In 2008, the Company reported a net loss of $8,443.2 million, compared with a net loss of $65.7 million in 2007 and net income of $424.2 million in 2006, primarily due to $8,397.9 million of other than temporary impairment ("OTTI") charges in the FP investment portfolio supporting FSA-insured GICs (the "FP Investment Portfolio"). Of the FP investment portfolio OTTI, $797.5 million was considered economic credit impairment at December 31, 2008. In prior years, unrealized gains and losses in the FP Investment Portfolio and the portfolio of investments supporting the variable interest entity ("VIE") liabilities (the "VIE Investment Portfolio") were generally recorded in other comprehensive income, based in part on the Company's ability and intent to hold the FP Segment Investment Portfolio to maturity and the Company's conclusion that the unrealized losses were temporary. The FP Investment Portfolio and VIE Investment Portfolio together make up the "FP Segment Investment Portfolio." See "-Expected Sale of the Company-Dexia's Retention of the FP Business."
Concerns regarding the capital adequacy of Triple-A guarantors have drawn attention not only from rating agencies but also state regulators, the federal government and financial institutions concerned about their own exposure to monolines. In September 2008, the New York Insurance Department issued a circular letter, effective January 1, 2009, that prescribes best practices for financial guaranty issuers that would significantly narrow the permitted scope of insurance of asset-backed securities, a business no longer pursued by the Company. There also have been proposals for a federal
The Company has evaluated all its U.S. RMBS of 2005 vintage or later, in both the insured portfolio and the FP Investment Portfolio, using the same modeling assumptions and the same approach to setting transaction default assumptions, driven by the actual performance of each transaction. The Company is also closely monitoring the consumer and corporate sectors for signs of deepening economic stress.
Viewed at a policy level, installment premiums and credit derivative fees are generally calculated as a fixed premium rate multiplied by the estimated or expected insured debt outstanding as of dates established by the terms of the policy. Because the actual installment premiums and credit derivative fees received could vary from the amount estimated at the time of origination based on variances in the actual versus estimated outstanding debt balances and foreign exchange rate fluctuations, the realization of PV financial guaranty originations could be greater or less than the amount reported.
Prior to ceasing to insure asset-backed securities in August 2008, the Company sold credit protection by insuring CDS contracts under which special purpose entities or other parties provided credit protection to various financial institutions. In certain cases the Company acquired back-to-back credit protection on all or a portion of the risk written, primarily by reinsuring its CDS guaranties. Management viewed these CDS contracts as part of its financial guarantee business, under which the Company generally intends to hold its written and purchased positions for the entire term of the related contracts. These CDS contracts are accounted for at fair value since they do not qualify for the financial guarantee scope exception under SFAS 133.
Global is a special purpose funding vehicle partially owned by a subsidiary of FSA Holdings. FSA Global issues FSA-insured medium term notes and generally invests the proceeds from the sale of its notes in FSA-insured GICs or other FSA-insured obligations with a view to realizing the yield difference between the notes issued and the obligations purchased with the note proceeds. Premier is principally engaged in leveraged lease transactions. The GIC Subsidiaries, FSAM, FSA-PAL, FSA Global and Premier are collectively referred to as the "FP segment."
The present value of loss amounts calculated for the current-year originations plus an amount representing the accretion of discount pertaining to prior-year originations are charged to loss expense and increase the non-specific loss reserve after adjustments that may be made to reflect observed favorable or adverse experience. The entire non-specific reserve is available to absorb probable losses inherent in the portfolio.
The Company enters into derivative contracts to manage interest rate and foreign currency risks associated with the Company's FP Segment Investment Portfolio and FP segment debt. The derivatives are recorded at fair value and generally include interest rate futures and interest rate and currency swap agreements, which are primarily utilized to convert the Company's fixed rate securities in the FP Segment Investment Portfolio and FP segment debt into U.S.-dollar floating rate assets and liabilities.
The Company uses valuation techniques that it concludes are appropriate in the specific circumstances and for which sufficient data are available. In selecting the valuation technique to apply, management considers the definition of an exit price and considers the nature of the asset or liability being valued.
The table below includes a rollforward of the balance sheet amounts for financial instruments classified by the Company within Level 3 of the valuation hierarchy for the year ended December 31, 2008. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable data to the overall fair value measurement. However, Level 3 financial instruments may include, in addition to the unobservable or Level 3 components, observable components. Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.
(1)Excludes $1.3 billion of draws on the First Dexia Line of Credit outstanding as of December 31, 2008.
The components of the net change in the fair value of credit derivatives are shown in the table below:
(1)Upon the adoption of SFAS 157, $40.9 million pre-tax, or $26.6 million after tax, was recorded as an adjustment to beginning retained earnings related to credit derivatives.
Director Share Purchase Program are in discussions with Dexia regarding the proper valuation of such shares, which may lead to mediation or arbitration of the dispute.
(c)County of San Diego v. Bank of America, N.A. (filed on or about August 28, 2008 in the Superior Court of the State of California in and for the County of Los Angeles, Case No. SC 99566, removed to C.D. Cal. as Case No. 2:08-cv-6283, transferred to S.D.N.Y. as Case No. 1:09-cv-1195);
(e)County of Contra Costa v. Bank of America, N.A. (filed on or about October 8, 2008 in the Superior Court of the State of California in and for the County of San Francisco, Case No. CGC-08-480733, removed to N.D. Cal. as Case No. 4:08-cv-4752, transferred to S.D.N.Y. as Case No. 1:09-cv-1197).
At December 31, 2007, FSA repaid its entire surplus note obligation of $108.9 million to FSA Holdings. In addition, FSA Holdings forgave all interest expense for 2007, which totaled $5.0 million, including $3.6 million already paid by FSA and $1.4 million of accrued interest. FSA Holdings recontributed to FSA the proceeds from the repayment of the surplus note plus the amount of interest expense already paid. All surplus note transactions were approved by the New York Superintendent. FSA paid surplus note interest of $5.4 million in 2006.
•surplus notes are recognized as surplus rather than as a liability unless approved for repayment; and