JP Morgan Chase 2008 Annual Report Download - page 29

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$100 billion in assets) have the capacity to remain
properly capitalized in a highly stressed environment.
The government’s adverse economic environment
envisions a two-year recession, where unemployment
reaches 10.4% and the housing price index declines
48% from peak to trough. While some banks may need
additional capital or support, a successful completion
of the stress test program should eliminate the need to
guess which banks are properly capitalized and which
are not. In the best case, it will affirm the banks’ capi-
tal, accounting and reserve ratios, which will remove
uncertainty in the marketplace and increase financial
stability. (Unfortunately, the announcement of the
stress test, which is expected to be presented in late
April, is causing enormous consternation in the mar-
kets that would have been better to avoid.)
We regularly do stress tests for our company, always
projecting forward our capital and liquidity. We think
our capital ratios will maintain their extremely strong
levels throughout the government’s “adverse economic
environment.”
You also should know that your company will be
prepared for an environment even worse than the one
just described.
F. Recent government actions and the potential
power of concerted efforts
Governments around the world have taken dramatic
actions during this crisis. The Federal Reserve and
Treasury of the United States have provided $5 tril-
lion of liquidity facilities to finance various types of
assets and – to stabilize individual companies and the
overall system – have guaranteed almost $1 trillion of
assets on the balance sheets of certain institutions
and injected $1 trillion of capital into the financial
system. In addition, the government is trying to
reduce the mortgage rate by buying mortgages,
making it easier to refinance; reducing consumer
payments; and aggressively pushing mortgage
modification programs. We believe the recent Term
Asset-Backed Securities Loan Facility, or TALF
program, which allows private investors to get non-
recourse financing on asset-backed securities, will
aid the securitization markets. This program eventual-
ly may lend up to $1 trillion to finance new securi-
tized loans. It can also be modified and extended
as appropriate. It should be noted that many of the
government’s programs are not only replacing bank
lending but are also filling the gaps left by many of
the nonbank lenders in the capital markets.
We know that these government actions will have
unintended consequences and can lead to political
interference and that we will need to remove these
forms of support over time, intelligently. All these
concerns add to our worries, particularly about poten-
tial future inflation, but we’ll reserve such a discus-
sion for another time.
There is no silver bullet: We believe that all of these
actions, if implemented properly and executed – in a
timely way and in conjunction with the U.S. fiscal
stimulus program – could have an enormous positive
impact. The sum of the parts can be a lot more power-
ful than each individual action.
We see that the largest global economic downturn is
being met with massive global government actions –
and while the specific outcome is uncertain, there is
good reason to think that the governments will even-
tually win.
This country has had its defining moments: the Civil
War; the Great Depression; World War II. This may
also be one of them. President Abraham Lincoln said,
“A house divided against itself cannot stand.” Just as
our military acts in concert – across the Army, Navy,
Air Force and Marines, under one commander-in-chief
– now, so too, should we. This means coordination
across the House and Senate, Democrats and Republi-
cans. If we rise to the challenge now, we will prevail.