an integral part of these combined financial statements.
Federal Reserve Banks Combined Statements of Changes in Capital for the years ended December 31, 2010 and December 31, 2009
(in millions, except share data)Capital paid-inSurplusTotal capitalNet income retainedAccumulated other comprehensive (loss)Total surplusBalance at January 1, 2009 (421,517,467 shares)$ 21,076$ 25,759$ (4,683)$ 21,076$ 42,152Net change in capital stock issued (91,289,192 shares)4,564---4,564Transferred to surplus and change in accumulated other comprehensive income-3,5571,0074,5644,564Balance at December 31, 2009 (512,806,659 shares)$ 25,640$ 29,316$ (3,676)$ 25,640$ 51,280Net change in capital stock issued (17,674,477 shares)884---884Transferred to surplus and change in accumulated other comprehensive income-83846884884Balance at December 31, 2010 (530,481,136 shares)$ 26,524$ 30,154$ (3,630)$ 26,524$ 53,048
The accompanying notes are an integral part of these combined financial statements.
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(1) Structure
The twelve Federal Reserve Banks (Reserve Banks) are part of the Federal Reserve System (System) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics.
In accordance with the Federal Reserve Act, supervision and control of each Reserve Bank is exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System (Board of Governors) to represent the public, and six directors are elected by member banks. Banks that are members of the System include all national banks and any state-chartered banks that apply and are approved for membership. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four other Reserve Bank presidents.
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(2) Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including large-dollar transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain Federal agencies, and other entities; serving as the federal government's bank; providing short-term loans to depository institutions; providing loans to individuals, partnerships, and corporations in unusual and exigent circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, and U.S. offices of foreign banking organizations. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which was signed into law and became effective on July 21, 2010, changed the scope of some services performed by the Reserve Banks. Among other things, the Dodd-Frank Act establishes a Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the Federal Reserve System that will have supervisory authority over some institutions previously supervised by the Reserve Banks under delegated authority from the Board of Governors in connection with those institutions' compliance with consumer protection statutes; limits the Reserve Banks' authority to provide loans in unusual and exigent circumstances to lending programs or facilities with broad-based eligibility; and vests the Board of Governors with all supervisory and rule-writing authority for savings and loan holding companies.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, Federal agency and government-sponsored enterprise (GSE) debt securities, Federal agency and GSE mortgage-backed securities (MBS), the purchase of these securities under agreements to resell, and the sale of these securities under agreements to repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The FRBNY is authorized to lend the Treasury securities and Federal agency and GSE debt securities that are held in the SOMA.
In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes the FRBNY to conduct operations in foreign markets in order to counter disorderly conditions in exchange markets or to meet other needs specified by the FOMC to carry out the System's central bank responsibilities. Specifically, the FOMC authorizes and directs the FRBNY to hold balances of, and to execute spot and forward foreign exchange and securities contracts for, 14 foreign currencies and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY is authorized and directed by the FOMC to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico and to "warehouse" foreign currencies for the Treasury and the Exchange Stabilization Fund (ESF).
Although the Reserve Banks are separate legal entities, they collaborate in the delivery of certain services to achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are supported by service agreements between the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks.
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(3) Financial Stability Activities
The Reserve Banks have implemented the following programs that support the liquidity of financial institutions and foster improved conditions in financial markets.
Large-Scale Asset Purchase Programs
The FOMC authorized and directed the FRBNY to purchase $300 billion of longer-term Treasury securities to help improve conditions in private credit markets. The FRBNY began the purchases of these Treasury securities in March 2009 and completed them in October 2009. On August 10, 2010, the FOMC announced that the Federal Reserve will maintain the level of domestic securities holdings in the SOMA portfolio by reinvesting principal payments from GSE debt securities and Federal agency and GSE MBS in longer-term Treasury securities. On November 3, 2010, the FOMC announced its intention to expand the SOMA portfolio holdings of longer-term Treasury securities by an additional $600 billion by June 2011. The FOMC will regularly review the pace of these securities purchases and the overall size of the asset purchase program and will adjust the program as needed to best foster maximum employment and price stability.
The FOMC authorized and directed the FRBNY to purchase GSE debt securities and Federal agency and GSE MBS, with a goal to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. The FRBNY was authorized to purchase up to $175 billion in fixed-rate, non-callable GSE debt securities and $1.25 trillion in fixed-rate Federal agency and GSE MBS. Purchases of GSE debt securities began in November 2008, and purchases of Federal agency and GSE MBS began in January 2009. The FRBNY completed the purchases of GSE debt securities and Federal agency and GSE MBS in March 2010. The settlement of all Federal agency and GSE MBS transactions was completed by August 2010.
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Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which could be structured as either U.S. dollar liquidity or foreign currency liquidity swap arrangements. U.S. dollar liquidity swap arrangements were authorized with 14 foreign central banks to provide liquidity in U.S. dollars to overseas markets. The authorization for these swap arrangements expired on February 1, 2010. In May 2010, U.S. dollar liquidity swap arrangements were reestablished with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank; these arrangements will expire on August 1, 2011.
Foreign currency liquidity swap arrangements provided the Reserve Banks with the capacity to offer foreign currency liquidity to U.S. depository institutions. The authorization for these swap arrangements expired on February 1, 2010.
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Lending to Depository Institutions
The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository institutions. The last TAF auction was conducted on March 8, 2010, and the related loans matured on April 8, 2010.
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Lending to Primary Dealers
The Term Securities Lending Facility (TSLF) promoted liquidity in the financing markets for Treasury securities. Under the TSLF, the FRBNY could lend up to an aggregate amount of $200 billion of Treasury securities held in the SOMA to primary dealers on a secured basis for a term of 28 days. The authorization for the TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (TOP) offered primary dealers the opportunity to purchase an option to draw upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The program was suspended effective with the maturity of the June 2009 TOP options, and authorization for the program expired on February 1, 2010.
The Primary Dealer Credit Facility (PDCF) was designed to improve the ability of primary dealers to provide financing to participants in the securitization markets. Primary dealers could obtain secured overnight financing under the PDCF in the form of repurchase transactions. The authorization for the PDCF expired on February 1, 2010, and the last loan matured on May 13, 2009.
The Transitional Credit Extension (TCE) program provided liquidity support through secured loans to broker-dealers that were in the process of transitioning to the bank holding company structure. The authorization for the TCE program expired on February 1, 2010, and the last loan matured on April 29, 2009.
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Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) provided funding to depository institutions and bank holding companies to finance the purchase of eligible high-quality asset-backed commercial paper (ABCP) from money market mutual funds. The Federal Reserve Bank of Boston administered the AMLF and was authorized to extend these loans to eligible borrowers on behalf of the other Reserve Banks. The authorization for the AMLF expired on February 1, 2010.
The Commercial Paper Funding Facility (CPFF program) enhanced the liquidity of the commercial paper market in the U.S. by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that issuers would be able to roll over their maturing commercial paper. The authorization to purchase high-quality commercial paper through the CPFF program expired on February 1, 2010. The Commercial Paper Funding Facility LLC (CPFF) was a Delaware limited liability company formed on October 14, 2008, in connection with the implementation of the CPFF program, to purchase eligible three-month unsecured commercial paper and ABCP directly from eligible issuers using the proceeds of loans made to CPFF by the FRBNY. The FRBNY's loans to CPFF were eliminated in consolidation of CPFF into the combined financial statements. The last commercial paper purchased by the CPFF matured on April 26, 2010, and the CPFF was dissolved on August 30, 2010. CPFF's financial statements as of May 31, 2010 and for the period January 1, 2010, through May 31, 2010, and as of and for the year-ended December 31, 2009 were last published on August 30, 2010.
The Term Asset-Backed Securities Loan Facility (TALF) assisted financial markets in accommodating the credit needs of consumers and businesses of all sizes by facilitating the issuance of asset-backed securities (ABS) collateralized by a variety of consumer and business loans. The Board of Governors authorized the offering of TALF loans collateralized by newly-issued ABS and legacy commercial mortgage-backed securities (CMBS) until March 31, 2010, and TALF loans collateralized by newly-issued CMBS until June 30, 2010. Under the TALF, the FRBNY was authorized to lend up to $200 billion to eligible borrowers.
TALF loans have maturities up to five years and are secured by eligible collateral, with the FRBNY having lent an amount equal to the value of the collateral, as determined by the Bank, less a margin. Loan proceeds were disbursed to the borrower contingent on receipt by the FRBNY's custodian of the eligible collateral, an administrative fee, and, if applicable, a margin.
The TALF loans were extended on a nonrecourse basis. If the borrower does not repay the loan, the FRBNY will enforce its rights in the collateral and may sell the collateral to TALF LLC, a Delaware limited liability company, established on February 4, 2009, for the purpose of purchasing such assets. As of December 31, 2010, the FRBNY has not enforced its rights to the collateral because there have been no defaults.
Pursuant to a put agreement with the FRBNY, TALF LLC has committed to purchase assets that secure a TALF loan at a price equal to the principal amount outstanding plus accrued but unpaid interest, regardless of the fair value of the collateral. Funding for the TALF LLC's purchases of these securities is derived first through the fees received by TALF LLC from the FRBNY for this commitment and any interest earned on its investments. In the event that such funding proves insufficient for the asset purchases that TALF LLC has committed to make under the put agreement, the Treasury committed to lend up to $20 billion, and on March 25, 2009, the Treasury funded $100 million. On July 19, 2010, this commitment was reduced to $4.3 billion to reflect the fact that only $43 billion of TALF loans were outstanding when the program closed to new lending on June 30, 2010. Treasury's loan to TALF LLC bears interest at a rate of the one-month London interbank offered rate (Libor) plus 300 basis points. In addition to Treasury's commitment, the FRBNY committed, as a senior lender, to lend up to $180 billion to TALF LLC if it needed the funding to purchase assets pursuant to the put agreement. The FRBNY's maximum exposure was subsequently reduced to $38.7 billion when the program closed to new lending. Any loan that the FRBNY makes to TALF LLC would be senior to any Treasury loan and would bear interest at a rate of the one-month Libor plus 100 basis points. To the extent that Treasury and the FRBNY have extended credit to TALF LLC, their loans are secured by all of the assets of TALF LLC. The FRBNY is the managing member and the controlling party of TALF LLC and will remain the controlling party as long as it retains an economic interest in TALF LLC. After TALF LLC has paid all operating expenses and principal due to the FRBNY, the remaining proceeds of the portfolio holdings will be distributed in the following order: principal due to Treasury, interest due to the FRBNY, and interest due to Treasury. Any residual cash flows will be shared between the FRBNY, which will receive 10 percent, and the Treasury, which will receive 90 percent.
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Support for Specific Institutions
Bear Stearns Companies, Inc.To facilitate the merger of The Bear Stearns Companies, Inc. (Bear Stearns) and JPMorgan Chase & Co. (JPMC), the FRBNY extended credit to Maiden Lane LLC (ML) in June 2008. ML is a Delaware limited liability company formed by the FRBNY to acquire certain assets of Bear Stearns and to manage those assets over time, in order to maximize the potential for the repayment of the credit extended to ML and to minimize disruption to the financial markets. The assets acquired by ML were valued at $29.9 billion as of March 14, 2008, the date that the FRBNY committed to the transaction, and largely consisted of Federal agency and GSE MBS, non-agency residential mortgage-backed securities (RMBS), commercial and residential mortgage loans, and derivatives and associated hedges.
The FRBNY extended a senior loan of approximately $28.8 billion and JPMC extended a subordinated loan of $1.15 billion to finance the acquisition of the assets. The loans are collateralized by all of the assets of ML through a pledge to the collateral agent. The FRBNY is the sole and managing member and the controlling party of ML and will remain as such as long as the FRBNY retains an economic interest in ML. The interest rate on the senior loan is the primary credit rate in effect from time to time. The interest rate on the JPMC subordinated loan is the primary credit rate plus 450 basis points. JPMC bears losses associated with the portfolio through its subordinated loan plus accrued interest on the loan. Once the principal and interest are paid, residual gains, if any, will be allocated to the FRBNY. The two-year accumulation period that followed the closing date for ML ended on June 26, 2010. Consistent with the terms of the ML transaction, the distributions of the proceeds realized on the asset portfolio held by ML, after payment of certain fees and expenses, now occur on a monthly basis unless otherwise directed by the Federal Reserve.
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American International Group, Inc.In September 2008, the Board of Governors authorized the FRBNY to lend to American International Group, Inc. (AIG). Initially, the FRBNY provided AIG with a revolving line of credit collateralized by the pledge of a substantial portion of the assets of AIG. Under the provisions of the original agreement, the FRBNY was authorized to lend up to $85 billion to AIG for two years at the three-month Libor, with a floor of 350 basis points, plus 850 basis points. In addition, the FRBNY assessed AIG a one-time commitment fee of 200 basis points on the full amount of the commitment and a fee of 850 basis points per annum on the undrawn credit line. A condition of the credit agreement was that AIG would issue to a trust, for the sole benefit of the fiscal treasury, preferred shares convertible to approximately 78 percent of the issued and outstanding shares of the common stock of AIG. The AIG Credit Facility Trust (AIG Trust) was formed January 16, 2009 and the preferred shares were issued to the AIG Trust on March 4, 2009. The AIG Trust had three independent trustees who control the AIG Trust's voting and consent rights. The FRBNY cannot exercise voting or consent rights.
The Board and the Treasury announced a restructuring of the government's financial support to AIG in November 2008. As part of the restructuring, the Treasury purchased $40 billion of newly-issued AIG preferred shares under the Troubled Asset Relief Program (TARP). The majority of the TARP funds were used to pay down AIG's debt to the FRBNY. In addition, the terms of the original credit agreement were modified to reduce the revolving line of credit to $60 billion; reduce the interest rate to the three-month Libor with a floor of 350 basis points, plus 300 basis points; reduce the fee on undrawn funds to 75 basis points; and extend the term of the agreement to five years. The other material terms of the funding were unchanged. These revised terms were more consistent with terms generally available to other entities with similar credit risk.
Concurrent with the November 2008 restructuring of its financial support to AIG, the FRBNY established two limited liability companies (LLCs). The FRBNY extended credit to Maiden Lane II LLC (ML II), a Delaware limited liability company formed to purchase non-agency RMBS from the reinvestment pool of the securities lending portfolios of several regulated U.S. insurance subsidiaries of AIG. ML II borrowed $19.5 billion from the FRBNY and used the proceeds to purchase non-agency RMBS that had an approximate fair value of $20.8 billion as of October 31, 2008 from AIG's domestic insurance subsidiaries. The FRBNY is the sole and managing member and the controlling party of ML II and will remain as the controlling party as long as the FRBNY retains an economic interest in ML II. As part of the agreement, the AIG subsidiaries also received from ML II a fixed deferred purchase price of up to $1.0 billion, plus interest on any such fixed deferred purchase price outstanding. The interest rate on the FRBNY's senior loan is one-month Libor plus 100 basis points, and the interest rate on the fixed deferred purchase price is one-month Libor plus 300 basis points. After ML II has first paid the FRBNY's senior loan, including accrued and unpaid interest, and then the fixed deferred purchase price in full, including accrued and unpaid interest, any net proceeds will be divided between the FRBNY, which is entitled to receive five-sixths, and the AIG subsidiaries, which are entitled to receive one-sixth. The FRBNY's loan and the fixed deferred purchase price payable to the AIG subsidiaries are collateralized by all of the assets of ML II through a pledge to the collateral agent.
