JP Morgan Chase 2006 Annual Report Download - page 134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
132 JPMorgan Chase & Co. / 2006 Annual Report
Over the next 12 months, it is expected that $67 million (after-tax) of net
losses recorded in Other comprehensive income at December 31, 2006, will
be recognized in earnings. The maximum length of time over which forecasted
transactions are hedged is 10 years, and such transactions primarily relate to
core lending and borrowing activities.
JPMorgan Chase does not seek to apply hedge accounting to all of the Firm’s
economic hedges. For example, the Firm does not apply hedge accounting to
standard credit derivatives used to manage the credit risk of loans and com-
mitments because of the difficulties in qualifying such contracts as hedges
under SFAS 133. Similarly, the Firm does not apply hedge accounting to cer-
tain interest rate derivatives used as economic hedges.
Note 29 – Off–balance sheet lending-related
financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments
and guarantees) to meet the financing needs of its customers. The contractual
amount of these financial instruments represents the maximum possible credit
risk should the counterparty draw down the commitment or the Firm fulfill its
obligation under the guarantee, and the counterparty subsequently fail to per-
form according to the terms of the contract. Most of these commitments and
guarantees expire without a default occurring or without being drawn. As a
result, the total contractual amount of these instruments is not, in the Firm’s
view, representative of its actual future credit exposure or funding require-
ments. Further, certain commitments, primarily related to consumer financings,
are cancelable, upon notice, at the option of the Firm.
To provide for the risk of loss inherent in wholesale-related contracts, an
allowance for credit losses on lending-related commitments is maintained.
See Note 13 on pages 113–114 of this Annual Report for further discussion of
the allowance for credit losses on lending-related commitments.
The following table summarizes the contractual amounts of off–balance
sheet lending-related financial instruments and guarantees and the related
allowance for credit losses on lending-related commitments at December 31,
2006 and 2005:
Off–balance sheet lending-related financial instruments
and guarantees
Allowance for
Contractual lending-related
amount commitments
December 31, (in millions) 2006 2005 2006 2005
Lending-related
Consumer(a) $ 747,535 $ 655,596 $25 $15
Wholesale:
Other unfunded commitments
to extend credit(b)(c)(d) 229,204 208,469 305 208
Asset purchase agreements(e) 67,529 31,095 63
Standby letters of credit
and guarantees(c)(f)(g) 89,132 77,199 187 173
Other letters of credit(c) 5,559 4,346 11
Total wholesale 391,424 321,109 499 385
Total lending-related $1,138,959 $ 976,705 $ 524 $ 400
Other guarantees
Securities lending guarantees(h) $ 318,095 $ 244,316 NA NA
Derivatives qualifying as
guarantees 71,531 61,759 NA NA
(a) Includes Credit card lending-related commitments of $657 billion at December 31, 2006,
and $579 billion at December 31, 2005, which represent the total available credit to the
Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its
cardholders will utilize their entire available lines of credit at the same time. The Firm can
reduce or cancel a credit card commitment by providing the cardholder prior notice or, in
some cases, without notice as permitted by law.
(b) Includes unused advised lines of credit totaling $39.0 billion and $28.3 billion at December
31, 2006 and 2005, respectively, which are not legally binding. In regulatory filings with the
Federal Reserve Board, unused advised lines are not reportable.
(c) Represents contractual amount net of risk participations totaling $32.8 billion and $29.3
billion at December 31, 2006 and 2005, respectively.
(d) Excludes unfunded commitments to private third-party equity funds of $589 million and
$242 million at December 31, 2006, and December 31, 2005, respectively.
(e) Represents asset purchase agreements with the Firm’s administered multi-seller asset-
backed commercial paper conduits, which excludes $356 million and $32.4 billion at
December 31, 2006 and 2005, respectively, related to conduits that were consolidated in
accordance with FIN 46R, as the underlying assets of the conduits are reported in the Firm’s
Consolidated balance sheets. It also includes $1.4 billion and $1.3 billion of asset purchase
agreements to other third-party entities at December 31, 2006 and 2005, respectively.
Certain of the Firm’s administered multi-seller conduits were deconsolidated as of June
2006; the assets deconsolidated were approximately $33 billion.
(f) JPMorgan Chase held collateral relating to $13.5 billion and $9.0 billion of these arrange-
ments at December 31, 2006 and 2005, respectively.
(g) Includes unused commitments to issue standby letters of credit of $45.7 billion and $37.5
billion at December 31, 2006 and 2005, respectively.
(h) Collateral held by the Firm in support of securities lending indemnification agreements was
$317.9 billion and $245.0 billion at December 31, 2006 and 2005, respectively.
Other unfunded commitments to extend credit
Unfunded commitments to extend credit are agreements to lend only when a
customer has complied with predetermined conditions, and they generally
expire on fixed dates.
FIN 45 establishes accounting and disclosure requirements for guarantees,
requiring that a guarantor recognize, at the inception of a guarantee, a liability
in an amount equal to the fair value of the obligation undertaken in issuing
the guarantee. FIN 45 defines a guarantee as a contract that contingently
requires the guarantor to pay a guaranteed party, based upon: (a) changes in
an underlying asset, liability or equity security of the guaranteed party; or (b) a
third party’s failure to perform under a specified agreement. The Firm considers
the following off–balance sheet lending arrangements to be guarantees under
FIN 45: certain asset purchase agreements, standby letters of credit and financial
guarantees, securities lending indemnifications, certain indemnification agree-
ments included within third-party contractual arrangements and certain deriva-
tive contracts. These guarantees are described in further detail below.
The fair value at inception of the obligation undertaken when issuing the
guarantees and commitments that qualify under FIN 45 is typically equal to
the net present value of the future amount of premium receivable under the
contract. The Firm has recorded this amount in Other Liabilities with an off-
setting entry recorded in Other Assets. As cash is received under the contract,
it is applied to the premium receivable recorded in Other Assets, and the
fair value of the liability recorded at inception is amortized into income as
Lending & deposit related fees over the life of the guarantee contract. The
amount of the liability related to FIN 45 guarantees recorded at December 31,
2006 and 2005, excluding the allowance for credit losses on lending-related
commitments and derivative contracts discussed below, was approximately
$297 million and $313 million, respectively.
Asset purchase agreements
The majority of the Firm’s unfunded commitments are not guarantees as
defined in FIN 45, except for certain asset purchase agreements that are prin-
cipally used as a mechanism to provide liquidity to SPEs, primarily multi-seller
conduits, as described in Note 15 on pages 118–120 of this Annual Report.
Some of these asset purchase agreements can be exercised at any time by
the SPE’s administrator, while others require a triggering event to occur.
Triggering events include, but are not limited to, a need for liquidity, a decline