JP Morgan Chase 2008 Annual Report Download - page 93

JPMorgan Chase & Co. / 2008 Annual Report 91
wholesale loan sales and securitization activities; sales and maturi-
ties of AFS securities; the net decline in auto loans, which was
caused partially by management’s decision to de-emphasize vehicle
leasing; and the sale of the insurance business at the beginning of
the second quarter.
Cash Flows from Financing Activities
The Firm’s financing activities primarily reflect cash flows related to
customer deposits, issuances of long-term debt and trust preferred
capital debt securities, and issuances of preferred and common
stock. In 2008, net cash provided by financing activities was $250.5
billion due to: growth in wholesale deposits, in particular, interest-
and noninterest-bearing deposits in TSS (driven by both new and
existing clients, and due to the deposit inflows related to the height-
ened volatility and credit concerns affecting the global markets), as
well as increases in AM and CB (due to organic growth); proceeds of
$25.0 billion from the issuance of preferred stock and a warrant to
the U.S. Treasury under the Capital Purchase Program; additional
issuances of common stock and preferred stock used for general cor-
porate purposes; an increase in other borrowings due to nonrecourse
secured advances from the Federal Reserve Bank of Boston to fund
the purchase of asset-backed commercial paper from money market
mutual funds; increases in federal funds purchased and securities
loaned or sold under repurchase agreements in connection with
higher short-term requirements to fulfill client demand for liquidity
and finance the Firm’s AFS securities inventory; and a net increase in
long-term debt due to a combination of non-FDIC guaranteed debt
and trust preferred capital debt securities issued prior to December
4, 2008, and the issuance of $20.8 billion of FDIC-guaranteed long-
term debt issued during the fourth quarter of 2008. The fourth-quar-
ter FDIC-guaranteed issuance was offset partially by maturities of
non-FDIC guaranteed long-term debt during the same period. The
increase in long-term debt and trust preferred capital debt securities
was used primarily to fund certain illiquid assets held by the parent
holding company and build liquidity. Cash was also used to pay divi-
dends on common and preferred stock. The Firm did not repurchase
any shares of its common stock in the open market during 2008 in
order to maintain its capital objectives.
In 2007, net cash provided by financing activities was $183.0 billion
due to a net increase in wholesale deposits from growth in business
volumes, in particular, interest-bearing deposits at TSS, AM and CB;
net issuances of long-term debt and trust preferred capital debt
securities primarily to fund certain illiquid assets held by the parent
holding company and build liquidity, and by IB from client-driven
structured notes transactions; and growth in commercial paper
issuances and other borrowed funds due to growth in the volume of
liability balances in sweep accounts in TSS and CB, and to fund trad-
ing positions and to further build liquidity. Cash was used to repur-
chase common stock and pay dividends on common stock, including
an increase in the quarterly dividend in the second quarter of 2007.
In 2006, net cash provided by financing activities was $152.7 billion
due to net cash received from growth in deposits, reflecting new
retail account acquisitions and the ongoing expansion of the retail
branch distribution network; higher wholesale business volumes;
increases in securities sold under repurchase agreements to fund
trading positions and higher AFS securities positions; and net
issuances of long-term debt and trust preferred capital debt securi-
ties. The net cash provided was offset partially by the payment of
cash dividends on stock and common stock repurchases.
Credit ratings
The cost and availability of financing are influenced by credit ratings.
Reductions in these ratings could have an adverse effect on the
Firm’s access to liquidity sources, increase the cost of funds, trigger
additional collateral or funding requirements and decrease the num-
ber of investors and counterparties willing to lend to the Firm.
Additionally, the Firm’s funding requirements for VIEs and other
third-party commitments may be adversely affected. For additional
information on the impact of a credit ratings downgrade on the
funding requirements for VIEs, and on derivatives and collateral
agreements, see Special-purpose entities on pages 79–80 and
Ratings profile of derivative receivables marked to market (“MTM”)
on page 100 of this Annual Report.
Critical factors in maintaining high credit ratings include a stable and
diverse earnings stream, strong capital ratios, strong credit quality
and risk management controls, diverse funding sources, and disci-
plined liquidity monitoring procedures.
The credit ratings of the parent holding company and each of the Firm’s significant banking subsidiaries as of January 15, 2009, were as follows.
Short-term debt Senior long-term debt
Moody’s S&P Fitch Moody’s S&P Fitch
JPMorgan Chase & Co. P-1 A-1 F1+ Aa3 A+ AA-
JPMorgan Chase Bank, N.A. P-1 A-1+ F1+ Aa1 AA- AA-
Chase Bank USA, N.A. P-1 A-1+ F1+ Aa1 AA- AA-