The FRBNY also extended credit to Maiden Lane III LLC (ML III), a Delaware limited liability company formed to purchase ABS collateralized debt obligations (CDOs) from certain third-party counterparties of AIG Financial Products Corp. (AIGFP). In connection with the acquisitions, the third-party counterparties agreed to terminate their related credit default swap (CDS) contracts with AIGFP. ML III borrowed approximately $24.3 billion from the FRBNY, and AIG provided an equity contribution of $5 billion to ML III. The proceeds were used to purchase ABS CDOs with a fair value of $29.6 billion. The counterparties received $26.8 billion net of principal, interest received, and finance charges paid. ML III also made a payment to AIGFP of $2.5 billion, representing the return of excess collateral previously posted by AIGFP with the counterparties. The FRBNY is the managing member and the controlling party of ML III and will remain as the controlling party as long as the FRBNY retains an economic interest in ML III. Net proceeds received by ML III will first be applied to repay the FRBNY's senior loan plus interest at one-month Libor plus 100 basis points. The FRBNY's senior loan is collateralized by all of the assets of ML III through a pledge to the collateral agent. After the FRBNY is paid in full, AIG, or its assignee, is entitled to receive repayment of its equity contribution plus interest at the one-month Libor plus 300 basis points. After ML III has paid the FRBNY's senior loan and AIG's equity contribution in full, the FRBNY will be entitled to receive 67 percent of any additional net proceeds received by ML III as a contingent interest on the senior loan and AIG, or its assignee, will be entitled to receive 33 percent of any net proceeds received by ML III as contingent distributions on its equity interest.
On April 17, 2009, the FRBNY, as part of the U.S. government's commitment to the orderly restructuring of AIG over time, in the face of continuing market dislocations, further restructured the AIG loan by eliminating the 350 basis-point floor on the Libor used to calculate the interest rate on the loan. The interest rate on the modified loan is the three-month Libor plus 300 basis points.
On December 1, 2009, the FRBNY's commitment to lend to AIG was reduced to $35 billion from $60 billion when the outstanding balance of the FRBNY's loan to AIG was reduced by $25 billion in exchange for a liquidation preference of nonvoting perpetual preferred interests in two limited liability companies. AIG created these limited liability companies to hold, directly or indirectly, all of the outstanding common stock of American Life Insurance Company (ALICO) and American International Assurance Company Ltd. (AIA), two life insurance holding company subsidiaries of AIG. The FRBNY was to be paid a 5 percent cumulative dividend on its nonvoting preferred interests through September 22, 2013 and a 9 percent cumulative dividend thereafter. Although the FRBNY had certain governance rights to protect its interests, AIG retained control of the LLCs and the underlying operating companies. The initial value of the FRBNY's preferred interests as of December 1, 2009 was $16 billion for the AIA Aurora LLC (AIA LLC) and $9 billion for the ALICO Holdings LLC (ALICO LLC), which represented a percentage of the fair market value of AIA and ALICO, respectively.
On September 30, 2010, AIG announced an agreement with the Treasury, FRBNY, and the trustees of the AIG Trust on a comprehensive recapitalization plan designed to repay all its obligations to American taxpayers. The agreement included an accelerated repayment of the outstanding balance of the FRBNY revolving line of credit including all accrued interest and fees, termination of that facility, the repayment of the FRBNY's preferred interests in AIA LLC and ALICO LLC, and the conversion of the AIG preferred stock currently owned by the Treasury and the AIG Trust into common equity of AIG.
Pending the closing of the recapitalization plan, the cash proceeds from certain AIG asset dispositions were held by the FRBNY as agent. On October 29, 2010, AIG completed the initial public offering (IPO) of AIA, successfully obtaining a listing on the Hong Kong Stock Exchange and raising total gross proceeds of $20.5 billion. On November 1, 2010, AIG completed the sale of ALICO to MetLife, initially announced on March 8, 2010, for approximately $15.5 billion, including $6.8 billion in cash and the remainder in equity and equity-linked securities of MetLife.
On January 14, 2011, upon closing of the recapitalization plan, the cash proceeds from certain asset dispositions, specifically the initial public offering of AIA and the sale of ALICO, were used first to repay in full the revolving line of credit extended to AIG by the FRBNY, including accrued interest and fees, and then to redeem a portion of the FRBNY's preferred interests in ALICO LLC taken earlier by the FRBNY in satisfaction of a portion of the revolving line of credit. The remaining FRBNY preferred interests in ALICO LLC and AIA LLC, valued at approximately $20 billion, were purchased by AIG through a draw on the Treasury's Series F preferred stock commitment and then transferred by AIG to the Treasury as partial consideration for the transfer to AIG of all outstanding Series F shares. In addition, the FRBNY's commitment to lend any funds under the revolving line of credit was terminated.
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Citigroup, Inc.The Board of Governors, the Treasury, and the Federal Deposit Insurance Corporation (FDIC) (parties) jointly announced on November 23, 2008, that they would provide financial support to Citigroup, Inc. (Citigroup). The agreement, which was executed on January 16, 2009, provided funding support for possible future principal losses relating to a designated pool of up to $301 billion of Citigroup's assets. The funding support was for a period of 10 years for residential assets and 5 years for nonresidential assets. No funding support was provided to Citigroup under this agreement, and on December 23, 2009, the parties terminated the agreement. As a result, the Bank had no contractual obligation at December 31, 2010 or 2009. As consideration for terminating the agreement, Citigroup paid the FRBNY a $50 million termination fee and reimbursed the FRBNY for its out-of-pocket expenses. The termination fee was recognized during the year-ended December 31, 2009, and is reported as a component of "Other income" in the Consolidated Statements of Income.
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Bank of America CorporationThe Board of Governors, the Treasury, and the FDIC (parties) jointly announced on January 15, 2009 that they would provide financial support to Bank of America Corporation (Bank of America). Under this arrangement, the Federal Reserve Bank of Richmond (FRBR) would have provided funding support for possible future principal losses relating to a designated pool of up to $118 billion of financial instruments. On September 21, 2009, the parties announced that they had reached an agreement with Bank of America to terminate the agreement. As part of the termination of the agreement, Bank of America paid $57 million in compensation for out-of-pocket expenses incurred by the FRBR and for commitment fees required by the agreement.
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(4) Significant Accounting Policies
Accounting principles for entities with the unique powers and responsibilities of a nation's central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank. These accounting principles and practices are documented in the
Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the FAM and the combined financial statements have been prepared in accordance with the FAM.
Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States (GAAP), due to the unique nature of the Reserve Banks' powers and responsibilities as part of the nation's central bank and given the System's unique responsibility to conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings at amortized cost and the recording of such securities on a settlement-date basis. The cost basis of Treasury securities, GSE debt securities, and foreign government debt instruments is adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method required by GAAP. Amortized cost, rather than the fair value presentation, more appropriately reflects the Reserve Banks' securities holdings given the System's unique responsibility to conduct monetary policy. Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, more appropriately reflects the timing of the transaction's effect on the quantity of reserves in the banking system. Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Bank earnings or capital. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open market operations and do not motivate decisions related to policy or open market activities.
In addition, the Reserve Banks do not present a Combined Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Reserve Banks are not a primary concern given the Reserve Banks' unique powers and responsibilities. Other information regarding the Reserve Banks' activities is provided in, or may be derived from, the Combined Statements of Condition, Income and Comprehensive Income, and Changes in Capital. There are no other significant differences between the policies outlined in the FAM and GAAP.
Preparing the combined financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Unique accounts and significant accounting policies are explained below.
a. Consolidation
The combined financial statements include the accounts and results of operations of the Reserve Banks as well as several variable interest entities (VIEs), which include ML, ML II, ML III, CPFF, and TALF LLC. The consolidation of the VIEs was assessed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810 (ASC 810)
Consolidation, which requires a variable interest entity to be consolidated by its controlling financial interest holder. Intercompany balances and transactions have been eliminated in consolidation.
A Reserve Bank consolidates a VIE if it has a controlling financial interest, which is defined as the power to direct the significant economic activities of the entity and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. To determine whether it is the controlling financial interest holder of a VIE, the Reserve Bank evaluates the VIE's design, capital structure, and relationships with the variable interest holders. The Reserve Bank reconsiders whether it has a controlling financial interest in a VIE, as required by ASC 810, at each reporting date.
The Dodd-Frank Act established the Bureau as an independent bureau within the Federal Reserve System, and section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the Federal Reserve System. Section 152 of the Dodd-Frank Act established the Office of Financial Research (OFR) within the Treasury. The Board of Governors funds the Bureau and OFR through assessments on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks reviewed the law and evaluated the design of and their relationships to the Bureau and the OFR and determined that neither should be consolidated in the Reserve Banks' combined financial statements.
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b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold and special drawing rights (SDR) certificates to the Reserve Banks. Upon authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on the average Federal Reserve notes outstanding at each Reserve Bank.
SDR certificates are issued by the International Monetary Fund (IMF) to its members in proportion to each member's quota in the IMF at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among the Reserve Banks based upon each Reserve Bank's Federal Reserve notes outstanding at the end of the preceding year. SDRs are recorded by the Reserve Banks at original cost. In 2009, the Treasury issued $3 billion in SDR certificates to the Reserve Banks. There were no SDR transactions in 2010.
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c. Coin
The amount reported as coin in the Combined Statements of Condition represents the face value of all United States coin held by the Reserve Banks. The Reserve Banks buy coin at face value from the U.S. Mint in order to fill depository institution orders.
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d. Loans
Loans to depository institutions are reported at their outstanding principal balances, and interest income is recognized on an accrual basis.
The FRBNY records the TALF loans at fair value in accordance with the fair value option provisions of FASB ASC Topic 825 (ASC 825)
Financial Instruments. Unrealized gains (losses) on TALF loans that are recorded at fair value are reported as "Non-interest income (loss): Term Asset-Backed Securities Loan Facility, unrealized gains (losses)" in the Combined Statements of Income and Comprehensive Income. The interest income on TALF loans is recognized based on the contracted rate and is reported as a component of "Interest Income: Term Asset-Backed Securities Loan Facility" in the Combined Statements of Income and Comprehensive Income. Administrative fees paid by borrowers at the initiation of each TALF loan, which are recognized as incurred and not deferred, are reported as a component of "Non-interest income (loss): Other income" in the Combined Statements of Income and Comprehensive Income.
The loan to AIG is reported at the outstanding principal balance net of unamortized administrative and commitment fees, and interest income is recognized on an accrual basis. Loan administrative and commitment fees are deferred and amortized on a straight-line basis, rather than using the interest method required by GAAP, over the term of the loan or commitment period. This method results in an interest amount that approximates the amount determined using the interest method.
Loans, other than those recorded at fair value, are impaired when current information and events indicate that it is probable that the Reserve Banks will not receive the principal and interest that is due in accordance with the contractual terms of the loan agreement. Impaired loans are evaluated to determine whether an allowance for loan loss is required. The Reserve Banks have developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Reserve Banks discontinue recognizing interest income on impaired loans until the borrower's repayment performance demonstrates principal and interest would be received in accordance with the terms of the loan agreement. If the Reserve Banks discontinue recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income.
Impaired loans include loans that have been modified in debt restructurings involving borrowers experiencing financial difficulties. The allowance for loan restructuring is determined by discounting the restructured cash flows using the original effective rate for the loan. Unless the borrower can demonstrate that it can meet the restructured terms, the Reserve Banks discontinue recognizing interest income. Performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms.
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e. Securities Purchased under Agreements to Resell, Securities Sold under Agreements to Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are settled through a tri-party arrangement. In a tri-party arrangement, two commercial custodial banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and securities custodial services for and on behalf of the FRBNY and counterparty. The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions primarily includes Treasury securities (including TIPS and STRIP Treasury securities); direct obligations of several Federal agency and GSE-related agencies, including Fannie Mae and Freddie Mac; and pass-through MBS of Fannie Mae, Freddie Mac, and Ginnie Mae. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. Repurchase transactions are reported at their contractual amount as "System Open Market Account: Securities purchased under agreements to resell," and the related accrued interest receivable is reported as a component of "Accrued interest receivable" in the Combined Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with primary dealers and, beginning August 2010, with selected money market funds as an open market operation. These reverse repurchase transactions may be executed through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official and international account holders as part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, and Federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts as "System Open Market Account: Securities sold under agreements to repurchase" and the related accrued interest payable is reported as a component of "Other liabilities" in the Combined Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers to facilitate the effective functioning of the domestic securities markets. Overnight securities lending transactions are fully collateralized by Treasury securities that have fair values in excess of the securities lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of "Other income" in the Combined Statements of Income and Comprehensive Income.
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in April each year.
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f. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets comprising the SOMA is accrued on a straight-line basis. Interest income on Federal agency and GSE MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to Federal agency and GSE MBS are amortized over the term of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal payments are received. Paydown gains and losses represent the difference between the principal amount paid and the amortized cost basis of the related security. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and Federal agency and GSE MBS are reported net of premiums and discounts on the Combined Statements of Condition and interest income on those securities is reported net of the amortization of premiums and accretion of discounts on the Combined Statements of Income and Comprehensive Income.
In addition to outright purchases of Federal agency and GSE MBS that are held in the SOMA, the FRBNY entered into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell "to be announced" (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date. The FRBNY also executed a limited number of TBA MBS coupon swap transactions, which involve a simultaneous sale of a TBA MBS and purchase of another TBA MBS of a different coupon rate. The FRBNY's participation in the dollar roll and coupon swap markets furthered the MBS purchase program goal of providing support to the mortgage and housing markets and fostered improved conditions in financial markets more generally. The FRBNY accounted for outstanding commitments under dollar roll and coupon swaps on a settlement-date basis. Based on the terms of the FRBNY dollar roll and coupon swap transactions, transfers of MBS upon settlement of the initial TBA MBS transactions are accounted for as purchases or sales in accordance with FASB ASC Topic 860 (ASC 860),
Transfers and Servicing, and the related outstanding commitments are accounted for as sales or purchases upon settlement. Net gains (losses) resulting from dollar roll and coupon swap transactions are reported as "Non-interest income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains (losses), net" in the Combined Statements of Income and Comprehensive Income.
Foreign currency denominated assets are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on foreign currency denominated assets are reported as "Foreign currency gains, net" in the Combined Statements of Income and Comprehensive Income.
Activity related to Treasury securities, GSE debt securities, and Federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in April of each year. Activity related to foreign currency denominated assets, including the premiums, discounts, and realized and unrealized gains and losses, is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of U.S. dollars for foreign currencies held by the Treasury over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international operations. Warehousing agreements are designated as held-for-trading purposes and are valued daily at current market exchange rates. Activity related to these agreements is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31.
The FRBNY is authorized to hold foreign currency working balances and execute foreign exchange contracts to facilitate international payments and currency transactions it makes on behalf of foreign central bank and U.S. official institution customers. These foreign currency working balances and contracts are not related to the Bank's monetary policy operations. Foreign currency working balances are reported as a component of "Other assets" in the Consolidated Statements of Condition and the related foreign currency valuation gains and losses that result from the daily revaluation of the foreign currency working balances and contracts are reported as a component of "Non-interest income (loss): Other income" in the Combined Statements of Income and Comprehensive Income.
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g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar liquidity or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued at current foreign currency market exchange rates.
