JP Morgan Chase 2009 Annual Report Download - page 101

JPMorgan Chase & Co./2009 Annual Report 99
ferred capital debt securities, as issuances of FDIC-guaranteed debt
and non-FDIC guaranteed debt in both the U.S. and European
markets were more than offset by redemptions. Cash proceeds
resulted from an increase in securities loaned or sold under repur-
chase agreements, partly attributable to favorable pricing and to
financing the increased size of the Firm’s AFS securities portfolio;
and the issuance of $5.8 billion of common stock. There were no
repurchases in the open market of common stock or the warrants
during 2009.
In 2008, net cash provided by financing activities was $247.8
billion due to: growth in wholesale deposits, in particular, inter-
est- and noninterest-bearing deposits in TSS (driven by both new
and existing clients, and due to the deposit inflows related to the
heightened volatility and credit concerns affecting the global
markets that began in the third quarter of 2008), as well as
increases in AM and CB (due to organic growth); proceeds of
$25.0 billion from the issuance of preferred stock and the War-
rant to the U.S. Treasury under the Capital Purchase Program;
additional issuances of common stock and preferred stock used
for general corporate purposes; an increase in other borrowings
due to nonrecourse secured advances under the Federal Reserve
Bank of Boston AML Facility 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 client demand
for liquidity and to finance growth in the Firm’s AFS securities
portfolio; and a net increase in long-term debt due to a combina-
tion 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-quarter FDIC-guaranteed
debt issuance was offset partially by maturities of non-FDIC
guaranteed long-term debt during the same period. The increase
in long-term debt (including trust preferred capital debt securities)
was used primarily to fund certain illiquid assets held by the
parent holding company and to build liquidity. Cash was also
used to pay dividends on common and preferred stock. The Firm
did not repurchase any shares of its common stock during 2008.
In 2007, net cash provided by financing activities was $184.1
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 (including 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 ac-
counts in TSS and CB, and to fund trading positions and to fur-
ther build liquidity. Cash was used to repurchase common stock
and pay dividends on common stock.
Credit ratings
The cost and availability of financing are influenced by credit rat-
ings. 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 number 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 collat-
eral agreements, see Special-purpose entities on pages 86–87 and
Ratings profile of derivative receivables marked to market
(“MTM”), and Note 5 on page 111 and pages 175–183, respec-
tively, 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 disciplined liquidity monitoring procedures.
The credit ratings of the parent holding company and each of the Firm’s significant banking subsidiaries as of January 15, 2010, 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-
Ratings actions affecting the Firm
On March 4, 2009, Moody’s revised the outlook on the Firm to
negative from stable. This action was the result of Moody’s view
that the Firm’s ability to generate capital would be adversely af-
fected by higher credit costs due to the global recession. The rating
action by Moody’s in the first quarter of 2009 did not have a mate-
rial impact on the cost or availability of the Firm’s funding. At
December 31, 2009, Moody’s outlook remained negative.
Ratings from S&P and Fitch on JPMorgan Chase and its principal
bank subsidiaries remained unchanged at December 31, 2009,
from December 31, 2008. At December 31, 2009, S&P’s outlook
remained negative, while Fitch’s outlook remained stable.
Following the Firm’s earnings release on January 15, 2010, S&P
and Moody’s announced that their ratings on the Firm remained
unchanged.
If the Firm’s senior long-term debt ratings were downgraded by one
additional notch, the Firm believes the incremental cost of funds or
loss of funding would be manageable, within the context of current
market conditions and the Firm’s liquidity resources. JPMorgan
Chase’s unsecured debt does not contain requirements that would
call for an acceleration of payments, maturities or changes in the
structure of the existing debt, provide any limitations on future
borrowings or require additional collateral, based on unfavorable