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Insurance has been purchased to mitigate certain of these risks.</font></p> </div> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: right; OVERFLOW: hidden"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"> <!-- 28 Begin_Flowing_Text * DO NOT REMOVE OR EDIT --><font size= "2" face="Times New Roman">We are a minority equity investor in, and member of, several industry clearing or settlement exchanges through which foreign exchange, securities, or other transactions settle. Certain of these industry clearing or settlement exchanges require their members to guarantee their obligations and liabilities or to provide financial support in the event other partners do not honor their obligations. It is not possible to estimate a maximum potential amount of payments that could be required with such agreements.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i><u>Legal Proceedings</u></i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and potential legal actions, including actions brought on behalf of various classes of claimants, and regulatory matters. Claims for significant monetary damages are asserted in certain of these actions and proceedings. In regulatory enforcement matters, claims for disgorgement and the imposition of penalties and/or other remedial sanctions are possible. Due to the inherent difficulty of predicting the outcome of such matters, the Company cannot ascertain what the eventual outcome of these matters will be; however, on the basis of current knowledge and after consultation with legal counsel, we do not believe that enforceable judgments or settlements, if any, arising from pending or potential legal actions or regulatory matters, either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage, will have a material adverse effect on the consolidated financial position or liquidity of the Company, although they could have a material effect on net income for a given period. The Company intends to defend itself vigorously against all of the claims asserted in these legal actions.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed in the Company&#8217;s Form 8-K dated May&#160;17, 2007, the Federal Customs Service of the Russian Federation is pursuing a claim against The Bank of New York, now The Bank of New York Mellon (the &#8220;Bank&#8221;), a subsidiary of the Company. The claim is based on allegations relating to the previously disclosed Russian funds transfer matter, and alleges that the Bank violated U.S. law by failing to supervise and monitor funds transfer activities at the Bank. 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The Bank believes it has meritorious procedural and substantive defenses to the allegations in the Russian courts and also believes it has meritorious defenses to an attempted enforcement of a judgment outside the Russian Federation in countries in which the Bank has material assets if a judgment were to be entered in this matter by the Russian courts. The Bank has engaged in settlement discussions with representatives of the Customs Service and has indicated that the Bank is willing to accept a reasonable resolution of this matter, which reflects its lack of merit. There can be no assurance that a resolution will be reached.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed, the Bank filed a proof of claim on Jan.&#160;18, 2008, in the Chapter 11 bankruptcy of Sentinel Management Group, Inc. (&#8220;Sentinel&#8221;), seeking to recover approximately $312 million loaned to Sentinel and secured by securities and cash in an account maintained by Sentinel at the Bank. Pursuant to a Plan of Reorganization confirmed by the Bankruptcy Court on Dec. 8, 2008, $370 million of cash has been set aside as a reserve, to be used by the Bank if its proof of claim is allowed in the bankruptcy. On March&#160;3, 2008, the bankruptcy trustee filed an adversary complaint against the Company seeking to disallow the Bank&#8217;s claim and seeking damages against the Bank for allegedly aiding and abetting Sentinel insiders in misappropriating customer assets and improperly using them as collateral for the loan. The Company has learned from the Commodities Futures Trading Commission (&#8220;CFTC&#8221;) that it has opened an investigation of the Bank in connection with its relationship to Sentinel.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed in the Company&#8217;s 2007 Annual Report on Form&#160;10-K, the U.S. Securities and Exchange Commission (&#8220;SEC&#8221;) is investigating the trading activities of Pershing Trading Company LP (&#8220;Pershing&#8221;), a floor specialist, on two regional exchanges from 1999 to 2004.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed, in connection with the acquired JPMorgan Chase corporate trust business, the Bank was required to file various IRS information and withholding tax returns for 2006. 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Accordingly, the Company has no further exposure for potential tax reporting deficiencies attributable to the 2006 JPMorgan Chase corporate trust business.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed, in the fourth quarter of 2007, we also discovered that other business lines, including the legacy The Bank of New York corporate trust business, may have similar issues and initiated an extensive company-wide review to identify any inconsistencies in the supporting tax documentation. Any deficiencies that are identified will be promptly remediated. We made an initial disclosure of this matter to the IRS on a voluntary basis in the fourth quarter of 2007 and we continue to work diligently with the IRS to help resolve the matter. The Company recorded a $13 million reserve as of June&#160;30, 2009 which represents its estimate of the potential exposure from tax reporting inconsistencies based on the remediation status and discussions with the IRS to date.