U.S. dollar liquidity swapsAt the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The foreign currency amounts that the FRBNY acquires are reported as "Central bank liquidity swaps" on the Combined Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the foreign currency amounts it holds for the FRBNY. The FRBNY recognizes compensation during the term of the swap transaction and reports it as "Interest income: Central bank liquidity swaps" in the Combined Statements of Income and Comprehensive Income.
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Foreign currency liquidity swapsThe structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amount received would be reported as a liability by the Reserve Banks.
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h. Investments Held by Consolidated Variable Interest Entities
The investments held by consolidated VIEs include investments in Federal agency and GSE MBS, non-agency RMBS, commercial and residential real estate mortgage loans, CDOs, commercial paper, other investment securities, other real estate owned, and derivatives and associated hedges. Investments are reported as "Consolidated variable interest entities: Investments held by consolidated variable interest entities" in the Combined Statements of Condition. These investments are accounted for and classified as follows:
- Commercial paper held by the CPFF was designated as held-to-maturity under FASB ASC Topic 320 (ASC 320) Investments-Debt and Equity Securities according to the terms of the CPFF program. The FRBNY had the positive intent and the ability to hold the securities to maturity, and, therefore, the commercial paper was recorded at amortized cost. The amortization of premiums and accretion of discounts was recorded on a straight-line basis, which was not materially different from the interest method. All other investments, consisting of short-term highly liquid assets, held by the CPFF were classified as trading securities under ASC 320 and were recorded at fair value.
- ML's investments in debt securities are accounted for in accordance with ASC 320 and ML elected the fair value option for all eligible assets and liabilities in accordance with ASC 825. Other financial instruments, including swap contracts and other derivatives instruments in ML, are recorded at fair value in accordance with FASB ASC Topic 815 (ASC 815) Derivatives and Hedging. Other real estate owned may be acquired by ML as a result of default on the related loan. Other real estate owned are considered held-for-sale, and are recorded initially at fair value, less estimated selling costs, in accordance with FASB ASC Topic 360 (ASC 360) Property, Plant, and Equipment. Consistent with the requirements of ASC 360, the assets are not depreciated, and are adjusted for subsequent changes in fair value up to the original fair value basis.
- ML II and ML III qualify as nonregistered investment companies under the provisions of FASB ASC Topic 946 (ASC 946) Financial Services-Investment Companies and, therefore, all investments are recorded at fair value in accordance with ASC 946.
- TALF LLC follows the guidance in ASC 320 when accounting for any acquired ABS investments, and has elected the fair value option for all eligible assets in accordance with ASC 825.
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i. Preferred Interests
The FRBNY presents its preferred interests in AIA LLC and ALICO LLC at cost consistent with ASC 320. The 5 percent cumulative dividends accrued by the FRBNY on the preferred interests are reported as "Dividends on preferred interests" on the Combined Statements of Income and Comprehensive Income. On a quarterly basis, the accrued dividends are capitalized and increase the recorded cost of the FRBNY's preferred interests in AIA LLC and ALICO LLC. A preferred interest is impaired if its fair value falls below its recorded value and the decline is considered other-than-temporary. An other-than-temporary impairment occurs if (1) the FRBNY has the intent to sell the interest, (2) it is more likely than not that the FRBNY will be required to sell the interest before recovery of its recorded investment, or (3) the FRBNY does not expect to recover the entire amortized cost basis of the interest even if it does not intend to sell the security. Dividends are accrued unless the impairment analysis indicates that the dividends will not be collected.
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j. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred.
Costs incurred for software during the application development stage, whether developed internally or acquired for internal use, are capitalized based on the purchase cost and the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance costs related to software are charged to expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds the assets' fair value.
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k. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Reserve Banks' assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted from the eligible collateral value.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States government.
"Federal Reserve notes outstanding, net" in the Combined Statements of Condition represents the Federal Reserve notes outstanding, reduced by the Reserve Banks' currency holdings of $180 billion and $193 billion at December 31, 2010 and 2009, respectively.
At December 31, 2010 and 2009, all Federal Reserve notes issued to the Reserve Banks were fully collateralized. At December 31, 2010, all gold certificates, all special drawing right certificates, and $925 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2010, no investments denominated in foreign currencies were pledged as collateral.
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l. Beneficial Interest in Consolidated Variable Interest Entities
ML, ML II, and ML III have outstanding senior and subordinated financial interests, inclusive of a fixed deferred purchase price in ML II and an equity contribution in ML III, and TALF LLC has an outstanding financial interest. Upon issuance of the financial interests, ML, ML II, ML III, and TALF LLC each elected to measure these obligations at fair value in accordance with ASC 825. Principal, interest, and changes in fair value on the senior financial interest, which were extended by the FRBNY, are eliminated in consolidation. The financial interests are recorded at fair value as "Beneficial interest in consolidated variable interest entities" in the Combined Statements of Condition. Interest expense and changes in fair value of the financial interest are recorded in "Interest expense: Beneficial interest in consolidated variable interest entities" and "Non-interest income (loss): Beneficial interest in consolidated variable interest entities (losses), net," respectively, in the Combined Statements of Income and Comprehensive Income.
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m. Deposits
Depository InstitutionsDepository institutions deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Reserve Banks. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMC-established target range for the federal funds rate. Interest payable is reported as "Interest payable to depository institutions" on the Combined Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks. The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported as "Interest payable to depository institutions" on the Combined Statements of Condition. There were no deposits held by the Reserve Banks under the TDF at December 31, 2010.
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TreasuryThe Treasury general account is the primary operational account of the Treasury and is held at the FRBNY.
The Treasury's temporary supplementary financing program consists of a series of Treasury bill auctions, in addition to Treasury's standard borrowing program. The proceeds of this debt are held in an account at the FRBNY that is separate from the Treasury's general account, and this separate account is reported as "Treasury, supplementary financing account" in the Combined Statements of Condition. The purpose of placing funds in this account is to drain reserves from the banking system and partially offset the reserve impact of the Reserve Banks' lending and liquidity initiatives.
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OtherOther deposits include foreign central bank and foreign government deposits held at the FRBNY. Other deposits also include GSE deposits held by the Bank.
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n. Funds from American International Group, Inc. Asset Dispositions, Held as Agent
Pending the closing of the AIG recapitalization plan discussed in Note 3, the cash proceeds from certain AIG asset dispositions were held by the FRBNY as agent.
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o. Items in Process of Collection and Deferred Credit Items
"Items in process of collection" primarily represents amounts attributable to checks that have been deposited for collection and that, as of the balance sheet date, have not yet been presented to the paying bank. "Deferred credit items" are the counterpart liability to items in process of collection. The amounts in this account arise from deferring credit for deposited items until the amounts are collected. The balances in both accounts can vary significantly.
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p. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting with a par value of $100 and may not be transferred or hypothecated. As a member bank's capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually. To meet the Federal Reserve Act requirement that annual dividends be deducted from net earnings, dividends are presented as a distribution of comprehensive income in the Combined Statements of Income and Comprehensive Income.
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q. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of December 31 of each year. Accumulated other comprehensive income is reported as a component of "Surplus" in the Combined Statements of Condition and the Combined Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 13, 14, and 15.
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r. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. This amount is reported as "Payments to Treasury as interest on Federal Reserve notes" in the Combined Statements of Income and Comprehensive Income. The amount due to the Treasury is reported as "Accrued interest on Federal Reserve notes" in the Combined Statements of Condition.
If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, payments to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings a Reserve Bank will need to realize before remittances to Treasury resume. This deferred asset is periodically reviewed for impairment.
In the event of a decrease in capital paid-in, the excess surplus, after equating capital paid-in and surplus at December 31, is distributed to the Treasury in the following year.
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s. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Reserve Banks are required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the years ended December 31, 2010 and 2009, the Reserve Banks were reimbursed for substantially all services provided to the Treasury as its fiscal agent.
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t. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau and, for a two-year period, the OFR. These assessments are allocated to each Reserve Bank based on each Reserve Bank's capital and surplus balances as of December 31 of the prior year for the Board of Governor's operations and as of the most recent quarter for the Bureau and OFR operations. The Board of Governors also assesses each Reserve Bank for the expenses incurred by the Treasury to produce and retire Federal Reserve notes based on each Reserve Bank's share of the number of notes comprising the System's net liability for Federal Reserve notes on December 31 of the prior year.
During the period prior to the Bureau transfer date of July 21, 2011, there is no limit on the funding that can be provided to the Bureau and that is assessed to the Reserve Banks; the Board of Governors must provide the amount estimated by the Secretary of the Treasury needed to carry out the authorities granted to the Bureau under the Dodd-Frank Act and other federal law. After the transfer date, the Dodd-Frank Act requires the Board of Governors to fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of the Federal Reserve System as reported in the Board of Governors' 2009 annual report. The fixed percentage of total operating expenses of the System is 10% for 2011, 11% for 2012, and 12% for 2013. After 2013, the amount will be adjusted in accordance with the provisions of the Dodd-Frank Act.
The Board of Governors assesses the Reserve Banks to fund the operations of the OFR for the two-year period following enactment of the Dodd-Frank Act; thereafter, the OFR will be funded by fees assessed on certain bank holding companies.
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u. Fair Value
Certain assets and liabilities reported on the Reserve Banks' Combined Statements of Condition are measured at fair value in accordance with ASC 820, including TALF loans, investments and beneficial interests of the consolidated VIE's, and assets of the Retirement Plan for Employees of the Federal Reserve System. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using market data obtained from independent sources (observable inputs) and the Reserve Bank's assumptions developed using the best information available in the circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows:
- Level 1-Valuation is based on quoted prices for identical instruments traded in active markets.
- Level 2-Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
- Level 3-Valuation is based on model-based techniques that use significant inputs and assumptions not observable in the market. These unobservable inputs and assumptions reflect the Reserve Bank's estimates of inputs and assumptions that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques.
The inputs or methodology used for valuing assets and liabilities are not necessarily an indication of the risk associated with those assets and liabilities.
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v. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Reserve Banks' real property taxes were $41 million and $37 million for the years ended December 31, 2010 and 2009, respectively, and are reported as a component of "Operating expenses: Occupancy" in the Combined Statements of Income and Comprehensive Income.
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w. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities from one location to another, or a fundamental reorganization that affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Reserve Banks commit to a formalized restructuring plan or execute the specific actions contemplated in the plan and all criteria for financial statement recognition have been met.
Note 16 describes the Reserve Banks' restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. The costs associated with the impairment of certain Reserve Banks' assets are discussed in Note 11. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY and discussed in Note 13. Costs and liabilities associated with enhanced postretirement benefits are discussed in Note 14.
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x. Recently Issued Accounting Standards
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) 166,
Accounting for Transfers of Financial Assets--An Amendment to FASB Statement No. 140 (codified in ASC 860). The new standard revises the criteria for recognizing transfers of financial assets as sales and clarifies that the transferor must consider all arrangements when determining if the transferor has surrendered control. The adoption of this accounting guidance was effective for the Reserve Banks for the year beginning on January 1, 2010, and did not have a material effect on the Reserve Banks' combined financial statements.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R), (codified in ASC 810), which expands the scope of Interpretation 46R,
Consolidation of Variable Interest Entities and changes the approach for determining whether an entity has a controlling interest in a VIE by making a qualitative assessment of its financial interests. Additional disclosures are required for a variable interest in a VIE. The adoption of this accounting guidance was effective for the Reserve Banks for the year beginning on January 1, 2010, and earlier adoption was prohibited. The adoption of this accounting guidance did not have a material effect on the Reserve Banks' combined financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-06,
Fair Value Measurements and Disclosures (Topic 820). New requirements for disclosure of information about transfers among the hierarchy's classification and the level of disaggregation of classes of assets were effective for the Reserve Banks for the year beginning on January 1, 2010, and the required disclosures are included in Note 5, Note 9, and Note 13. Other requirements, including the gross presentation of purchases, sales, issuances, and settlements in the reconciliation for Level 3 fair value measurements are effective for the Reserve Banks in 2011 and are not expected to have a material effect on the Reserve Banks' combined financial statements.
In March 2010, the FASB issued Accounting Standards Update 2010-11,
Derivatives and Hedging, (Topic 815), which clarifies embedded credit derivatives that are subject to the FASB's guidance on derivatives and hedging and defines the embedded credit derivatives that are required to be evaluated for bifurcation and separate accounting. The adoption of this accounting guidance was effective for the Reserve Banks on July 1, 2010 and did not have a material effect on the Reserve Banks' combined financial statements.
In July 2010, the FASB issued Accounting Standards Update 2010-20,
Receivables (Topic 310), which requires additional disclosures about the allowance for credit losses and the credit quality of loan portfolios. The additional disclosures include a rollforward of the allowance for credit losses on a disaggregated basis and more information, by type of receivable, on credit quality indicators, including the amount of certain past due receivables and troubled debt restructurings and significant purchases and sales. The adoption of this accounting guidance is effective for the Reserve Banks on December 31, 2011, and is not expected to have a material effect on the Reserve Banks' combined financial statements.
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(5) Loans
The remaining maturity distribution of loans outstanding at December 31, 2010, and total loans outstanding at December 31, 2009, were as follows (in millions):
20102009Within 15 days16 days to 90 daysOver 1 year to 5 yearsTotalTotalPrimary, secondary, and seasonal credit$ 215$ 6$ -$ 221$ 20,700TAF----$ 75,918Loans to depository institutions$ 215$ 6$ -$ 221$ 96,618TALF loans, fair value$ -$ -$ 24,853$ 24,853$ 48,183AIG loan, net$ -$ -$ 20,603$ 20,603$ 21,250
Loans to Depository Institutions
The Reserve Banks offer primary, secondary, and seasonal credit to eligible borrowers, and each program has its own interest rate. Interest is accrued using the applicable interest rate established at least every 14 days by the Reserve Banks' boards of directors, subject to review and determination by the Board of Governors. Primary and secondary credit are extended on a short-term basis, typically overnight, whereas seasonal credit may be extended for a period of up to nine months.
Primary, secondary, and seasonal credit lending is collateralized to the satisfaction of each Reserve Bank to reduce credit risk. Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities (ABS); corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by each Reserve Bank, which is typically fair value reduced by a margin.
Depository institutions that are eligible to borrow under the Reserve Banks' primary credit program were eligible to participate in the TAF program. Under the TAF program, the Reserve Banks conducted auctions for a fixed amount of funds, with the interest rate determined by the auction process, subject to a minimum bid rate. TAF loans were extended on a short-term basis, with terms ranging from 28 to 84 days. All advances under the TAF program were collateralized to the satisfaction of each Reserve Bank. All TAF loan principal and accrued interest was fully repaid.
Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. The financial condition of borrowers is monitored by the Reserve Banks and, if a borrower no longer qualifies for these programs, the Reserve Banks will generally request full repayment of the outstanding loan or, for primary or seasonal credit lending, may convert the loan to a secondary credit loan.
Collateral levels are reviewed daily against outstanding obligations and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or to make partial or full repayment.
At December 31, 2010 and 2009, the Reserve Banks did not have any impaired loans and no allowances for loan losses were required. There were no impaired loans during the years ended December 31, 2010 and 2009.
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TALF
TALF loans are non-recourse loans secured by eligible collateral. Each TALF loan has a three-year maturity, except loans secured by SBA Pool Certificates, loans secured by SBA Development Company Participation Certificates, or ABS backed by student loans or commercial mortgage loans, which have a five-year maturity if the borrower so elects.
