Bank One Corporation - Page 162

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          FNBC adjusts midmarket value by the presumed market value of                
          future administrative costs, reestimates the value each period,             
          and reduces or increases income by the change in value is                   
          consistent with mark-to-market accounting.  We do not believe               
          that the procedures used by FNBC reflected fair market value.               
                    2.  Incremental Costs                                             
               FNBC calculated its administrative costs adjustments by                
          using fully allocated costs.  The Court-appointed experts                   
          testified that the administrative costs’ impact on the value of a           
          swap is no more than the marginal (incremental) costs to                    
          administer the swap.  We agree.  FNBC’s method is incorrect in              
          that only incremental costs affect fair market value.                       
               In contrast to fixed costs such as general overhead costs,             
          the incremental costs of a swap are the additional costs                    
          associated with acquiring the swap.  FNBC’s approach, which used            
          general overhead from its other departments as part of its                  
          administrative costs adjustment, is wrong.  For a dealer of                 
          swaps, general overhead is not an incremental cost.  General                
          overhead generally consists of the costs that would occur whether           
          or not additional swaps would be acquired.  When a dealer is                
          considering whether to acquire a swap, only incremental costs               
          would affect the prices at which the dealers would be willing to            
          trade by reducing the present value of the cashflows associated             
          with acquiring the swap.                                                    






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Last modified: May 25, 2011