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed, during 2001 and 2002, we entered into various structured transactions that involved, among other things, the payment of U.K. corporate income taxes that were credited against our U.S. corporate income tax liability.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">On Sept. 30, 2008, as part of our closing agreement for the 1998-2002 federal audit cycle, the IRS designated one such transaction for litigation and we agreed to litigate in the U.S. Tax Court.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">The transaction involved payments of U.K. corporate income taxes that generated foreign tax credits over the 2001-2006 period. The IRS has indicated it intends to seek to disallow the foreign tax credits primarily on the basis the transaction lacked economic substance. We are prepared to vigorously defend our position.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">While we have not yet received a statutory notice of deficiency, during the second quarter of 2009 we deposited approximately $800 million with the IRS to mitigate interest costs that could arise with this disputed tax assessment. 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In the event the Company is unsuccessful in defending its position, the IRS has agreed not to assess underpayment penalties on this transaction.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Based on a probability assessment of various potential outcomes, we currently believe our accruals for tax liabilities are adequate for all open years. Probabilities and outcomes are reviewed as events unfold, and adjustments to the tax liabilities are made when appropriate.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed, the Company self-disclosed to the SEC that Mellon Financial Markets LLC (&#8220;MFM&#8221;) placed orders on behalf of issuers to purchase their own Auction Rate Securities. The SEC and certain state authorities, including the Texas State Securities Board, Florida Office of Financial Regulation, and the New York Attorney General are investigating these transactions. MFM is cooperating fully with the investigations.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">As previously disclosed, the Company became aware of circumstances suggesting that employees of Mellon Securities LLC (&#8220;Mellon Securities&#8221;), which executes orders to purchase and sell securities on behalf of Mellon Investor Services LLC, failed to comply with certain best execution and regulatory requirements in connection with agency cross trades. The Company self-disclosed this matter to the Financial Industry Regulatory Authority, Inc. (&#8220;FINRA&#8221;) and the SEC on a voluntary basis. In June 2009, the SEC obtained a formal order of investigation. 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Ivy Asset Management LLC (&#8220;Ivy&#8221;), a subsidiary that primarily manages funds-of-hedge-funds, has not had any funds-of-funds investments with Madoff since 2000. Several investment managers contracted with Ivy as a sub-advisor and one pension fund contracted with Ivy as investment manager; a portion of these funds were invested with Madoff and likely suffered losses as a result of the Madoff fraud.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">The Company and its affiliates, including Ivy, have received subpoenas and document requests in connection with a number of regulatory inquiries regarding Madoff and have been cooperating with these inquiries.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">The Company or its affiliates have been named in several civil lawsuits relating to certain investment funds that invested money with Madoff. 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MARGIN-BOTTOM: 0px; FONT-SIZE: 12px"> &#160;</p> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: left; OVERFLOW: hidden; MARGIN-RIGHT: 1%"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"><font size="2" face= "Times New Roman"><i>Trading activities (including trading derivatives)</i></font></p> <p style="MARGIN-TOP: 6px; MARGIN-BOTTOM: 0px"><font size="2" face= "Times New Roman">Our trading activities are focused on acting as a market maker for our customers. 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Based on certain assumptions, the VAR methodology is designed to</font></p> </div> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: right; OVERFLOW: hidden"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"> <!-- 28 Begin_Flowing_Text * DO NOT REMOVE OR EDIT --><font size= "2" face="Times New Roman">capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period for most instruments, utilizes a 99% confidence level, and incorporates the non-linear characteristics of options. 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MARGIN-BOTTOM: 0px"><font size= "1">&#160;</font></p> </div> <div> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: left; OVERFLOW: hidden; MARGIN-RIGHT: 1%"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"><font size="2" face= "ARIAL"><b>Note 16&#160;- Fair value measurement</b></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">We adopted SFAS 157 (ASC 820-10), (&#8220;Fair Value Measurement&#8221;), effective Jan. 1, 2008. SFAS 157 (ASC 820-10) 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 and establishes a framework for measuring fair value. It establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and expands the disclosures about instruments measured at fair value. SFAS 157 (ASC 820-10) requires consideration of a company&#8217;s own creditworthiness when valuing liabilities.