Bank One Corporation - Page 157

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          payment and closeout netting contract becomes bankrupt or                   
          insolvent, payment and closeout netting reduces credit exposure             
          of the nondefaulting party to the bankrupt counterparty.                    
               FNBC had a program that took netting into account but                  
          apparently chose not to use it.  FNBC’s failure to take netting             
          into account in determining its credit adjustments overestimated            
          the credit adjustments and did not reflect the true value of its            
          swaps.  In fact, FNBC acknowledged as much in its annual                    
          statements when it reported that the credit exposure amount was             
          overstated because FNBC ignored the effects of netting and other            
          credit enhancements.                                                        
                    7.  Static or Dynamic Procedure                                   
               FNBC ascertained its credit adjustments using a static                 
          procedure.  Petitioner argues that FNBC’s static procedure was              
          reasonable and consistent with industry practices and did not               
          overstate the credit adjustments compared to a dynamic model.               
          Petitioner asserts that the G-30 report endorsed the use of                 
          straight-line amortization of a credit adjustment over the life             
          of the related transaction as the most common approach in the               
          industry.                                                                   
               We believe that a static procedure such as that used by FNBC           
          is contrary to the requirement of section 475 that a swap be                
          marked to market at each yearend.  FNBC’s static procedure failed           
          to reflect (1) the changing market value of credit risk,                    






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Last modified: May 25, 2011