JP Morgan Chase 2008 Annual Report Download - page 91

JPMorgan Chase & Co./ 2008 Annual Report 89
Liquidity of the parent holding company and its nonbank subsidiaries
is monitored independently as well as in conjunction with the liquidity
of the Firm’s bank subsidiaries. At the parent holding company level,
long-term funding is managed to ensure that the parent holding
company has, at a minimum, sufficient liquidity to cover its obliga-
tions and those of its nonbank subsidiaries within the next 12
months. For bank subsidiaries, the focus of liquidity risk management
is on maintenance of unsecured and secured funding capacity suffi-
cient to meet on- and off-balance sheet obligations.
A component of liquidity management is the Firm’s contingency
funding plan. The goal of the plan is to ensure appropriate liquidity
during normal and stress periods. The plan considers various tempo-
rary and long-term stress scenarios where access to unsecured fund-
ing is severely limited or nonexistent, taking into account both on-
and off-balance sheet exposures, and separately evaluates access to
funds by the parent holding company and the Firm’s banks.
Funding
Sources of funds
The deposits held by the RFS, CB, TSS and AM lines of business are a
generally consistent source of funding for JPMorgan Chase Bank,
N.A. As of December 31, 2008, total deposits for the Firm were $1.0
trillion, compared with $740.7 billion at December 31, 2007. A sig-
nificant portion of the Firm’s deposits are retail deposits, which are
less sensitive to interest rate changes or market volatility and there-
fore are considered more stable than market-based (i.e., wholesale)
liability balances. The Washington Mutual transaction added approxi-
mately $159.9 billion of deposits to the Firm, a significant majority
of which are retail deposits. In addition, through the normal course
of business, the Firm benefits from substantial liability balances origi-
nated by RFS, CB, TSS and AM. These franchise-generated liability
balances include deposits and funds that are swept to on-balance
sheet liabilities (e.g., commercial paper, federal funds purchased and
securities loaned or sold under repurchase agreements), a significant
portion of which are considered to be stable and consistent sources
of funding due to the nature of the businesses from which they are
generated. For further discussions of deposit and liability balance
trends, see the discussion of the results for the Firm’s business seg-
ments and the Balance sheet analysis on pages 54–72 and 76–78,
respectively, of this Annual Report.
Additional sources of funding include a variety of unsecured short-
and long-term instruments, including federal funds purchased, certifi-
cates of deposits, time deposits, bank notes, commercial paper, long-
term debt, trust preferred capital debt securities, preferred stock and
common stock. Secured sources of funding include securities loaned
or sold under repurchase agreements, asset securitizations, borrow-
ings from the Federal Reserve (including discount window borrow-
ings, the Primary Dealer Credit Facility and the Term Auction Facility)
and borrowings from the Chicago, Pittsburgh and, as a result of the
Washington Mutual transaction, the San Francisco Federal Home
Loan Banks. However, the Firm does not view borrowings from the
Federal Reserve as a primary means of funding the Firm.
Issuance
Funding markets are evaluated on an ongoing basis to achieve an
appropriate global balance of unsecured and secured funding at
favorable rates. Generating funding from a broad range of sources in
a variety of geographic locations enhances financial flexibility and
limits dependence on any one source.
During 2008, JPMorgan Chase issued approximately $42.6 billion of
long-term debt for funding or capital management purposes, including
$20.8 billion of FDIC-guaranteed notes issued under the TLG Program.
The Firm also issued $28.0 billion of IB structured notes, the issuances
of which are generally client-driven and not for funding or capital
management purposes, as the proceeds from such transactions are
generally used to purchase securities to mitigate the risk associated
with structured note exposure. In addition, during the year, the Firm
issued $1.8 billion of trust preferred capital debt securities. During the
same period, the Firm redeemed or had maturities of $62.7 billion of
securities, including $35.8 billion of IB structured notes.
Preferred stock issuances included $6.0 billion and $1.8 billion of
noncumulative perpetual preferred stock issued on April 23 and
August 21, 2008, respectively, as well as preferred stock issued to
the U.S. Treasury on October 28, 2008, under the Capital Purchase
Program. In connection with preferred stock issuance under the
Capital Purchase Program, the Firm also issued to the U.S. Treasury
on October 28, 2008, a warrant to purchase up to 88,401,697
shares of the Firm’s common stock, at an exercise price of $42.42
per share, subject to certain antidilution and other adjustments. The
Firm has in the past, and may continue in the future, to repurchase
from time to time its debt or trust preferred capital debt securities in
open market purchases or privately negotiated transactions subject
to regulatory and contractual restrictions.
Finally, during 2008, the Firm securitized $21.4 billion of credit card
loans. The ability to securitize loans, and the associated gains on those
securitizations, are principally dependent upon the credit quality and
other characteristics of the assets securitized as well as upon prevailing
market conditions. Given the volatility and stress in the financial mar-
kets in the second half of 2008, the Firm did not securitize any resi-
dential mortgage loans, auto loans or student loans during 2008.
Replacement Capital Covenants
In connection with the issuance of certain of its trust preferred capi-
tal debt securities and noncumulative perpetual preferred stock, the
Firm entered into Replacement Capital Covenants (“RCCs”) granting
certain rights to the holders of “covered debt,” as defined in the
RCCs, that prohibit the repayment, redemption or purchase of the
trust preferred capital debt securities and noncumulative perpetual
preferred stock except, with limited exceptions, to the extent that
JPMorgan Chase has received, in each such case, specified amounts
of proceeds from the sale of certain qualifying securities. Currently
the Firm’s covered debt is its 5.875% Junior Subordinated Deferrable
Interest Debentures, Series O, due in 2035. For more information
regarding these covenants, reference is made to the respective RCCs
entered into by the Firm in connection with the issuances of such
trust preferred capital debt securities and noncumulative perpetual