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Effective Jan. 1, 2009, we adopted SFAS 157-4 (ASC 820-10), &#8220;Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly&#8221;. SFAS 157-4 (ASC 820-10) provides guidance on how to determine the fair value when the volume and level of activity for the asset or liability have significantly decreased and reemphasizes that the objective of a fair value measurement remains an exit price notion. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS 157 (ASC 820-10). It also requires additional disclosures for instruments within the scope of SFAS 157 (ASC 820-10) to include inputs and valuation techniques used, change in valuation techniques and related inputs, if any, and more disaggregated information relating to debt and equity securities.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">The amended standard provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of</font></p> </div> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: right; OVERFLOW: hidden"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"> <!-- 28 Begin_Flowing_Text * DO NOT REMOVE OR EDIT --><font size= "2" face="Times New Roman">significant judgment. The objective is to determine from weighted indicators of fair value a reasonable point within the range that is most representative of fair value under current market conditions.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">We also adopted SFAS 159 (ASC 825-10) (&#8220;The Fair Value Option for Financial Assets and Financial Liabilities&#8221;), effective Jan. 1, 2008. SFAS 159 (ASC 825-10) provides an option to elect fair value as an alternative measurement basis for selected financial assets, financial liabilities, unrecognized firm commitments and written loan commitments which are not subject to fair value under other accounting standards.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="ARIAL"><i>Determination of fair value</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Following is a description of our valuation methodologies for assets and liabilities measured at fair value. We have established processes for determining fair values. Fair value is based upon quoted market prices, where available. For financial instruments where quotes from recent exchange transactions are not available, we determine fair value based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Model-based pricing uses inputs of observable prices for interest rates, foreign exchange rates, option volatilities and other factors. Models are benchmarked and validated by an independent internal risk management function. Our valuation process takes into consideration factors such as counterparty credit quality, liquidity, concentration concerns, observability of model parameters and the results of stress tests. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Most derivative contracts are valued using internally developed models which are calibrated to observable market data and employ standard market pricing theory for their valuations. An initial &#8220;risk-neutral&#8221; valuation is performed on each position assuming time-discounting based on an AA credit curve. Then, to arrive at a fair value that incorporates counterparty credit risk, a credit adjustment is made to these results by discounting each trade&#8217;s expected exposures to the counterparty using the counterparty&#8217;s credit spreads, as implied by the credit default swap market. We also adjust expected liabilities to the counterparty using the Company&#8217;s</font></p> </div> <br clear="all" /> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px">&#160;</p> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: left; OVERFLOW: hidden; MARGIN-RIGHT: 1%"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"> <!-- 28 Begin_Flowing_Text * DO NOT REMOVE OR EDIT --><font size= "2" face="Times New Roman">own credit spreads, also implied by the credit default swap market. Accordingly, the valuation of our derivative position is sensitive to the current changes in our own credit spreads as well as those of our counterparties.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">In certain cases, we may face additional costs to exit large risk positions or recent prices may not be observable for instruments that trade in inactive or less active markets. The costs to exit large risk positions are based on evaluating the negative change in the market during the time it would take for us to bring those positions to normal market levels for those instruments. Upon evaluating the uncertainty in valuing financial instruments subject to liquidity issues, we make an adjustment to their value. The determination of the liquidity adjustment includes the availability of external quotes, the time since the latest available quote and the price volatility of the instrument.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Certain parameters in some financial models are not directly observable and, therefore, are based on managements&#8217; estimates and judgments. These financial instruments are normally traded less actively. Examples include certain credit products where parameters such as correlation and recovery rates are unobservable. We apply valuation adjustments to mitigate the possibility of error and revision in the model based estimate value.