The FRBNY has elected the fair value option for all TALF loans in accordance with ASC 825. Recording all TALF loans at fair value, rather than at the remaining principal amount outstanding, improves accounting consistency and provides the most appropriate presentation on the financial statements by matching the change in fair value of TALF loans, the related put agreement with TALF LLC, and the valuation of the beneficial interests in TALF LLC. Information regarding the TALF LLC's assets and liabilities is presented in Note 9.
In certain cases where there is limited activity around inputs to the valuation, loans are classified within Level 3 of the valuation hierarchy. Because external price information was not available, market-based models were used to determine the fair value of the TALF loans. The fair value of the TALF loans was determined by valuing the future cash flows from loan interest income and the estimated fair value losses associated with collateral that may be put to the FRBNY. The valuation model takes into account a range of outcomes on TALF loan repayments, market prices of the collateral, risk premiums estimated using market prices, and the volatilities of market risk factors. Other methodologies employed or assumptions made in determining fair value could result in an amount that differs significantly from the amount reported.
The following table presents the TALF loans at fair value as of December 31 by ASC 820 hierarchy (in millions):
20102009Level 3$ 24,853$ 48,183Total fair value$ 24,853$ 48,183
The following table presents a reconciliation of TALF loans measured at fair value using significant unobservable inputs (Level 3) during the year-ended December 31, 2010 and for the period February 4, 2009, to December 31, 2009, (in millions):
TALF LoansFair value at February 4, 2009$ -Net loans originated61,626Loan repayments and prepayments(14,000)Total realized and unrealized gains (losses)557Fair value at December 31, 2009$ 48,183Net loans originated9,484Loan repayments and prepayments(32,37
Total realized and unrealized gains (losses)(436)Fair value at December 31, 2010$ 24,853
The fair value of TALF loans reported in the Combined Statements of Condition as of December 31, 2010 and 2009 includes $121 million and $557 million in unrealized gains, respectively. FRBNY attributes substantially all changes in fair value of non-recourse loans to changes in instrument-specific credit spreads.
Eligible collateral includes U.S. dollar-denominated ABS that are backed by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium financial loans, loans guaranteed by the SBA, residential mortgage servicing advances, or commercial mortgage loans. To be considered eligible, collateral must have a credit rating in the highest investment-grade rating category from at least two eligible nationally-recognized statistical rating organizations (NRSROs) and must not have a credit rating below the investment-grade rating category from an eligible NRSRO. In addition to the aforementioned eligibility requirements, collateral also must meet other criteria as stipulated in the TALF program's terms and conditions. The following table presents the collateral concentration and maturity distribution for the remaining unpaid principal and accrued interest as of December 31, 2010 (in millions):
Collateral type and credit rating
1Years to maturity1-34-5TotalStudent loan$ 2,427$ 4,556$ 6,983Credit card6,918-6,918CMBS2,5041,7254,229Floorplan2,489-2,489Auto1,673-1,673SBAs424228652Other
21,788-1,788Total$ 18,223$ 6,509$ 24,7321. All credit ratings are AAA.
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2. Includes equipment loans, insurance premium financial loans, and residential mortgage servicing advances.
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The aggregate remaining principal amount outstanding on TALF loans as of December 31, 2010 and 2009, was $24,703 million and $47,574 million, respectively.
At December 31, 2010 and 2009, no TALF loans were over 90 days past due or in nonaccrual status.
Earnings reported by the FRBNY related to the TALF include income and unrealized gains and losses on TALF loans as well as the FRBNY's allocated share of the TALF LLC's net income. Additional information regarding the income of the TALF LLC is presented in Note 9. The following table presents the components of TALF earnings recorded by the FRBNY for the years ended December 31 (in millions):
20102009Interest income$ 750$ 414Administrative fee income1354Unrealized gains (losses)(436)557Total income on TALF loans$ 327$ 1,025Allocated share of TALF LLC71(702)Earnings of TALF$ 398$ 323
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AIG loan, net
The following table presents the components of the AIG loan at December 31 (in millions):
Loan components20102009Line of credit drawn$ 14,621$ 17,900Capitalized interest4,6633,835Capitalized commitment fees1,7001,700AIG loan, gross$ 20,984$ 23,435Unamortized deferred commitment fees(335)(697)Allowance for loan restructuring, net(46)(1,48
AIG loan, net$ 20,603$ 21,250
The fair value of the AIG revolving line of credit provided by the FRBNY, based on estimated and actual draws and repayments, was not materially different from the net amount reported in the Combined Statements of Condition as of December 31, 2010 and 2009.
The activity related to the allowance for AIG loan restructuring for the years-ended December 31 was as follows (in millions):
20102009Allowance for loan restructuring January 1$ (1,48
$ -Provision for loan restructuring-(2,621)Adjustments to the allowance1,4421,133Allowance for loan restructuring December 31$ (46)$ (1,48
The allowance for loan restructuring represented the economic effect of the reduction of the interest rate on loans the FRBNY made to AIG prior to April 17, 2009 as part of the loan restructuring that occurred on that date. The restructuring charges were recovered over the remaining term of the related loan as adjustments to the allowance, which resulted from periodic evaluations and are reported as a component of "Interest income: American International Group, Inc., net" on the Combined Statements of Income and Comprehensive Income. The average balance of the loans to AIG under the revolving line of credit, net of the allowance for restructuring, during the year ended December 31, 2010 and 2009, was $22,874 million and $39,099 million, respectively.
As a result of the closing of the AIG recapitalization plan on January 14, 2011, all outstanding draws under the revolving line of credit and the related accrued interest, capitalized interest and capitalized commitment fees were paid in full. The remaining amount of the unamortized deferred commitment fees and the allowance for loan restructuring as of the closing of the recapitalization were fully recognized at that date.
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(6) Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities; Securities Purchased under Agreements to Resell Securities Sold under Agreements to Repurchase; and Securities Lending
The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA.
The total of the Treasury securities, GSE debt securities, and Federal agency and GSE MBS, net excluding accrued interest, held in the SOMA at December 31 was as follows (in millions):
2010ParUnamortized premiumsUnaccreted discountsTotal amortized costFair valueBills$ 18,423$ -$ (1)$ 18,422$ 18,422Notes773,28414,056(765)786,575804,703Bonds229,78632,739(570)261,955289,757Total Treasury securities$ 1,021,493$ 46,795$ (1,336)$ 1,066,952$1,112,882GSE debt securities$ 147,460$ 5,532$ (20)$ 152,972$ 156,780Federal agency and GSE MBS$ 992,141$ 14,106$ (1,552)$ 1,004,695$1,026,003
2009ParUnamortized premiumsUnaccreted discountsTotal amortized costFair valueBills$ 18,423$ -$ -$ 18,423$ 18,422Notes568,3236,544(991)573,876583,040Bonds189,84324,460(630)213,673230,717Total Treasury securities$ 776,589$ 31,004$ (1,621)$ 805,972$ 832,179GSE debt securities$ 159,879$ 7,509$ (26)$ 167,362$ 167,444Federal agency and GSE MBS$ 908,371$ 12,110$ (1,554)$ 918,927$ 914,290
The fair value amounts in the above tables are presented solely for informational purposes. Although the fair value of security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. The fair value of Federal agency and GSE MBS was determined using a model-based approach that considers observable inputs for similar securities; fair value for all other SOMA security holdings was determined by reference to quoted prices for identical securities.
The fair value of the fixed-rate Treasury securities, GSE debt securities, and Federal agency and GSE MBS in the SOMA's holdings is subject to market risk, arising from movements in market variables, such as interest rates and securities prices. The fair value of Federal agency and GSE MBS is also affected by the rate of prepayments of mortgage loans underlying the securities.
The following table provides additional information on the amortized cost and fair values of the Federal agency and GSE MBS portfolio at December 31 (in millions):
Distribution of MBS holdings by coupon rate20102009Amortized costFair valueAmortized costFair valueSOMA:3.5%$ 341$ 352$ 363$ 3654.0%167,675168,403170,119165,7404.5%497,672508,798434,352431,6465.0%231,420237,545195,418196,4115.5%93,11995,873103,379104,5836.0%12,91013,37612,71012,9016.5%1,5581,6562,5862,644Total$ 1,004,695$ 1,026,003$ 918,927$ 914,290
Financial information related to securities purchased under agreements to resell and securities sold under agreements to repurchase for the years ended December 31 was as follows (in millions):
Securities purchased under agreements to resellSecurities sold under agreements to repurchase2010200920102009Contract amount outstanding, end of year$ -$ -$ 59,703$ 77,732Average daily amount outstanding, during the year-3,61658,47667,837Maximum balance outstanding, during the year-80,00077,73289,525Securities pledged (par value), end of year--43,64277,860
The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase approximate fair value. The FRBNY executes transactions for the purchase of securities under agreements to resell primarily to temporarily add reserve balances to the banking system. Conversely, transactions to sell securities under agreements to repurchase are executed primarily to temporarily drain reserve balances from the banking system.
The remaining maturity distribution of Treasury securities, GSE debt securities, Federal agency and GSE MBS bought outright, and securities sold under agreements to repurchase at December 31, 2010 was as follows (in millions):
Within 15 days16 days to 90 days91 days to 1 yearOver 1 year to 5 yearsOver 5 years to 10 yearsOver 10 yearsTotalTreasury securities (par value)$ 9,802$ 24,816$ 54,254$ 439,594$ 333,955$ 159,072$ 1,021,493GSE debt securities (par value)1,12913,83628,50171,05030,5972,347$ 147,460Federal agency and GSE MBS (par value)---2420992,097$ 992,141Securities sold under agreements to repurchase(contract amount)59,703-----$ 59,703
Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities at December 31, 2010, which differs from the stated maturity primarily because it factors in prepayment assumptions, is approximately 4.2 years.
The par value of Treasury securities and GSE debt securities that were loaned from the SOMA at December 31 was as follows (in millions):
SOMA20102009Treasury securities$ 22,081$ 20,502GSE debt securities1,6101,108
Other investments consist of cash and short-term investments related to the Federal agency and GSE MBS portfolio. Other liabilities, which are related to purchases of Federal agency and GSE MBS, arise from the failure of a seller to deliver securities to the FRBNY on the settlement date. Although the Reserve Banks have ownership of and records their investments in the MBS as of the contractual settlement date, they are not obligated to make payment until the securities are delivered, and the amount reported as other liabilities represents the Reserve Banks' obligation to pay for the securities when delivered. The amount of other investments and other liabilities held in the SOMA at December 31 was as follows (in millions):
20102009Other investments-$ 5Other liabilities-601
The FRBNY enters into commitments to buy Treasury and GSE debt securities and records the related securities on a settlement-date basis. There were no commitments to buy Treasury and GSE debt securities as of December 31, 2010.
The FRBNY enters into commitments to buy Federal agency and GSE MBS and records the related MBS on a settlement-date basis. There were no commitments to buy or sell Federal agency or GSE MBS as of December 31, 2010.
During the years ended December 31, 2010 and 2009, the Reserve Banks recorded net gains from dollar roll and coupon swap related transactions of $782 million and $879 million, respectively. These net gains are reported as "Non-interest income (loss): Federal agency and government-sponsored enterprise mortgage-backed securities gains, net" in the Combined Statements of Income and Comprehensive Income.
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(7) Foreign Currency Denominated Assets
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments. These foreign government debt instruments are guaranteed as to principal and interest by the issuing foreign governments. In addition, the FRBNY enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain.
The Reserve Bank's foreign currency denominated assets, including accrued interest, valued at amortized cost and foreign currency market exchange rates at December 31 was as follows (in millions):
20102009Euro:Foreign currency deposits$ 7,057$ 7,396Securities purchased under agreements to resell2,4672,591Government debt instruments4,6034,936Japanese yen:Foreign currency deposits3,8833,403Government debt instruments8,0396,946Total$ 26,049$ 25,272
At December 31, 2010 and 2009, the fair value of foreign currency denominated assets, including accrued interest, was $26,213 million and $25,480 million, respectively. The fair value of government debt instruments was determined by reference to quoted prices for identical securities. The cost basis of foreign currency deposits and securities purchased under agreements to resell, adjusted for accrued interest, approximates fair value. Similar to the Treasury securities, GSE debt securities, and Federal agency and GSE MBS discussed in Note 6, unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. The fair value is presented solely for informational purposes.
The remaining maturity distribution of foreign currency denominated assets at December 31, 2010, was as follows (in millions):
Within 15 days16 days to 90 days91 days to 1 yearOver 1 year to 5 yearsTotalEuro$ 5,422$ 3,000$ 2,023$ 3,682$ 14,127Japanese yen4,1025602,4374,82311,922Total$ 9,524$ 3,560$ 4,460$ 8,505$ 26,049
At December 31, 2010 and 2009, the authorized warehousing facility was $5 billion, with no balance outstanding.
There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico during the years ended December 31, 2010 and 2009.
There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2010.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. As of December 31, 2010, there were outstanding commitments to purchase Euro-denominated government debt instruments of $209 million. These securities settled on January 4, 2011, and replaced Euro-denominated government debt instruments held in the SOMA that matured on that date.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing daily monitoring procedures.
Foreign currency working balances held and foreign exchange contracts executed by the FRBNY to facilitate international payments and currency transactions it makes on behalf of foreign central banks and U.S. official institution customers were not material as of December 31, 2010 and 2009.
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( Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2010 and 2009, was $75 million and $10,272 million, respectively.
All of the U.S. dollar liquidity swaps outstanding at December 31, 2010 were transacted with the European Central Bank and had remaining maturity distributions of less than 15 days.
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Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2010 and 2009.
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(9) Investments Held By Consolidated Variable Interest Entities
a. Summary Information for Consolidated Variable Interest Entities
The total assets of consolidated VIEs, including cash, cash equivalents, and accrued interest, at December 31 were as follows (in millions):
20102009ML$ 27,961$ 28,140ML II16,45715,912ML III23,58322,797TALF LLC665298CPFF-14,233Total$ 68,666$ 81,380
The FRBNY's maximum exposure to loss at December 31, 2010 and 2009 was $55,434 million and $73,879 million, respectively. These estimates incorporate potential losses associated with assets recorded on the FRBNY's Consolidated Statements of Condition, net of the fair value of subordinated interests (beneficial interest in consolidated VIEs).
The classification of significant assets and liabilities of the consolidated VIEs at December 31 was as follows (in millions):
20102009Assets:CDOs$ 23,112$ 22,650Non-agency RMBS18,36017,552Federal agency and GSE MBS16,84218,149Commercial mortgage loans5,1304,025Swap contracts8511,127Residential mortgage loans603583Commercial paper-9,421Other investments5875,467Subtotal$ 65,485$ 78,974Cash, cash equivalents, and accrued interest receivable3,1812,406Total investments held by consolidated VIEs$ 68,666$ 81,380Liabilities:Beneficial interest in consolidated VIEs$ 10,051$ 5,095Other liabilities
1$ 921$ 1,3161. The amount reported as "Consolidated variable interest entities: Other liabilities" in the Combined Statements of Condition includes $695 million and $980 million related to cash collateral received on swap contracts at December 31, 2010 and 2009, respectively. The amount also includes accrued interest, unearned registration fees, and accrued other expenses.
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Total realized and unrealized gains (losses) for the year-ended December 31, 2010, were as follows (in millions):
Total portfolio holdings realized gains (losses)Fair value changes unrealized gains (losses)Total portfolio holdings realized/unrealized gains (losses)CDOs$ 52$ 3,201$ 3,253Non-agency RMBS1083,0823,190Federal agency and GSE MBS291320611Commercial mortgage loans
1(879)2,3191,440Residential mortgage loans 1(86)197111Swap contracts(150)(255)(405)Other investments53103156Other assets(203)27(176)Total$ (814)$ 8,994$ 8,1801. Substantially all unrealized gains (losses) on the commercial and residential mortgage loans are attributable to changes in instrument-specific credit risk.
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Total realized and unrealized gains (losses) for the year-ended December 31, 2009, were as follows (in millions):
Total portfolio holdings realized gains (losses)Fair value changes unrealized gains (losses)Total portfolio holdings realized/unrealized gains (losses)CDOs$ (3)$ (1,211)$ (1,214)Non-agency RMBS217(991)(774)Federal agency and GSE MBS322521843Commercial mortgage loans
1(47)(1,177)(1,224)Residential mortgage loans 1(4
(219)(267)Swap contracts(119)21293Other investments12712724Other assets(182)64(11
Total$ 152$ (2,089)$ (1,937)1. Substantially all unrealized gains (losses) on the commercial and residential mortgage loans are attributable to changes in instrument-specific credit risk.
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The net income (loss) attributable to ML, ML II, ML III, CPFF, and TALF LLC for the year-ended December 31, 2010 was as follows (in millions):
MLML IIML IIICPFFTALF LLCTotalInterest income
ortfolio interest income$ 1,133$ 794$ 2,299$ 213$ 1$ 4,440Less: Interest expense6634173-4277Net interest income1,0677602,126213(3)4,163Non-interest income
ortfolio holdings gains2,5712,4673,1411-8,180Less: Unrealized gains (losses) on beneficial interest in consolidated VIEs(1,135)(1,353)(2,266)-75
1(4,679)Net non-interest income1,4361,1148751753,501Total net interest income and non-interest income2,5031,8743,001214727,664Less: Professional fees69102221104Net income attributable to consolidated VIEs$ 2,434$ 1,864$ 2,979$ 212$ 71
2$ 7,5601. The TALF LLC's unrealized loss on beneficial interest represents Treasury's financial interest in the net income of TALF LLC for the year ended December 31, 2010.
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2. Additional information regarding TALF-related income recorded by the FRBNY is presented in Note 5.
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The net income (loss) attributable to ML, ML II, ML III, and CPFF for the year ended December 31, 2009 and for TALF LLC from the inception date of February 4, 2009 to December 31, 2009 was as follows (in millions):
MLML IIML IIICPFFTALF LLCTotalInterest income
ortfolio interest income$ 1,476$ 1,088$ 3,032$ 4,224$ -$ 9,820Less: Interest expense6133171-2267Net interest income1,4151,0552,8614,224(2)9,553Non-interest income
ortfolio holdings (losses) gains(102)(604)(1,239)8-(1,937)Less: Unrealized gains (losses) on beneficial interest in consolidated VIEs6134(1,299)-(699)
1(1,903)Net non-interest (loss) income(41)(570)(2,53
8(699)(3,840)Total net interest income and non-interest income1,3744853234,232(701)5,713Less: Professional fees551227301125Net income (loss) attributable to consolidated VIEs$ 1,319$ 473$ 296$ 4,202(702)
2$ 5,5881. The TALF LLC's unrealized loss on beneficial interest represents Treasury's financial interest in the net income of TALF LLC for the year ended December 31, 2009.
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2. Additional information regarding TALF-related income recorded by the FRBNY is presented in Note 5.
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Following is a summary of the consolidated VIEs' subordinated financial interest for the years ended December 31, 2010 and 2009 (in millions):
ML subordinated loanML II deferred purchase priceML III equity contributionTALF financial interestTotalFair value, January 31, 2009$ -$ -$ 2,824$ -$ 2,824Interest accrued and capitalized61341712268Treasury loan---100100Unrealized gain/(loss)(61)(34)1,2996991,903Fair value, December 31, 2009$ -$ -$ 4,294$ 801$ 5,095Interest accrued and capitalized66341734277Unrealized (gain)/loss1,1351,3532,266(75)4,679Fair value, at December 31, 2010$ 1,201$ 1,387$ 6,733$ 730$ 10,051
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b. Commercial Paper Funding Facility LLC
The CPFF Program charged a lending rate for unsecured commercial paper equal to a three-month overnight indexed swap (OIS) rate plus 100 basis points per annum, with an additional surcharge of 100 basis points per annum as an unsecured credit enhancement fee. The rate imposed for ABCP was the three-month OIS rate plus 300 basis points. The credit enhancement and registration fees were amortized on a straight-line basis over the term of the commercial paper.
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c. Maiden Lane LLC
ML's investment portfolio consists primarily of Federal agency and GSE MBS, non-agency RMBS, commercial and residential mortgage loans, and derivatives and associated hedges. Following is a description of the significant holdings at December 31, 2010 and the associated credit risk for each holding:
i. Debt SecuritiesFederal agency and GSE MBS represent fractional ownership interests in MBS guaranteed by Federal agencies and GSEs. The rate of delinquencies and defaults on the underlying residential mortgage loans and the aggregate amount of the resulting losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged property is located; the level of the borrower's equity in the mortgaged property; and the individual financial circumstances of the borrower. Changes in economic conditions, including delinquencies and defaults on assets underlying these securities, can affect the securities' value, income, and liquidity.
ML's non-agency RMBS investment portfolio is subject to varying levels of credit, interest rate, general market, and concentration risk. Credit-related risk on non-agency RMBS arises from losses due to delinquencies and defaults by borrowers on the underlying mortgage loans and breaches by originators and servicers of their obligations under the underlying documentation pursuant to which the non-agency RMBS were issued. The rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged property is located; the level of the borrower's equity in the mortgaged property; and the individual financial circumstances of the borrower.
The rate of interest payable on certain non-agency RMBS may be set or effectively capped at the weighted average net coupon of the underlying mortgage loans themselves, often referred to as an "available funds cap." As a result of this cap, the return to ML on such non-agency RMBS is dependent on the relative timing and rate of delinquencies and prepayments of mortgage loans bearing a higher interest rate.
As of December 31, 2010, approximately 38.3 percent and 12.3 percent of the properties collateralizing the non-agency RMBS held by ML were located in California and Florida, respectively, based on the total unpaid principal balance of the underlying loans.
The fair value of any particular non-agency RMBS asset may be subject to substantial variation. The entire market or particular instruments traded on a market may decline in value, even if projected cash flow or other factors improve, because the prices of such instruments are subject to numerous other factors that have little or no correlation to the performance of a particular instrument. Adverse developments in the non-agency RMBS market could have a considerable effect on ML because of its investment concentration in non-agency RMBS.
At December 31, 2010, the ratings breakdown of the $19.6 billion of debt securities, which are recorded at fair value in the ML portfolio as a percentage of aggregate fair value of all securities in the portfolio was as follows:
Security Type:
1Ratings
2,
3AAAAA+ to AA-A+ to A-BBB+ to BBB-BB+ and lower
4Government/agencyTotalFederal agency and GSE MBS0.0%0.0%0.0%0.0%0.0%85.8%85.8%Non-agency RMBS0.3%0.4%0.2%0.2%8.4%0.0%9.5%Other
50.6%0.9%0.2%1.5%1.4%0.0%4.7%Total1.0%1.3%0.4%1.7%9.8%85.8%100.0%1. This table does not include ML swaps and other derivative contracts, commercial and residential mortgage loans, or TBA investments.
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2. Lowest of all ratings is used for the purposes of this table if rated by two or more nationally recognized statistical rating organizations.
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3. Rows and columns may not total due to rounding.
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4. BB+ and lower includes debt securities that were not rated as of December 31, 2010.
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5. Includes all asset sectors that, individually, represent less than 5 percent of aggregate portfolio fair value.
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ii. Commercial and Residential Mortgage LoansCommercial and residential mortgage loans are subject to a high degree of credit risk because of exposure to loss from loan defaults. Default rates are subject to a wide variety of factors, including, but not limited to, property performance, property management, supply and demand, construction trends, consumer behavior, regional economic conditions, interest rates, and other factors.
The performance profile for the commercial and residential mortgage loans at December 31, 2010, was as follows (in millions):
Unpaid principal balanceFair valueFair value as a percentage of unpaid principal balancePerforming loans:Commercial$ 6,454$ 4,96676.9%Residential78844055.8%Subtotal7,2425,40674.6%Non-performing/Non-accrual loans:
1Commercial31516452.1%Residential49116333.2%Subtotal80632740.6%Total:Commercial6,7695,13075.8%Residential1,27960347.1%Total loans$ 8,048$ 5,73371.2%1. Non-performing/non-accrual loans include loans with payments past due greater than 90 days.
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The following table summarizes the state in which residential mortgage loans are collateralized and the property types of the commercial mortgage loans held in the ML portfolio at December 31, 2010:
Concentration of unpaid principal balancesResidentialCommercial
1By state:California36.7%Florida8.9%Other
254.4%Total100.0%By property:Hospitality81.8%Office11.0%Other27.2%Total100.0%1. One borrower represents approximately 55 percent of total unpaid principal balance of the commercial mortgage loan portfolio.
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2. No other individual state or property type comprises more than 5 percent of the total.
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Commercial mortgage loans held by ML are composed of different levels of subordination with respect to the underlying properties, and relative to each other. Senior mortgage loans are secured property loans evidenced by a first mortgage that is senior to any subordinate or mezzanine financing. Subordinate mortgage interests, sometimes known as B Notes, are loans evidenced by a junior note or a junior participation in a mortgage loan. Mezzanine loans are loans made to the direct or indirect owner of the property-owning entity. Mezzanine loans are not secured by a mortgage on the property but rather by a pledge of the mezzanine borrower's direct or indirect ownership interest in the property-owning entity.
The following table summarizes commercial mortgage loans held by ML at December 31, 2010 (in millions):
Loan typeUnpaid principal balancesConcentration of unpaid principal balancesSenior mortgage loan$ 3,88657.4%Subordinate mortgage interests630.9%Mezzanine loans2,82041.7%Total6,769100.0%
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iii. Derivative InstrumentsDerivative contracts are instruments, such as futures or swap contracts, that derive their value from underlying assets, indices, reference rates or a combination of these factors. The ML portfolio includes various derivative financial instruments, primarily consisting of a total return swap agreement (TRS) with JPMC. ML and JPMC entered into the TRS with reference obligations representing single-name CDS primarily on RMBS and CMBS, and interest rate swaps (IRS) with various market participants, including JPMC. ML, through its investment manager, currently manages the CDS contracts within the TRS as a runoff portfolio and may unwind, amend, or novate reference obligations on an ongoing basis.
ML enters into additional derivative contracts consisting of futures and IRS to economically hedge its exposure to interest rates. For 2010, there were 29 trades executed as IRS. All derivatives are recorded at fair value in accordance with ASC 815. None of the derivatives held by ML are designated as hedging instruments for accounting purposes.
On an ongoing basis, ML pledges collateral for credit or liquidity related shortfalls based on 20 percent of the notional amount of sold CDS protection and 10 percent of the present value of future premiums on purchased CDS protection. Failure to post this collateral constitutes a TRS event of default. Separately, ML and JPMC engage in bilateral posting of collateral to cover the net mark-to-market (MTM) variations in the swap portfolio. ML nets the collateral received from JPMC from the bilateral MTM posting only to the extent that the reference obligations indicate JPMC as the original counterparty to Bear Stearns on March 14, 2008. The values of ML's cash equivalents and investments, purchased by the re-hypothecation of cash collateral associated with the TRS, were $0.8 billion and $0 billion, respectively, as of December 31, 2010, and $0.8 billion and $0.5 billion, respectively, as of December 31, 2009. In addition, ML has pledged $1.0 billion and $1.5 billion of Federal agency and GSE MBS to JPMC as of December 31, 2010 and 2009, respectively.
The following risks are associated with the derivative instruments held by ML as part of the TRS agreement with JPMC as well as any derivatives outside of the TRS:
Market Risk
CDS are agreements that provide protection for the buyer against the loss of principal and, in some cases, interest on a bond or loan in case of a default by the issuer. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency or failure to meet payment obligations when due. The buyer of the CDS pays a premium in return for payment protection upon the occurrence, if any, of a credit event. Upon the occurrence of a triggering credit event, the maximum potential amount of future payments the seller could be required to make under a CDS is equal to the notional amount of the contract. Such future payments could be reduced or offset by amounts recovered under recourse or by collateral provisions outlined in the contract, including seizure and liquidation of collateral pledged by the buyer. ML's derivatives portfolio consists of purchased credit protection with underlying referenced names not correlated to offset its exposure to sold credit protection.
IRS obligate two parties to exchange one or more payments typically calculated with reference to fixed or periodically reset rates of interest applied to a specified notional principal amount. Notional principal is the amount to which interest rates are applied to determine the payment streams under IRS. Such notional principal amounts often are used to express the volume of these transactions but are not actually exchanged between the counterparties.
Futures contracts are agreements to buy and sell financial instruments for a set price on a future date. Initial margin deposits are made upon entering into futures contracts in the form of cash or securities. During the period that a futures contract is open, changes in the value of the contract are recorded as unrealized gains or losses by revaluing the contracts daily to reflect the market value of the contract at the end of each day's trading. Variation margin payments are paid or received, depending upon whether unrealized gains or losses result. When the contract is closed, ML will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and ML's cost basis in the contract. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates, and the underlying hedged assets. ML is also at risk of not being able to enter into a closing transaction for the futures contract because of an illiquid secondary market. ML had pledged cash collateral related to future contracts of $18 million and $40 million as of December 31, 2010 and 2009, respectively.
Credit Risk
Credit risk is the risk of financial loss resulting from failure by a counterparty to meet its contractual obligations to ML. This can be caused by factors directly related to the counterparty, such as business or management. Taking collateral is the most common way to mitigate credit risk. ML takes financial collateral in the form of cash and marketable securities to cover JPMC counterparty risk as part of the TRS agreement with JPMC as well as the over-the-counter derivatives activities outside of the TRS.
The following table summarizes the notional amounts of derivative contracts outstanding as of December 31, 2010 and 2009, and the change in notional amounts is representative of the volume of activity for the year ended December 31, 2010 (in millions):
Notional amounts
1,
220102009Interest rate contracts:IRS$ 4,130$ 3,185Futures and options on futures
31870Credit derivatives:CDS5,8567,323Total$ 10,004$ 10,5781. Represents the sum of gross long and short notional derivative contracts.
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2. There were 1,400 and 1,764 CDS and IRS contracts outstanding as of December 2010, and 2009, respectively.
