JP Morgan Chase 2009 Annual Report Download - page 100

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report
98
and trading strategies. Management believes cash flows from
operations, available cash balances and the Firm’s ability to
generate cash through short- and long-term borrowings are
sufficient to fund the Firm’s operating liquidity needs.
For the years ended December 31, 2009 and 2008, net cash pro-
vided by operating activities was $121.9 billion and $23.1 billion,
respectively, while for the year ended December 31, 2007, net cash
used in operating activities was $110.6 billion. In 2009, the net
decline in trading assets and liabilities was affected by balance
sheet management activities and the impact of the challenging
capital markets environment that existed at December 31, 2008,
and continued into the first half of 2009. In 2009 and 2008, net
cash generated from operating activities was higher than net in-
come, largely as a result of adjustments for non-cash items such as
the provision for credit losses. In addition, for 2009 and 2008
proceeds from sales, securitizations and paydowns of loans origi-
nated or purchased with an initial intent to sell were higher than
cash used to acquire such loans, but the cash flows from these loan
activities remained at reduced levels as a result of the lower activity
in these markets since the second half of 2007.
For the year ended December 31, 2007, the net cash used in trad-
ing activities reflected a more active capital markets environment,
largely from client-driven market-making activities. Also during
2007, cash used to originate or purchase loans held-for-sale was
higher than proceeds from sales, securitizations and paydowns of
such loans, although these activities were affected by a significant
deterioration in liquidity in the second half of 2007.
Cash flows from investing activities
The Firm’s investing activities predominantly include originating
loans to be held for investment, the AFS securities portfolio and
other short-term interest-earning assets. For the year ended
December 31, 2009, net cash of $29.4 billion was provided by
investing activities, primarily from: a decrease in deposits with
banks reflecting lower demand for inter-bank lending and lower
deposits with the Federal Reserve Bank relative to the elevated
levels at the end of 2008; a net decrease in the loan portfolio
across most businesses, driven by continued lower customer
demand and loan sales in the wholesale businesses, lower charge
volume on credit cards, slightly higher credit card securitizations,
and paydowns; and the maturity of all asset-backed commercial
paper issued by money market mutual funds in connection with
the AML facility of the Federal Reserve Bank of Boston. Largely
offsetting these cash proceeds were net purchases of AFS securi-
ties associated with the Firm’s management of interest rate risk
and investment of cash resulting from an excess funding position.
For the year ended December 31, 2008, net cash of $283.7
billion was used in investing activities, primarily for: increased
deposits with banks as the result of the availability of excess cash
for short-term investment opportunities through interbank lend-
ing, and reserve balances held by the Federal Reserve (which
became an investing activity in 2008, reflecting a policy change of
the Federal Reserve to pay interest to depository institutions on
reserve balances); net purchases of investment securities in the
AFS portfolio to manage the Firm’s exposure to interest rate
movements; net additions to the wholesale loan portfolio from
organic growth in CB; additions to the consumer prime mortgage
portfolio as a result of the decision to retain, rather than sell, new
originations of nonconforming prime mortgage loans; an increase
in securities purchased under resale agreements reflecting growth
in demand from clients for liquidity; and net purchases of asset-
backed commercial paper from money market mutual funds in
connection with the AML facility of the Federal Reserve Bank of
Boston. Partially offsetting these uses of cash were proceeds from
loan sales and securitization activities as well as net cash received
from acquisitions and the sale of an investment. Additionally, in
June 2008, in connection with the Bear Stearns merger, the Firm
sold assets acquired from Bear Stearns to the FRBNY and received
cash proceeds of $28.85 billion.
For the year ended December 31,2007, net cash of $74.2 billion
was used in investing activities, primarily for: funding purchases in
the AFS securities portfolio to manage the Firm’s exposure to
interest rate movements; net additions to the wholesale retained
loan portfolios in IB, CB and AM, mainly as a result of business
growth; a net increase in the consumer retained loan portfolio,
primarily reflecting growth in RFS in home equity loans and net
additions to the RFS’s subprime mortgage loans portfolio (which
was affected by management’s decision in the third quarter to
retain (rather than sell) new subprime mortgages); growth in prime
mortgage loans originated by RFS and AM that were not eligible to
be sold to U.S. government agencies or U.S. government-sponsored
enterprises; and increases in securities purchased under resale
agreements as a result of a higher level of cash that was available
for short-term investment opportunities in connection with the
Firm’s efforts to build liquidity. These net uses of cash were partially
offset by cash proceeds received from sales and maturities of AFS
securities and from credit card, residential mortgage, student and
wholesale loan sales and securitization activities.
Cash flows from financing activities
The Firm’s financing activities primarily reflect cash flows related to
raising customer deposits, and issuing long-term debt (including
trust preferred capital debt securities) as well as preferred and
common stock. In 2009, net cash used in financing activities was
$152.2 billion; this reflected a decline in wholesale deposits, pre-
dominantly in TSS, driven by the continued normalization of whole-
sale deposit levels resulting from the mitigation of credit concerns,
compared with the heightened market volatility and credit concerns
in the latter part of 2008; a decline in other borrowings, due to the
absence of borrowings from the Federal Reserve under the Term
Auction Facility program; net repayments of advances from Federal
Home Loan Banks and the maturity of the nonrecourse advances
under the Federal Reserve Bank of Boston AML Facility; the June
17, 2009, repayment in full of the $25.0 billion principal amount of
Series K Preferred Stock issued to the U.S. Treasury; and the pay-
ment of cash dividends on common and preferred stock. Cash was
also used for the net repayment of long-term debt and trust pre-