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">The methods described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. We believe our methods of determining fair value are appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="ARIAL"><i>Valuation hierarchy</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">SFAS 157 (ASC 820-10) establishes a three-level valuation hierarchy for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are described below.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i><u>Level 1</u></i>: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 assets and</font></p> </div> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: right; OVERFLOW: hidden"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"><font size="2" face= "Times New Roman">liabilities include debt and equity securities and derivative financial instruments actively traded on exchanges and U.S. Treasury securities and U.S. Government securities that are actively traded in highly liquid over the counter markets.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i><u>Level 2</u></i>: Observable inputs other than Level 1 prices, for example, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are observable or can be corroborated, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 assets and liabilities include debt instruments that are traded less frequently than exchange traded securities and derivative instruments whose model inputs are observable in the market or can be corroborated by market observable data. Examples in this category are certain variable and fixed rate agency and non-agency securities, corporate debt securities and derivative contracts.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i><u>Level 3</u></i>: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Examples in this category include interests in certain securitized financial assets, non-agency RMBS, certain private equity investments, and derivative contracts that are highly structured or long-dated.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">A financial instrument&#8217;s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i>Loans and unfunded lending-related commitments</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Where quoted market prices are not available, we generally base the fair value of loans and unfunded lending-related commitments on observable market prices of similar instruments, including bonds, credit derivatives and loans with similar characteristics. If observable market prices are not available, we base the fair value on estimated cash flows adjusted for credit risk which are discounted using an interest rate appropriate for the maturity of the applicable loans or the unfunded commitments.</font></p> </div> <br clear="all" /> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px">&#160;</p> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: left; OVERFLOW: hidden; MARGIN-RIGHT: 1%"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"><font size="2" face= "Times New Roman">Loans carried at fair value are included in trading assets on the balance sheet. Unrealized gains and losses on unfunded lending commitments carried at fair value are classified in Other assets and Other liabilities, respectively. 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Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain agency and non-agency mortgage-backed securities, commercial mortgage-backed securities and European floating rate notes.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">For securities where quotes from recent transactions are not available for identical securities, we determine fair value primarily based on pricing sources with reasonable levels of price transparency that employ financial models or obtain comparison to similar instruments to arrive at &#8220;consensus&#8221; prices.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Specifically, the pricing sources obtain recent transactions for similar types of securities (e.g., vintage, position in the securitization structure) and ascertain variables such as discount rate and speed of prepayment for the types of transaction and apply such variables to similar types of bonds. 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The pricing sources receive their daily observed trade price and other information feeds from the interdealer brokers.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">For securities with bond insurance, the financial strength of the insurance provider is analyzed and that information is included in the fair value assessment for such securities.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in Level 3 of the valuation hierarchy. Securities classified within Level 3 include certain asset-backed securities CDOs, non-agency RMBS and other retained interests in securitizations.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">In the first quarter of 2009, we changed our valuation technique in determining the fair value of certain securities when there has been a significant decline in volume and market activity.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Recent transactions in non-agency RMBS and commercial mortgage-backed securities may not reflect an orderly transaction in the marketplace. In adopting the guidance of SFAS 157-4 (ASC 820-10), for these securities, we adjust the discount rate to reflect &#8220;an orderly transaction&#8221; in the current marketplace. We used a discount rate that was determined based on our assessment of the credit quality of the non-agency RMBS and commercial mortgage-backed securities. The discount rate was derived based on input from market participants as to the appropriate discount rate for hypothetical bond issuances that exhibit certain credit features similar to the bonds we hold.