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3. Futures and options on futures relate to contract obligations and not gross notional amounts
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The following table summarizes the fair value of derivative instruments by contract type on a gross basis as of December 31, 2010 and 2009, which is reported as a component of "Consolidated variable interest entities: Investments held by consolidated variable interest entities" in the Combined Statement of Condition (in millions):
20102009Gross derivative assetsGross derivative liabilitiesGross derivative assetsGross derivative liabilitiesInterest rate contracts:IRS$ 9$ 229$ 5$ 195Futures and options on futures4220-Credit derivatives:CDS2,3171,3473,2711,816Counterparty netting(1,375)(1,374)(1,86
(1,86
Cash collateral(100)-(281)-Total$ 855$ 204$ 1,147$ 143
The table below summarizes certain information regarding protection sold through CDS as of December 31 (in millions):
Credit ratings of the reference obligationMaximum potential payout/notional20102009Years to maturityFair valueTotalFair value1 year or lessAfter 1 year through 3 yearsAfter 3 years through 5 yearsAfter 5 yearsTotalAsset/ (liability)Asset/(liability)Investment grade (AAA to BBB-)$ -$ -$ -$ 120$ 120$ (23)$ 350$ (154)Non-investment grade10250-1,5641,824(1,284)2,099(1,640)Total credit protection sold$ 10$ 250$ -$ 1,684$ 1,944$ (1,307)$ 2,449$ (1,794)
The table below summarizes certain information regarding protection bought through CDS as of December 31 (in millions):
Credit ratings of the reference obligationMaximum potential recovery/notional20102009Years to maturityFair valueTotalFair value1 year or lessAfter 1 year through 3 yearsAfter 3 years through 5 yearsAfter 5 yearsTotalAsset/(liability)Asset/ (liability)Investment grade (AAA to BBB-)$ -$ -$ -$ 263$ 263$ 76$ 702$ 404Non-investment grade3850153,1043,6482,1904,1722,808Total credit protection bought$ 38$ 501$ 5$ 3,367$ 3,911$ 2,266$ 4,874$ 3,212
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Other AssetsOther assets are primarily composed of other real estate owned of approximately $19 million, and options of $4 million.
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d. Maiden Lane II LLC
ML II's investments in non-agency RMBS are subject to varying levels of credit, interest rate, general market, and concentration risk. Credit-related risk on non-agency RMBS arises from losses due to delinquencies and defaults by borrowers on the underlying residential mortgage loans and breaches by originators and servicers of their obligations under the underlying documentation pursuant to which the non-agency RMBS are issued. The rate of delinquencies and defaults on residential mortgage loans and the aggregate amount of the resulting losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged property is located; the level of the borrower's equity in the mortgaged property; and the individual financial circumstances of the borrower.
The rate of interest payable on certain non-agency RMBS may be set or effectively capped at the weighted average net coupon of the underlying residential mortgage loans themselves, often referred to as an "available funds cap." As a result of this cap, the return to the holder of such non-agency RMBS is dependent on the relative timing and rate of delinquencies and prepayments of mortgage loans bearing a higher rate of interest.
The fair value of any particular non-agency RMBS asset may be subject to substantial variation. The entire market or particular instruments traded on a market may decline in value, even if projected cash flow or other factors improve, because the prices of such instruments are subject to numerous other factors that have little or no correlation to the performance of a particular instrument. Adverse developments in the non-agency RMBS market could have a considerable effect on ML II because of its investment concentration in non-agency RMBS.
At December 31, 2010, the type/sector and rating composition of the ML II's $16.2 billion non-agency RMBS portfolio, recorded at fair value, as a percentage of aggregate fair value, were as follows:
Asset Type:Rating
1,
2AAAAA+ to AA-A+ to A-BBB+ to BBB-BB+ and lowerTotalAlt-A ARM0.3%1.3%0.9%0.3%26.5%29.4%Subprime4.1%2.6%1.3%1.2%46.4%55.6%Option ARM0.0%0.0%0.0%0.0%6.8%6.8%Other
30.0%0.5%1.1%0.1%6.4%8.2%Total4.5%4.4%3.3%1.6%86.2%100.0%1. Lowest of all ratings is used for the purposes of this table if rated by two or more nationally recognized statistical rating organizations.
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2. Rows and columns may not total due to rounding.
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3. Includes all asset types that, individually, represent less than 5% of aggregate portfolio fair value.
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At December 31, 2010, approximately 30 percent and 13 percent of the properties collateralizing the non-agency RMBS held by ML II were located in California and Florida, respectively, based on the geographical location data available for the underlying loans by aggregate unpaid principal balance.
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e. Maiden Lane III LLC
The primary holdings within ML III are ABS CDOs. An ABS CDO is a security issued by a bankruptcy-remote entity that is backed by a diversified pool of debt securities, which in the case of ML III are primarily RMBS and CMBS. The cash flows of ABS CDOs can be split into multiple segments, called "tranches," which vary in risk profile and yield. The junior tranches bear the initial risk of loss, followed by the more senior tranches. The ABS CDOs in the ML III portfolio represent senior tranches. Because they are shielded from defaults by the subordinated tranches, senior tranches typically have higher credit ratings and lower yields than the underlying securities, and will often receive investment-grade ratings from one or more of the nationally recognized rating agencies. Despite the protection afforded by the subordinated tranches, senior tranches can experience substantial losses from actual defaults on the underlying non-agency RMBS or CMBS.
Certain ABS CDO issuers can issue short-term eligible investments under Rule 2a-7 of the Investment Company Act of 1940 if the ABS CDO contains arrangements to remarket the securities at defined periods. The investments must contain put options (2a-7 Puts) that allow the purchasers to sell the ABS CDO at par to a third-party (Put Provider), if a scheduled remarketing is unsuccessful due to reasons other than a credit or bankruptcy event. The total notional value of ABS CDOs held by ML III with embedded 2a-7 Puts, for which AIGFP was, directly or indirectly, the Put Provider, was $1.6 billion at 2009. There were no remaining ABS CDO investments held by the LLC with embedded 2a-7 puts as of December 31, 2010.
ML III's investment in CMBS and RMBS contain varying levels of credit, interest rate, liquidity, and concentration risk. Credit-related risk arises from losses due to delinquencies and defaults by borrowers on the underlying mortgage loans and breaches by originators and servicers of their obligations under the underlying documentation pursuant to which the securities are issued. The rate of delinquencies and defaults on residential and commercial mortgage loans and the aggregate amount of the resulting losses will be affected by a number of factors, including general economic conditions, particularly those in the area where the related mortgaged property is located; the level of the borrower's equity in the mortgaged property; and the individual financial circumstances of the borrower. Adverse developments in the RMBS and CMBS markets could have a considerable effect on ML III because of its investment concentration in CDOs backed by CMBS and RMBS.
At December 31, 2010, the investment type/vintage and rating composition of ML III's $23 billion portfolio, recorded at fair value, as a percentage of aggregate fair value of all securities in the portfolio was as follows:
Rating
1,
2,
3AAAAA+ to AA-A+ to A-BBB+ to BBB-BB+ andlowerNot ratedTotalABS CDOs:High-grade ABS CDOs0.0%0.0%0.0%0.0%64.2%1.0%65.3%Pre-20050.0%0.0%0.0%0.0%22.1%0.0%22.1%20050.0%0.0%0.0%0.0%29.1%1.0%30.1%20060.0%0.0%0.0%0.0%6.3%0.0%6.3%20070.0%0.0%0.0%0.0%6.7%0.0%6.7%Mezzanine ABS CDOs0.0%0.0%0.0%0.1%8.2%0.1%8.5%Pre-20050.0%0.0%0.0%0.1%4.7%0.1%4.9%20050.0%0.0%0.0%0.0%2.9%0.0%2.9%20060.0%0.0%0.0%0.0%0.0%0.0%0.0%20070.0%0.0%0.0%0.0%0.6%0.0%0.6%Commercial Real-Estate CDOs0.0%0.0%0.0%0.0%25.1%0.0%25.1%Pre-20050.0%0.0%0.0%0.0%3.2%0.0%3.2%20050.0%0.0%0.0%0.0%0.0%0.0%0.0%20060.0%0.0%0.0%0.0%0.0%0.0%0.0%20070.0%0.0%0.0%0.0%21.9%0.0%21.9%RMBS, CMBS, & Other:0.1%0.2%0.1%0.0%0.9%0.0%1.3%Pre-20050.0%0.0%0.0%0.0%0.1%0.0%0.2%20050.1%0.2%0.1%0.0%0.7%0.0%1.1%20060.0%0.0%0.0%0.0%0.1%0.0%0.1%20070.0%0.0%0.0%0.0%0.0%0.0%0.0%Total investments0.1%0.2%0.1%0.1%98.4%1.2%100.0%1. Lowest of all ratings was used for the purpose of this table if rated by two or more nationally recognized statistical rating organizations.
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2. The year of issuance with the highest concentration of underlying assets as measured by outstanding principal balance determines the vintage of the CDO.
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3. Rows and columns may not total due to rounding.
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f. TALF LLC
Cash receipts resulting from the put option fees paid to TALF LLC and proceeds from the Treasury's loan are invested in the following types of U.S. dollar-denominated short-term investments and cash equivalents eligible for purchase by the LLC: (1) US Treasury securities, (2) Federal agency securities that are senior, negotiable debt obligations of the Fannie Mae, Freddie Mac, Federal Home Loan Banks (FHLB) and Federal Farm Credit Banks (FFCB), which have a fixed rate of interest, (3) repurchase agreements that are collateralized by Treasury and Federal agency securities and fixed-rate agency mortgage-backed securities, and (4) money market mutual funds registered with the Securities and Exchange Commission and regulated under Rule 2a-7 of the Investment Company Act that invest exclusively in US Treasury and Federal agency securities. Cash may also be invested in a demand interest-bearing account held at the Bank of New York Mellon.
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g. Fair Value Measurement
The consolidated VIEs have adopted ASC 820 and ASC 825 and have elected the fair value option for all securities and commercial and residential mortgages held by ML and TALF LLC. ML II and ML III qualify as nonregistered investment companies under the provisions of ASC 946 and, therefore, all investments are recorded at fair value in accordance with ASC 820. In addition, the FRBNY has elected to record the beneficial interests in ML, ML II, ML III, and TALF LLC at fair value.
The accounting and classification of these investments appropriately reflect the VIEs' and the FRBNY's intent with respect to the purpose of the investments and most closely reflect the amount of the assets available to liquidate the entities' obligations.
i. Determination of Fair ValueThe consolidated VIEs value their investments on the basis of the last available bid prices or current market quotations provided by dealers or pricing services selected by the designated investment managers. To determine the value of a particular investment, pricing services may use information on transactions in such investments; quotations from dealers; pricing metrics; market transactions in comparable investments; relationships observed in the market between investments; and calculated yield measures based on valuation methodologies commonly employed in the market for such investments.
Market quotations may not represent fair value in circumstances in which the investment manager believes that facts and circumstances applicable to an issuer, a seller, a purchaser, or the market for a particular security result in the current market quotations reflecting an inaccurate fair value of the security. To determine fair value, the investment manager applies proprietary valuation models that use collateral performance scenarios and pricing metrics derived from the reported performance of the universe of bonds with similar characteristics as well as the observable market.
Because of the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ significantly from the values that would have been reported if a readily available fair value had existed for these investments and may differ materially from the values that may ultimately be realized.
The fair value of the liability for the beneficial interests of consolidated VIEs is estimated based upon the fair value of the underlying assets held by the VIEs. The holders of these beneficial interests do not have recourse to the general credit of the FRBNY.
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ii. Valuation Methodologies for Level 3 Assets and LiabilitiesIn certain cases where there is limited activity around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. For example, in valuing CDOs, certain collateralized mortgage obligations, and commercial and residential mortgage loans, the determination of fair value is based on collateral performance scenarios. These valuations also incorporate pricing metrics derived from the reported performance of the universe of bonds and from observations and estimates of market data. Because external price information is not available, market-based models are used to value these securities. Key inputs to the model may include market spreads or yield estimates for comparable instruments, data for each credit rating, valuation estimates for underlying property collateral, projected cash flows, and other relevant contractual features. Because there is lack of observable pricing, securities and investment loans that are carried at fair value are classified within Level 3.
The following tables present the financial instruments recorded in VIEs at fair value as of December 31 by ASC 820 hierarchy (in millions):
2010Level 1Level 2Level 3Netting
1Total fair valueAssets:CDOs$ -$ 301$ 22,811$ -$ 23,112Non-agency RMBS-11,5516,809-18,360Federal agency and GSE MBS-16,81230-16,842Commercial mortgage loans-3,1991,931-5,130Cash equivalents3,003---3,003Swap contracts-92,317(1,475)851Residential mortgage loans--603-603Other investments8540079-564Other assets-4--4Total assets$ 3,088$ 32,276$ 34,580$ (1,475)$ 68,469Liabilities:Beneficial interest in consolidated VIEs$ -$ -$ 10,051$ -$ 10,051Swap contracts-2291,347(1,375)201Other liabilities2---2Total liabilities$ 2$ 229$ 11,398$ (1,375)$ 10,2541. Derivative receivables and payables and the related cash collateral received and paid are shown netted when a master netting agreement exists.
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2009Level 1Level 2Level 3Netting
1Total fair valueAssets:CDOs$ -$ 241$ 22,409$ -$ 22,650Federal agency and GSE MBS-18,12524-18,149Non-agency RMBS-9,4618,091-17,552Commercial mortgage loans--4,025-4,025Cash equivalents1,933142--2,075Swap contracts-53,272(2,150)1,127Residential mortgage loans--583-583Other investments315,41323-5,467Other assets20---20Total assets$ 1,984$ 33,387$ 38,427$ (2,150)$ 71,648Liabilities:Beneficial interest in consolidated VIEs$ -$ -$ 5,095$ -$ 5,095Swap contracts-1951,816(1,86
143Total liabilities$ -$ 195$ 6,911$ (1,86
$ 5,2381. Derivative receivables and payables and the related cash collateral received and paid are shown netted when a master netting agreement exists.
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The tables below present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2010 and 2009 (in millions). Unrealized gains and losses related to those assets still held at December 31, 2010 and 2009, are reported as a component of "Consolidated variable interest entities: Investments held by consolidated variable interest entities, net" in the Combined Statements of Condition.
2010Fair value January 1Net purchases, sales, and settlementsTotal realized/unrealized gains (losses)Net transfers in or out
1,
2,
3,
4Fair value December 31Change in unrealized gains (losses) related to financial instruments held at December 31, 2010Assets:CDOs
5$ 22,200$ (2,474)$ 3,096$ (11)$ 22,811$ 3,043Non-agency RMBS58,300(1,046)1,144(1,589)6,8091,044Commercial mortgage loans4,025(335)681(2,440)1,931542Residential mortgage loans583(91)111-603197Federal agency and GSE MBS24(34)238302Other investments23(39)65307911Total assets$ 35,155$ (4,019)$ 5,099$ (3,972)$ 32,263$ 4,839Net swap contracts
6$ 1,456$ (325)$ (161)$ -$ 970$ (137)Liabilities:Beneficial interest in consolidated VIEs$ (5,095)$ (277)
7$ (4,679)$ -$ (10,051)$ (4,679)1. The amount of transfers is based on the fair values of the transferred assets at the beginning of the reporting period.
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2. There were no significant transfers between Level 1 and Level 2 during the year ended December 31, 2010.
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3. Commercial mortgage loans, with a December 31, 2009 fair value of $2,440 million, were transferred from Level 3 to Level 2 because they are valued at December 31, 2010 based on quoted prices for identical or similar instruments in non-active markets (Level 2). These investments were valued in the prior year based on non-observable inputs (Level 3).
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4. Non-agency RMBS, with a December 31, 2009 fair value of $3,830 million, were transferred from Level 3 to Level 2 because they are valued at December 31, 2010 based on quoted prices in non-active markets (Level 2). These investments were valued in the prior year on non-observable model based inputs (Level 3). There were also certain non-agency RMBS for which valuation inputs became less observable during the year ended December 31, 2010 which resulted in $2,647 million in transfers from Level 2 to Level 3. There were no other significant transfers between Level 2 and Level 3 during the year.
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5. Investments with a fair value of $209 million as of December 31, 2009 were reclassified from CDOs to Non-agency RMBS.
