JP Morgan Chase 2008 Annual Report Download - page 81

JPMorgan Chase & Co. / 2008 Annual Report 79
in the SPE in order to provide liquidity. These commitments are
included in other unfunded commitments to extend credit and asset
purchase agreements, as shown in the Off-balance sheet lending-
related financial instruments and guarantees table on page 81 of
this Annual Report.
As noted above, the Firm is involved with three types of SPEs. A sum-
mary of each type of SPE follows.
Multi-seller conduits
The Firm helps customers meet their financing needs by providing
access to the commercial paper markets through variable interest
entities (“VIEs”) known as multi-seller conduits. Multi-seller conduit
entities are separate bankruptcy-remote entities that purchase inter-
ests in, and make loans secured by, pools of receivables and other
financial assets pursuant to agreements with customers of the Firm.
The conduits fund their purchases and loans through the issuance of
highly rated commercial paper to third-party investors. The primary
source of repayment of the commercial paper is the cash flow from
the pools of assets. JPMorgan Chase receives fees related to the
structuring of multi-seller conduit transactions and receives compen-
sation from the multi-seller conduits for its role as administrative
agent, liquidity provider, and provider of program-wide credit
enhancement.
Investor intermediation
As a financial intermediary, the Firm creates certain types of VIEs and
also structures transactions, typically derivative structures, with these
VIEs to meet investor needs. The Firm may also provide liquidity and
other support. The risks inherent in derivative instruments or liquidity
commitments are managed similarly to other credit, market and liquidi-
ty risks to which the Firm is exposed. The principal types of VIEs the
Firm uses in these structuring activities are municipal bond vehicles,
credit-linked note vehicles and collateralized debt obligation vehicles.
Loan securitizations
JPMorgan Chase securitizes and sells a variety of loans, including
residential mortgages, credit cards, automobile, student, and com-
mercial loans (primarily related to real estate). JPMorgan Chase-
sponsored securitizations utilize SPEs as part of the securitization
process. These SPEs are structured to meet the definition of a QSPE
(as discussed in Note 1 on page 134 of this Annual Report); accord-
ingly, the assets and liabilities of securitization-related QSPEs are not
reflected on the Firm’s Consolidated Balance Sheets (except for
retained interests, as described below). The primary purpose of these
vehicles is to meet investor needs and generate liquidity for the Firm
through the sale of loans to the QSPEs. These QSPEs are financed
through the issuance of fixed or floating-rate asset-backed securities
that are sold to third-party investors or held by the Firm.
Consolidation and consolidation sensitivity analysis on capital
For more information regarding these programs and the Firm’s other
SPEs, as well as the Firm’s consolidation analysis for these programs,
see Note 16 and Note 17 on pages 180–188 and 189–198, respec-
tively, of this Annual Report.
JPMorgan Chase is involved with several types of off-balance sheet
arrangements, including special purpose entities (“SPEs”) and lend-
ing-related financial instruments (e.g., commitments and guarantees).
Special-purpose entities
The basic SPE structure involves a company selling assets to the SPE.
The SPE funds the purchase of those assets by issuing securities to
investors in the form of commercial paper, short-term asset-backed
notes, medium-term notes and other forms of interest. SPEs are gen-
erally structured to insulate investors from claims on the SPE’s assets
by creditors of other entities, including the creditors of the seller of
the assets.
SPEs are an important part of the financial markets, providing market
liquidity by facilitating investors’ access to specific portfolios of
assets and risks. These arrangements are integral to the markets for
mortgage-backed securities, commercial paper and other asset-
backed securities.
JPMorgan Chase uses SPEs as a source of liquidity for itself and its
clients by securitizing financial assets, and by creating investment
products for clients. The Firm is involved with SPEs through multi-
seller conduits and investor intermediation activities, and as a result
of its loan securitizations, through qualifying special purpose entities
(“QSPEs”). This discussion focuses mostly on multi-seller conduits
and investor intermediation. For a detailed discussion of all SPEs with
which the Firm is involved, and the related accounting, see Note 1,
Note 16 and Note 17 on pages 134–145, 180–188 and 189–198,
respectively of this Annual Report.
The Firm holds capital, as deemed appropriate, against all SPE-relat-
ed transactions and related exposures, such as derivative transactions
and lending-related commitments and guarantees.
The Firm has no commitments to issue its own stock to support any
SPE transaction, and its policies require that transactions with SPEs
be conducted at arm’s length and reflect market pricing. Consistent
with this policy, no JPMorgan Chase employee is permitted to invest
in SPEs with which the Firm is involved where such investment
would violate the Firm’s Code of Conduct. These rules prohibit
employees from self-dealing and acting on behalf of the Firm in
transactions with which they or their family have any significant
financial interest.
Implications of a credit rating downgrade to JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, the Firm could be required
to provide funding if the short-term credit rating of JPMorgan Chase
Bank, N.A., was downgraded below specific levels, primarily “P-1”,
“A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respec-
tively. The amount of these liquidity commitments was $61.0 billion
and $94.0 billion at December 31, 2008 and 2007, respectively.
Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the
Firm could be replaced by another liquidity provider in lieu of provid-
ing funding under the liquidity commitment, or in certain circum-
stances, the Firm could facilitate the sale or refinancing of the assets
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS