JP Morgan Chase 2008 Annual Report Download - page 43

JPMorgan Chase & Co./ 2008 Annual Report 41
EXECUTIVE OVERVIEW
This overview of management’s discussion and analysis highlights
selected information and may not contain all of the information that
is important to readers of this Annual Report. For a complete
description of events, trends and uncertainties, as well as the capital,
liquidity, credit and market risks, and the critical accounting esti-
mates affecting the Firm and its various lines of business, this
Annual Report should be read in its entirety.
Business overview
JPMorgan Chase reported 2008 net income of $5.6 billion, or $1.37
per share, and total net revenue of $67.3 billion, compared with
record net income of $15.4 billion, or $4.38 per share, and record
total net revenue of $71.4 billion, for 2007. Return on common equi-
ty was 4% in 2008, compared with 13% in 2007. Results in 2008
include the acquisition of The Bear Stearns Companies Inc. (“Bear
Stearns”) on May 30, 2008, and the acquisition of the banking oper-
ations of Washington Mutual Bank (“Washington Mutual”) on
September 25, 2008.
The decline in net income for the year was the result of a significant-
ly higher provision for credit losses, reflecting the addition of $13.7
billion to the Firm’s allowance for credit losses in 2008; a decline in
total net revenue driven by over $10 billion of markdowns on mort-
gage-related positions and leveraged lending exposures in the
Investment Bank; and an increase in total noninterest expense due
to the impact of the Washington Mutual transaction and the Bear
Stearns merger.
The business environment for financial services firms was extremely
challenging in 2008. The global economy slowed, with many coun-
tries, including the U.S., slipping into recession. Financial conditions
worsened throughout the year amid a number of unprecedented
developments that undermined the economic outlook and eroded
confidence in global financial markets. JPMorgan Chase acquired
Bear Stearns through a merger consummated in May and acquired
the banking operations of Washington Mutual from the Federal
Deposit Insurance Corporation (“FDIC”) in September. The U.S. feder-
al government placed the Federal Home Loan Mortgage Corporation
(“Freddie Mac”) and the Federal National Mortgage Association
(“Fannie Mae”) under its control. Lehman Brothers Holdings Inc.
declared bankruptcy. The Bank of America Corporation acquired
Merrill Lynch & Co., Inc. and Wells Fargo & Company acquired
Wachovia Corporation. The government provided a loan to American
International Group, Inc. (“AIG”) in exchange for an equity interest in
AIG to prevent the insurer’s failure. Morgan Stanley, The Goldman
Sachs Group, Inc., GMAC, American Express, Discover Financial
Services and CIT Group received approval from the Board of
Governors of the Federal Reserve System (the “Federal Reserve”) to
become federal bank holding companies. In other industries, the U.S.
government provided temporary loans to General Motors
Corporation and Chrysler LLC.
These events accompanied severe strains in term funding markets,
reflecting heightened concerns about counterparty risk. As a result,
LIBOR rates rose significantly in the fall, despite a round of coordinat-
ed rate cuts by a number of central banks. By year-end, LIBOR rates
eased in response to proposals to insure deposits and selected debt
of financial institutions. The turmoil in financial markets during 2008
led to tighter credit conditions and diminished liquidity, causing con-
sumers and businesses around the world to become more cautious
and curtail spending and investment activity. As a result, the U.S.
economy contracted sharply, 2.8 million jobs were lost in 2008, and
the U.S. unemployment rate rose significantly, to 7.2% by year-end.
The continued economic and financial disruption led the Federal
Reserve to reduce its target overnight interest rates to near zero in
the fourth quarter of 2008, capping off a year of near-continuous rate
reductions. In addition, the U.S. Department of the Treasury (the “U.S.
Treasury”), the Federal Reserve and the FDIC, working in cooperation
with foreign governments and other central banks, including the Bank
of England, the European Central Bank and the Swiss National Bank,
began, in the fourth quarter of 2008, to take a variety of extraordi-
nary measures designed to restore confidence in the financial markets
and strengthen financial institutions, including capital injections, guar-
antees of bank liabilities and the acquisition of illiquid assets from
banks. In particular, on October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant
to the EESA, the U.S. Treasury has the authority to take a range of
Financial performance of JPMorgan Chase
Year ended December 31,
(in millions, except per share and ratio data) 2008(c) 2007 Change
Selected income statement data
Total net revenue $ 67,252 $ 71,372 (6)%
Provision for credit losses(a) 20,979 6,864 206
Total noninterest expense 43,500 41,703 4
Income before extraordinary gain 3,699 15,365 (76)
Extraordinary gain(b) 1,906 —NM
Net income 5,605 15,365 (64)
Diluted earnings per share
Income before extraordinary gain $ 0.84 $ 4.38 (81)
Net income 1.37 4.38 (69)
Return on common equity
Income before extraordinary gain 2% 13%
Net income 4% 13%
(a) Includes an accounting conformity provision for credit losses of $1.5 billion related to
the acquisition of Washington Mutual Bank’s banking operations in 2008.
(b) JPMorgan Chase acquired the banking operations of Washington Mutual Bank from the
Federal Deposit Insurance Corporation (“FDIC”) for $1.9 billion. The fair value of the net
assets acquired from the FDIC exceeded the purchase price which resulted in negative
goodwill. In accordance with SFAS 141, nonfinancial assets that are not held-for-sale
were written down against that negative goodwill. The negative goodwill that remained
after writing down nonfinancial assets was recognized as an extraordinary gain in 2008.
The allocation of the purchase price to the net assets acquired (based on their respective
fair values at September 25, 2008) and the resulting negative goodwill may be modified
through September 25, 2009, as more information is obtained about the fair value of
assets acquired and liabilities assumed.
(c) On September 25, 2008, JPMorgan Chase acquired the banking operations of
Washington Mutual Bank. On May 30, 2008, the merger with The Bear Stearns
Companies, Inc. was consummated. Each of these transactions was accounted for as a
purchase and their respective results of operations are included in the Firm’s results from
each respective transaction date. For additional information on these transactions, see
Note 2 on pages 135–140 of this Annual Report.