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6. Level 3 derivative assets and liabilities are presented net for purposes of this table.
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7. Includes $277 million in capitalized interest.
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2009Fair value January 1Net purchases, sales, and settlementsTotal realized/unrealized gains (losses)Net transfers in or outFair value December 31Change in unrealized gains/(losses) related to financial instruments held at December 31, 2009Assets:CDOs$ 26,802$ (3,123)$ (1,267)$ (3)$ 22,409$ (1,265)Non-agency RMBS12,510(1,481)(499)(2,439)8,091(533)Commercial mortgage loans5,553(305)(1,223)-4,025(1,177)Residential mortgage loans937(86)(26
-583(219)Federal agency and GSE MBS895(24
-(623)24-Other investments348(263)30(92)2329Total assets$ 47,045$ (5,506)$ (3,227)$ (3,157)$ 35,155$ (3,165)Net swap contracts
1$ 2,454$ (906)$ 94$ (186)$ 1,456$ 212Liabilities:Beneficial interest in consolidated VIEs$ (2,824)(36
2$ (1,903)$ -$ (5,095)$ (1,903)1. Level 3 derivative assets and liabilities are presented net for the purposes of this table.
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2. Includes $268 million in capitalized interest.
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h. Professional Fees
The consolidated VIEs have recorded costs for professional services provided, among others, by several nationally recognized institutions that serve as investment managers, administrators, and custodians for the VIEs' assets. The fees charged by the investment managers, custodians, administrators, auditors, attorneys, and other service providers, are recorded in "Professional fees related to consolidated variable interest entities" in the Combined Statements of Income and Comprehensive Income.
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(10) Non-consolidated Variable Interest Entities
In December 2009, the FRBNY received preferred interests in two VIEs, AIA LLC and ALICO LLC. The FRBNY does not consolidate these VIEs because it does not have a controlling financial interest. The FRBNY's maximum exposure to any potential losses of the VIEs, should any occur, is limited to the recorded value of the FRBNY's investment in the preferred interests and dividends receivable from the VIEs. The following table shows financial information as of December 31, 2010 (in millions):
2010AIA LLCALICO LLCTotal non-consolidated VIEsTotal assets$ 31,223$ 17,417$ 48,640Total liabilities-898898Maximum exposure to loss16,8869,49926,385
The recorded value of the FRBNY's preferred interests, including capitalized dividends, was $16,886 million and $16,068 million for AIA LLC and $9,499 million and $9,038 million for ALICO LLC at December 31, 2010 and 2009, respectively. The FRBNY's preferred interests and capitalized dividends are reported as "Preferred interests" and dividends receivable are reported as a component of "Other Assets" in the Combined Statements of Condition.
The fair value of FRBNY's preferred interests in AIA LLC and ALICO LLC was not materially different from the amounts reported as "Preferred interests" in the Combined Statements of Condition as of December 31, 2010 and 2009.
As a result of the closing of the AIG recapitalization plan on January 14, 2011, the FRBNY was paid in full for its preferred interests in AIA LLC and ALICO LLC, including accrued dividends.
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(11) Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
20102009Bank premises and equipment:Land and land improvements$ 350$ 344Buildings2,4362,378Building machinery and equipment511492Construction in progress3143Furniture and equipment1,0341,010Subtotal4,3624,267Accumulated depreciation(1,749)(1,643)Bank premises and equipment, net$ 2,613$ 2,624Depreciation expense, for the years ended December 31$ 204$ 202
Bank premises and equipment at December 31 included the following amounts for capitalized leases (in millions):
20102009Leased premises and equipment under capital leases$ 18$ 10Accumulated depreciation(
(6)Leased premises and equipment under capital leases, net$ 10$ 4Depreciation expense related to leased premises and equipment under capital leases$ 3$ 2
The Reserve Banks lease space to outside tenants with remaining lease terms ranging from one to fourteen years. Rental income from such leases was $34 million and $32 million for the years ended December 31, 2010 and 2009, respectively, and is reported as a component of "Other income" in the Combined Statements of Income and Comprehensive Income. Future minimum lease payments that the Reserve Banks will receive under noncancelable lease agreements in existence at December 31, 2010 are as follows (in millions):
2011$ 28201224201324201424201519Thereafter41Total$ 160
The Reserve Banks had capitalized software assets, net of amortization, of $146 million and $134 million at December 31, 2010 and 2009, respectively. Amortization expense was $54 million and $52 million for the years ended December 31, 2010 and 2009, respectively. Capitalized software assets are reported as a component of "Other assets" in the Combined Statements of Condition and the related amortization is reported as a component of "Operating expenses: Other" in the Combined Statements of Income and Comprehensive Income.
In 2008, after relocating operations to a new facility, the Federal Reserve Bank of San Francisco (FRBSF) classified its former Seattle branch office building as held for sale, and the building is reported at fair value as a component of "Other Assets" in the Combined Statements of Condition. During the year ended December 31, 2010, the FRBSF recorded an adjustment of $6.7 million to the fair value of the building and reported the charge as a component of "Operating expenses: Other" in the Combined Statements of Income and Comprehensive Income. The fair value of the building as of December 31, 2010 was based on appraised valuation.
The FRBSF disclosed a subsequent event in its 2009 financial statements, related to the termination of a contract for software development. The FRBSF has determined that a portion of the software development program will not be used, and in 2010 reduced the carrying value of the asset by $20.2 million. The adjustment to the asset value is reported as a component of "Operating expenses: Other" in the Combined Statements of Income and Comprehensive Income. The FRBSF expects the remaining asset value will be recovered through use in other continuing software development programs.
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(12) Commitments and Contingencies
Conducting its operations, the Reserve Banks enter into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.
At December 31, 2010, the Reserve Banks were obligated under noncancelable leases for premises and equipment with remaining terms ranging from one to approximately thirteen years. These leases provide for increased rental payments based upon increases in real estate taxes, operating costs, or selected price indices.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $30 million and $27 million for the years ended December 31, 2010 and 2009, respectively.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2010, are as follows (in millions):
Operating leases2011$ 13201212201312201411201511Thereafter85Future minimum rental payments$ 144
At December 31, 2010, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2021 with a remaining fixed commitment of $178 million. Purchases of $54 million and $28 million were made against these commitments during 2010 and 2009, respectively. These commitments are for maintenance of currency processing machines and have variable and/or fixed components. The variable portion of the commitments is for additional services above the fixed contractual service limits.
The fixed payments for the next five years under these commitments are as follows (in millions):
2011$ 2201226201345201427201525
The Reserve Banks are involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these actions, in management's opinion, based on discussions with counsel, the aforementioned litigation and claims will be resolved without material adverse effect on the financial position or results of operations of the Reserve Banks.
Other Commitments
In support of financial market stability activities, the Reserve Banks entered into commitments to provide financial assistance to financial institutions. The contractual amounts shown below are the Reserve Banks' maximum exposures to loss in the event that the commitments are fully funded and there is a default by the borrower or total loss in value of pledged collateral. Total commitments at December 31, 2010 and 2009 were as follows (in millions):
20102009Contractual amountUnfunded amountContractual amountUnfunded amountSecured revolving line of credit (AIG)$ 24,512$ 9,891$ 35,000$ 17,100Commercial loan commitments (ML)7272157157Additional loan commitments (ML)
199--Total$ 24,593$ 9,972$ 35,157$ 17,2571. In 2010, there is additional restricted cash totaling $9 million that may be required to be advanced by ML for property level expenses or improvements.
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The contractual amount of the commitment related to the AIG secured revolving line of credit represents the maximum commitment at December 31, 2010, to lend to AIG and the unfunded amount represents the maximum commitment reduced by draws outstanding. The amount of the FRBNY's commitment to lend to AIG was reduced during the year ended December 31, 2009 as a result of the debt restructurings described in Note 3, Note 4, and Note 5. The FRBNY's commitment was further reduced during the year ended December 31, 2010, as a result of AIG asset sales. Collateral to secure the FRBNY's loan to AIG includes equity interests of various AIG subsidiaries. The FRBNY did not incur any losses related to the unfunded commitment as of December 31, 2010.
As a result of the closing of the AIG recapitalization plan on January 14, 2011, the revolving line of credit was paid in full, including interest and fees, and FRBNY's commitment to lend any further funds was terminated.
The undrawn portion of the FRBNY's commercial loan commitments relates to commercial mortgage loan commitments acquired by ML.
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(13) Retirement and Thrift Plans
Retirement Plans
The Reserve Banks currently offer three defined benefit retirement plans to their employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP). Under the Dodd-Frank Act, employees of the Bureau can elect to participate in the System Plan. As of December 31, 2010, there were no Bureau participants in the System Plan.
The System Plan provides retirement benefits to employees of the Federal Reserve Banks, Board of Governors, and OEB and in the future will provide retirement benefits to certain employees of the Bureau. The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its combined financial statements. During the years ended December 31, 2010 and 2009, costs associated with the System Plan were not reimbursed by other participating employers.
Following is a reconciliation of the beginning and ending balances of the System Plan benefit obligation (in millions):
20102009Estimated actuarial present value of projected benefit obligation at January 1$ 7,364$ 7,031Service cost-benefits earned during the period223204Interest cost on projected benefit obligation450427Actuarial loss (gain)508(2
Contributions by plan participants93Special termination benefits119Benefits paid(307)(291)Plan amendments-9Estimated actuarial present value of projected benefit obligation at December 31$ 8,258$ 7,364
Following is a reconciliation showing the beginning and ending balance of the System Plan assets, the funded status, and the accrued pension benefit costs (in millions):
20102009Estimated plan assets at January 1 (of which $6,252 and $5,037 is measured at fair value as of January 1, 2010 and 2009, respectively)$ 6,281$ 5,053Actual return on plan assets7101,016Contributions by the employer580500Contributions by plan participants93Benefits paid(307)(291)Estimated plan assets at December 31 (of which $6,998 and $6,252 is measured at fair value as of December 31, 2010 and 2009, respectively)$ 7,273$ 6,281Funded status and accrued pension benefit costs$ (985)$ (1,083)Amounts included in accumulated other comprehensive loss are shown below
rior service cost$ (771)$ (883)Net actuarial loss(2,589)(2,48
Total accumulated other comprehensive loss$ (3,360)$ (3,371)
Accrued pension benefit costs are reported as a component of "Accrued benefit costs" in the Combined Statements of Condition.
The accumulated benefit obligation for the System Plan, which differs from the estimated actuarial present value of projected benefit obligation because it is based on current rather than future compensation levels, was $7,136 million and $6,430 million at December 31, 2010 and 2009, respectively.
The weighted-average assumptions used in developing the accumulated pension benefit obligation for the System Plan as of December 31 were as follows:
20102009Discount rate5.50%6.00%Rate of compensation increase5.00%5.00%
Net periodic benefit expenses for the years ended December 31, 2010 and 2009, were actuarially determined using a January 1 measurement date. The weighted-average assumptions used in developing net periodic benefit expenses for the System Plan for the years were as follows:
20102009Discount rate6.00%6.00%Expected asset return7.75%7.75%Rate of compensation increase5.00%5.00%
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the System Plan's benefits when due. The expected long-term rate of return on assets is an estimate that is based on a combination of factors, including the System Plan's asset allocation strategy and historical returns; surveys of expected rates of return for other entities' plans; a projected return for equities and fixed income investments based on real interest rates, inflation expectations, and equity risk premiums; and surveys of expected returns in equity and fixed income markets.
The components of net periodic pension benefit expense for the System Plan for the years ended December 31 are shown below (in millions):
20102009Service cost-benefits earned during the period$ 223$ 204Interest cost on accumulated benefit obligation450427Amortization of prior service cost112116Amortization of net loss188285Expected return on plan assets(491)(389)Net periodic pension benefit expense482643Special termination benefits119Total periodic pension benefit expense$ 493$ 652
Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2011 are shown below:
Prior service cost$ 110Net actuarial loss182Total$ 292
The recognition of special termination losses is primarily the result of enhanced retirement benefits provided to employees during the restructuring described in Note 16.
Following is a summary of expected benefit payments, excluding enhanced retirement benefits (in millions):
Expected benefit payments2011$ 32620123472013370201439420154172016-20192,454Total$ 4,308
The System's Committee on Investment Performance (CIP) is responsible for establishing investment policies, selecting investment managers, and monitoring the investment managers' compliance with its policies. The CIP is supported by staff in the OEB in carrying out these responsibilities. At December 31, 2010, the System Plan's assets were held in seven investment vehicles: a liability-linked account, two actively managed long-duration fixed income portfolios, an indexed U.S. investment-grade bond fund, an indexed U.S. equity fund, an indexed non-U.S. developed-markets fund, and a money market fund.
The diversification of the Plan's investments is designed to limit concentration of risk and the risk of loss related to an individual asset class. The liability-linked account, funded in 2008, seeks to defease a portion of the System Plan's liability related to retired lives using a Treasury securities portfolio. The policy governing this account calls for cash-matching the first two years of a portion of retiree benefits payments and immunizing the remaining obligation. The two long-duration fixed income portfolios are separate accounts benchmarked to the Barclays Long Government/Credit Index, which was selected as a proxy for the liabilities of the Plan. While these portfolios are both actively managed, the guidelines are designed to limit portfolio deviations from the benchmark. The indexed U.S. investment-grade bond fund tracks the Barclays U.S. Aggregate Index, which is a broader fixed income index than the Barclays Long Government/Credit Index, but has a shorter duration and average maturity. The indexed U.S. equity fund is intended to track the overall U.S. equity market across market capitalizations. The indexed non-U.S. developed markets equity fund is intended to track the Morgan Stanley Capital International (MSCI) Emerging Markets Index, Europe, Australia, Far East plus Canada Index, which includes stocks from 23 markets deemed by MSCI to be "developed markets." Finally, the money market fund, which invests in high-quality money market securities, is the repository for cash balances and adheres to a constant dollar methodology.
Permitted and prohibited investments, including the use of derivatives, are defined in either the trust agreement (for commingled index vehicles) or the investment guidelines (for the three separate accounts). The CIP reviews the trust agreement and approves all investment guidelines as part of the selection of each investment to ensure that the trust agreement is consistent with the CIP's investment objectives for the System Plan's assets.
The System Plan's policy weight and actual asset allocations at December 31, by asset category, are as follows:
Policy WeightActual Asset Allocations20102009U.S. equities42.8%45.4%53.0%International equities12.2%12.6%12.9%Fixed income45.0%41.7%33.8%Cash0.0%0.3%0.3%Total100.0%100.0%100.0%
Employer contributions to the System Plan may be determined using different assumptions than those required for financial reporting. The System Plan's actuarial funding method is expected to produce a recommended annual funding range between $350 and $400 million. In 2011, the System will make monthly contributions of $35 million and will reevaluate the monthly contributions upon completion of the 2011 actuarial valuation. The Reserve Banks' projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2010 and 2009, and for the years then ended, were not material.
The System Plan's investments are reported at fair value as required by ASC 820. ASC 820 establishes a three-level fair value hierarchy that distinguishes between market participant assumptions developed using market data obtained from independent sources (observable inputs) and the Reserve Banks' assumptions about market participant assumptions developed using the best information available in the circumstances (unobservable inputs).
Determination of Fair ValueThe System Plan's investments are valued on the basis of the last available bid prices or current market quotations provided by dealers, or pricing services. To determine the value of a particular investment, pricing services may use information on transactions in such investments; quotations from dealers; pricing metrics; market transactions in comparable investments; relationships observed in the market between investments; and calculated yield measures based on valuation methodologies commonly employed in the market for such investments.