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">To further reflect current market conditions, we weighted our internally modeled price with prices derived from pricing sources to calculate the fair market value in an orderly transaction. Depending on credit quality, the price weighting of the security ranged from 5% pricing source and 95% model to 85% pricing source and 15% model.</font></p> </div> <br clear="all" /> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px">&#160;</p> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: left; OVERFLOW: hidden; MARGIN-RIGHT: 1%"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"> <!-- 28 Begin_Flowing_Text * DO NOT REMOVE OR EDIT --><font size= "2" face="Times New Roman"><i>Other short-term U.S. government-backed commercial paper and borrowings from Federal Reserve related to asset-backed commercial paper</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">These instruments are classified in Level 2 of the valuation hierarchy. The fair value of these instruments is estimated using pricing models.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i>Derivatives</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">We classify exchange-traded derivatives valued using quoted prices in Level 1 of the valuation hierarchy. Examples include exchanged-traded equity and foreign exchange options. Since few other classes of derivative contracts are listed on an exchange, most of our derivative positions are valued using internally developed models that use as their basis readily observable market parameters and we classify them in Level 2 of the valuation hierarchy. Such derivatives include basic interest rate swaps and options and credit default swaps. Derivatives valued using models with significant unobservable market parameters and that are traded less actively or in markets that lack two way flow, are classified in Level 3 of the valuation hierarchy. Examples include long-dated interest rate or currency swaps, where swap rates may be unobservable for longer maturities; and certain credit products, where correlation and recovery rates are unobservable. Additional disclosures of derivative instruments are provided in Note 18 of Notes to Consolidated Financial Statements.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i>Seed capital</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">In our Asset Management segment we manage investment assets, including equities, fixed income, money market and alternative investment funds for institutions and other investors; as part of that activity we make seed capital investments in certain funds. Seed capital is included in trading assets, securities available-for-sale and other assets, depending on the nature of the investment. When applicable, we value seed capital based on the published net asset value (&#8220;NAV&#8221;) of the fund. We include funds in which ownership interests in the fund are publicly-traded in an active market and institutional funds in which investors trade in and out daily in Level 1 of the valuation hierarchy. We include open-end funds where investors are allowed to sell their ownership interest back to the fund less frequently than daily and where our interest in the fund contains no other rights or obligations</font></p> </div> <div style= "POSITION: relative; PADDING-BOTTOM: 8px; WIDTH: 48%; PADDING-RIGHT: 9px; FLOAT: right; OVERFLOW: hidden"> <p style="MARGIN-TOP: 0px; MARGIN-BOTTOM: 0px"> <!-- 28 Begin_Flowing_Text * DO NOT REMOVE OR EDIT --><font size= "2" face="Times New Roman">in Level 2 of the valuation hierarchy. 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To the extent the NAV measurements reported for the investments are based on unobservable inputs or include other rights and obligations (e.g., obligation to meet cash calls), we generally classify them in Level 3 of the valuation hierarchy.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i>Certain interests in securitizations</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">For certain interests in securitizations which are classified in securities available-for-sale and other assets, we use discounted cash flow models which generally include assumptions of projected finance charges related to the securitized assets, estimated net credit losses, prepayment assumptions and estimates of payments to third-party investors. When available, we compare our fair value estimates and assumptions to market activity and to the actual results of the securitized portfolio. Changes in these assumptions may significantly impact our estimate of fair value of the interests in securitizations; accordingly, we generally classify them in Level 3 of the valuation hierarchy.</font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman"><i>Private equity investments</i></font></p> <p style="MARGIN-TOP: 12px; MARGIN-BOTTOM: 0px"><font size="2" face="Times New Roman">Our Other segment includes holdings of nonpublic private equity investment through funds managed by third party investment managers and, to a lesser extent, direct investment in private equities. Nonpublic private equity investments generally lack quoted market prices, are less liquid and may be long term; accordingly, we must apply significant judgment in determining their fair value. 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