Because of the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ significantly from the values that would have been reported if a readily available fair value had existed for these investments and may differ materially from the values that may ultimately be realized.
The following tables present the financial instruments recorded at fair value as of December 31 by ASC 820 hierarchy (in millions):
Description2010Level 1Level 2Level 3TotalShort-term investments$ -$ 30$ -$ 30Treasury and Federal agency securities1,06539-1,104GSE debt securities----Other fixed income securities-644-644Common stocks----Commingled funds-5,220-5,220Total$ 1,065$ 5,933$ -$ 6,998
Description2009Level 1Level 2Level 3TotalShort-term investments$ -$ 24$ -$ 24Treasury and Federal agency securities67738-715GSE debt securities-156-156Other fixed income securities-128-128Common stocks883--883Commingled funds-4,346-4,346Total$ 1,560$ 4,692$ -$ 6,252
The System Plan enters into futures contracts, traded on regulated exchanges, to manage certain risks and to maintain appropriate market exposure in meeting the investment objectives of the System Plan. The System Plan bears the market risk that arises from any unfavorable changes in the value of the securities or indexes underlying these futures contracts. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recorded in the Statements of Condition. The guidelines established by the CIP further reduce risk by limiting the net futures positions, for most fund managers, to 15 percent of the market value of the advisor's portfolio. No limit has been established on the futures positions of the liability-driven investments because the fund manager only executes Treasury futures.
At December 31, 2010 and 2009, a portion of short-term investments was available for futures trading. There were $1 million of Treasury securities pledged as collateral for each of the years ended December 31, 2010 and 2009.
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Thrift Plan
Employees of the Reserve Banks participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The Reserve Banks match employee contributions based on a specified formula. Effective April 1, 2009, the Reserve Banks match 100 percent of the first 6 percent of employee contributions from the date of hire and provide an automatic employer contribution of 1 percent of eligible pay. For the first three months of the year ended December 31, 2009, the Reserve Banks matched 80 percent of the first 6 percent of employee contributions for employees with less than five years of service and 100 percent of the first 6 percent of employee contributions for employees with five or more years of service. The Reserve Banks' Thrift Plan contributions totaled $94 million and $82 million for the years ended December 31, 2010 and 2009, respectively, and are reported as a component of "Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.
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(14) Postretirement Benefits Other Than Retirement Plans and Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans
In addition to the Reserve Bank's retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical benefits and life insurance coverage during retirement.
The Reserve Banks funds benefits payable under the medical and life insurance plans as due and, accordingly, have no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
20102009Accumulated postretirement benefit obligation at January 1$ 1,324$ 1,221Service cost-benefits earned during the period4740Interest cost on accumulated benefit obligation7674Net actuarial loss (gain)(9)54Special termination benefits loss11Contributions by plan participants1816Benefits paid(8
(79)Medicare Part D subsidies55Plan amendments(16)(
Accumulated postretirement benefit obligation at December 31$ 1,358$ 1,324
At December 31, 2010 and 2009, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 5.25 percent and 5.75 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan's benefits when due.
Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit costs (in millions):
20102009Fair value of plan assets at January 1$ -$ -Contributions by the employer6558Contributions by plan participants1816Benefits paid(8
(79)Medicare Part D subsidies55Fair value of plan assets at December 31$ -$ -Unfunded obligation and accrued postretirement benefit cost$ 1,358$ 1,324Amounts included in accumulated other comprehensive loss are shown below
rior service cost$ 31$ 33Net actuarial (loss)(301)(33
Total accumulated other comprehensive loss$ (270)$ (305)
Accrued postretirement benefit costs are reported as a component of "Accrued benefit costs" in the Combined Statements of Condition.
For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:
20102009Health care cost trend rate assumed for next year8.00%7.50%Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)5.00%5.00%Year that the rate reaches the ultimate trend rate20172015
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A 1 percentage point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2010 (in millions):
1 percentage point increase1 percentage point decreaseEffect on aggregate of service and interest cost components of net periodic postretirement benefit costs$ 17$ (14)Effect on accumulated postretirement benefit obligation$ 140$ (120)
The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31 (in millions):
20102009Service cost-benefits earned during the period$ 47$ 40Interest cost on accumulated benefit obligation7674Amortization of prior service cost(1
(20)Amortization of net actuarial loss2829Total periodic expense133123Curtailment (gain)-(4)Special termination benefits loss11Net periodic postretirement benefit expense$ 134$ 120
Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2011 are shown below:
Prior service cost$ (
Net actuarial loss21Total$ 13
Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2010 and 2009, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.75 percent and 6.00 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of "Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Reserve Banks' plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in actuarial loss (gain) in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $4.3 million and $6.4 million in the years ended December 31, 2010 and 2009, respectively. Expected receipts in 2011, related to benefits paid in the years ended December 31, 2010 and 2009, are $1 million.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidyWith subsidy2011$ 75$ 70201279732013837720148780201592832016-2020523469Total$ 939$ 852
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Postemployment Benefits
The Reserve Banks offer benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a December 31 measurement date and include the cost of medical and dental insurance, survivor income, disability benefits, and self-insured workers' compensation expenses. The accrued postemployment benefit costs recognized by the Reserve Banks at December 31, 2010 and 2009, were $146 million and $153 million, respectively. This cost is included as a component of "Accrued benefit costs" in the Combined Statements of Condition. Net periodic postemployment benefit expense included in 2010 and 2009 operating expenses were $11 million and $56 million, respectively, and are recorded as a component of "Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.
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(15) Accumulated Other Comprehensive Income and Other Comprehensive Income
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) (in millions):
Amount related to defined benefit retirement planAmount related to postretirement benefits other than retirement plansTotal accumulated other comprehensive income (loss)Balance at January 1, 2009$ (4,41
$ (265)$ (4,683)Change in funded status of benefit plans
rior service costs arising during the year(10)9(1)Net actuarial gain (loss) arising during the year656(54)602Amortization of prior service cost116(20)96Amortization of net actuarial loss28529314Amortization of deferred curtailment gain-(4)(4)Change in funded status of benefit plans-other comprehensive income (loss)1,047(40)1,007Balance at December 31, 2009$ (3,371)$ (305)$ (3,676)Change in funded status of benefit plans
rior service costs arising during the year-1616Net actuarial gain (loss) arising during the year(289)9(280)Amortization of prior service cost112(1
94Amortization of net actuarial loss18828216Change in funded status of benefit plans-other comprehensive income113546Balance at December 31, 2010$ (3,360)$ (270)$ (3,630)
Additional detail regarding the classification of accumulated other comprehensive loss is included in Notes 13 and 14.
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(16) Business Restructuring Charges
In 2010, the Reserve Banks announced the consolidation of some of their currency processing operations. As a result of this initiative, currency processing operations performed by two Reserve Bank Branch offices will be consolidated.
In 2009, the Reserve Banks continued their check restructuring initiatives to align check processing infrastructure and operations with declining check processing volumes. Additional announcements in 2009 included restructuring plans associated with discontinuing check print sites.
Restructuring plans announced prior to 2009 included the acceleration of their check restructuring initiatives to align the check processing infrastructure and operations with declining check processing volumes. The new infrastructure consolidated operations into two regional Reserve Bank processing sites; one in Cleveland, for paper check processing, and one in Atlanta, for electronic check processing. Additional announcements in 2008 included restructuring plans associated with the closure of a check processing contingency center and the consolidation of check adjustments sites.
Following is a summary of financial information related to the restructuring plans (in millions):
2010 restructuring plans2009 restructuring plans2008 and prior restructuring plansTotalInformation related to restructuring plans as of December 31, 2010:Total expected costs related to restructuring activity$ 4$ 4$ 53$ 61Estimated future costs related to restructuring activity1--1Expected completion date201120102010Reconciliation of liability balances:Balance at January 1, 2009$ -$ -$ 40$ 40Employee separation costs-4-4Adjustments--(2)(2)Payments--(23)(23)Balance at December 31, 2009$ -$ 4$ 15$ 19Employee separation costs3--3Contract termination costs--11Adjustments-(1)(1)(2)Payments-(2)(9)(11)Balance at December 31, 2010$ 3$ 1$ 6$ 10
Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated benefit earned by the employee. Separation costs that are provided under the terms of one-time benefit arrangements are generally measured based on the expected benefit as of the termination date and recorded ratably over the period to termination. Restructuring costs related to employee separations are reported as a component of "Salaries and benefits" in the Combined Statements of Income and Comprehensive Income.
Contract termination costs include the charges resulting from terminating existing lease and other contracts and are shown as a component of "Operating expenses: Other" in the Combined Statements of Income and Comprehensive Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a component of the appropriate expense category in the Combined Statements of Income and Comprehensive Income.
Restructuring costs associated with the impairment of certain Bank assets, including software and buildings, are discussed in Note 11.
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(17) Subsequent Events
The closing of the AIG recapitalization plan, which occurred on January 14, 2011, is discussed in Note 3. On February 11, 2011, Treasury announced the consolidation of the Treasury Retail Securities operations and, as a result, the related operations currently performed at the Federal Reserve Bank of Cleveland will be consolidated at the Federal Reserve Bank of Minneapolis. Treasury plans to complete the consolidation by the end of 2011, and the Federal Reserve Bank of Cleveland is evaluating the consolidation efforts and has not yet determined the effects on the 2011 financial statements. There were no other subsequent events that require adjustments to or disclosures in the combined financial statements as of December 31, 2010. Subsequent events were evaluated through March 22, 2011, which is the date that the Board issued the combined financial statements.
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Office of Inspector General Activities
The Office of Inspector General (OIG) for the Federal Reserve Board operates in accordance with the Inspector General Act of 1978, as amended. The OIG conducts activities and makes recommendations to promote economy and efficiency; enhance policies and procedures; and prevent and detect waste, fraud, and abuse in Board programs and operations, including functions that the Board has delegated to the Federal Reserve Banks. Accordingly, the OIG plans and conducts audits, inspections, evaluations, investigations, and other reviews relating to Board and Board-delegated programs and operations. It also retains an independent auditor to annually audit the Board's and the Federal Financial Institutions Examination Council's financial statements. In addition, the OIG keeps the Congress and the Board of Governors fully informed about serious abuses and deficiencies.
During 2010, the OIG completed 21 audits, inspections, and evaluations (table 1) and conducted a number of follow-up reviews to evaluate action taken on prior recommendations. Due to the sensitive nature of some of the material, certain reports were only issued internal to the Board, as indicated. OIG investigative work resulted in five arrests, five indictments, one criminal information, six convictions, and one termination, as well as $837,148 in monetary recoveries and $3,810,050 in criminal fines and restitution. Two investigations were closed during the year. The OIG also issued two semiannual reports to Congress and performed approximately 50 reviews of legislation and regulations related to the operations of the Board and/or the OIG.
For more information, visit the OIG website at
www.federalreserve.gov/oig/
.
Table 1. OIG audit, inspection, and evaluation reports issued in 2010 Report titleMonth issuedMaterial Loss Review of Neighborhood Community BankJanuaryMaterial Loss Review of Community Bank of West GeorgiaJanuaryMaterial Loss Review of BankFirstFebruaryMaterial Loss Review of Community First BankMarchMaterial Loss Review of CapitalSouth BankMarchMaterial Loss Review of Community Bank of NevadaMarchFederal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2009 and 2008, and Independent Auditors' ReportMarchBoard of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2009 and 2008, and Independent Auditors' ReportMarchMaterial Loss Review of Warren BankAprilMaterial Loss Review of Irwin Union Bank and TrustAprilMaterial Loss Review of Bank of ElmwoodMayMaterial Loss Review of San Joaquin BankMayMaterial Loss Review of Orion BankJuneMaterial Loss Review of SolutionsBankJuneSecurity Control Review of the Lotus Notes and Lotus Domino Infrastructure (Internal Report)JuneMaterial Loss Review of Barnes Banking CompanySeptemberReview of the Failure of Marco Community BankSeptemberAudit of the Board's Information Security ProgramNovemberThe Federal Reserve's Section 13(3) Lending Facilities to Support Overall Market Liquidity: Function, Status, and Risk ManagementNovemberMaterial Loss Review of Midwest Bank and Trust CompanyDecemberSecurity Control Review of the Internet Electronic Submission System (Internal Report)December
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Government Accountability Office Reviews
The Federal Banking Agency Audit Act (Pub. L. No. 95-320) authorizes the Government Accountability Office (GAO) to audit certain aspects of Federal Reserve System operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs GAO to conduct additional audits with respect to these operations. For example, under the Dodd-Frank Act, GAO is required to conduct a one-time audit of the existing credit facilities established by the Federal Reserve under section 13(3) of the Federal Reserve Act between December 1, 2007, and July 21, 2010. GAO is instructed to examine the involvement of the Reserve Banks in the establishment and operation of any such emergency facility or program. The Dodd-Frank Act also instructs GAO to conduct operational audits of all future credit facilities established under section 13(3), and of discount window and open market transactions engaged in after July 21, 2010. However, GAO is prohibited from disclosing participant- and transaction-specific information until the Federal Reserve Board is required to disclose this information. Additionally, GAO is required to complete an audit of Reserve Bank governance no later than July 21, 2011.
In 2010, the GAO completed eight reports on selected aspects of Federal Reserve operations (table 1). In addition, 10 projects concerning the Federal Reserve were in various stages of completion at year-end, 5 of which were required under the Dodd-Frank Act (table 2). The Federal Reserve also provided information to the GAO during the year on numerous other GAO investigations, including 4 completed reviews and 15 ongoing reviews, 8 of which resulted from the Dodd-Frank Act. The reports are available directly from the GAO website.
Table 1. Reports completed during 2010 Report titleReport numberMonth issued (2010)Troubled Asset Relief Program: Treasury Needs to Strengthen Its Decision-Making Process on the Term Asset-Backed Securities Loan FacilityGAO-10-25FebruaryFederal Deposit Insurance Act: Regulators' Use of Systemic Risk Exception Raises Moral Hazard Concerns and Opportunities Exist to Clarify the ProvisionGAO-10-100AprilTroubled Asset Relief Program: Update of Government Assistance Provided to AIGGAO-10-475AprilFederal Reserve Banks: Areas for Improvement in Information Security ControlsGAO-10-640RAprilFinancial Assistance: Ongoing Challenges and Guiding Principles Related to Government Assistance for Private Sector CompaniesGAO-10-719AugustTroubled Asset Relief Program: Bank Stress Test Offers Lessons as Regulators Take Further Actions to Strengthen Supervisory OversightGAO-10-861SeptemberTroubled Asset Relief Program: Opportunities Exist to Apply Lessons Learned from the Capital Purchase Program to Similarly Designed Programs and to Improve the Repayment ProcessGAO-11-47OctoberFinancial Audit: Bureau of the Public Debt's Fiscal Years 2010 and 2009 Schedules of Federal DebtGAO-11-52November
Table 2. Projects active at year-end 2010 Subject of projectMonth initiated (2010)Second Anniversary TARP ReportMarchTroubled Asset Relief Program: Update of AIG indicatorsMayAIG federal assistanceMayBank examinations and creditsJuneReserve bank governanceJulyPrompt corrective actionJulyEmergency lending and other facilitiesJulyProprietary tradingOctoberOverseeing mortgage servicer foreclosure proceduresOctoberCapital requirementsDecember
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