JP Morgan Chase 2009 Annual Report Download - page 210

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 208
Securitization activity by major product type
The following discussion describes the nature of the Firm’s securiti-
zation activities by major product type.
Credit Card Securitizations
The Card Services (“CS”) business securitizes originated and pur-
chased credit card loans, primarily through the Chase Issuance
Trust (the “Trust”). In connection with the Washington Mutual
transaction, the Firm acquired the seller’s interest in the Washing-
ton Mutual Master Trust (the “WMM Trust”) and also became its
sponsor. The Firm’s primary continuing involvement in credit card
securitizations includes servicing the receivables, retaining an
undivided seller’s interest in the receivables, retaining certain senior
and subordinated securities and the maintenance of escrow ac-
counts. CS maintains servicing responsibilities for all credit card
securitizations that it sponsors. As servicer and transferor, the Firm
receives contractual servicing fees based on the securitized loan
balance plus excess servicing fees, which are recorded in credit card
income as discussed in Note 6 on page 184 of this Annual Report.
Actions taken in the second quarter of 2009
During the quarter ended June 30, 2009, the overall performance of
the Firm’s credit card securitization trusts declined, primarily due to
the increase in credit losses incurred on the underlying credit card
receivables.
Chase Issuance Trust: The Chase Issuance Trust (the Firm’s primary
issuance trust), which holds prime quality credit card receivables,
maintained positive excess spread, a key metric for evaluating the
performance of a card trust, through the first six months of 2009. In
spite of this positive excess spread, the Firm took certain actions, as
permitted by the Trust agreements, in the second quarter of 2009 to
enhance the performance of the Trust due to continuing market
uncertainty concerning projected credit costs in the credit card indus-
try, and to mitigate any further deterioration in the performance of
the Trust. On May 12, 2009, the Firm increased the required credit
enhancement level for each tranche of outstanding notes issued by
the Trust, by increasing the minimum required amount of subordi-
nated notes and the funding requirements for the Trust’s cash escrow
accounts. On June 1, 2009, the Firm began designating as “discount
receivables” a percentage of new credit card receivables for inclusion
in the Trust, thereby requiring collections of such discounted receiv-
ables to be applied as finance charge collections in the Trust, which
increased the excess spread for the Trust. The Firm expects to discon-
tinue designating a percentage of new receivables as discount receiv-
ables on July 1, 2010. Also, during the second quarter of 2009, the
Firm exchanged $3.5 billion of its undivided seller’s interest in the
Trust for $3.5 billion par value of zero-coupon subordinated securities
issued by the Trust and retained by the Firm. The issuance of the
zero-coupon securities by the Trust also increased the excess spread
for the Trust. These actions resulted in the addition of approximately
$40 billion of risk-weighted assets for regulatory capital purposes,
which decreased the Firm’s Tier 1 capital ratio by approximately 40
basis points, but did not have a material impact on the Firm’s Con-
solidated Balance Sheets or results of operations.
WMM Trust: At the time of the acquisition of the Washington Mutual
banking operations, the assets of the WMM Trust were comprised of
Washington Mutual subprime credit card receivables. The quality of
the assets in the WMM Trust was much lower than the quality of the
credit card receivables that JPMorgan Chase has historically securi-
tized in the public markets.
In order to more closely conform the WMM Trust to the overall quality
typical of a JPMorgan Chase–sponsored credit card securitization
master trust, during the fourth quarter of 2008 the Firm randomly
removed $6.2 billion of credit card loans held by the WMM Trust and
replaced them with $5.8 billion of higher-quality receivables from the
Firm’s portfolio.
However, as a result of continued deterioration during 2009 in the
credit quality of the remaining Washington Mutual–originated
assets in the WMM Trust, the performance of the portfolio indi-
cated that an early amortization event was likely to occur unless
additional actions were taken. On May 15, 2009, JPMorgan Chase,
as seller and servicer, and the Bank of New York Mellon, as trustee,
amended the pooling and servicing agreement to permit non-
random removals of credit card accounts. On May 19, 2009, the
Firm removed all remaining credit card receivables originated by
Washington Mutual. Following this removal, the WMM Trust col-
lateral was entirely composed of receivables originated by JPMor-
gan Chase. As a result of the actions taken by the Firm, the assets
and liabilities of the WMM Trust were consolidated on the balance
sheet of JPMorgan Chase; as a result, during the second quarter of
2009, the Firm recorded additional assets with an initial fair value
of $6.0 billion, liabilities with an initial fair value of $6.1 billion,
and a pretax loss of approximately $64 million.
Retained interests in nonconsolidated credit card securitizations
The following is a description of the Firm’s retained interests in
credit card securitizations that were not consolidated at the dates
presented. Accordingly, the Firm’s retained interests in the WMM
Trust are included in the amounts reported at December 31, 2008,
but no longer included at December 31, 2009, due to the second
quarter actions noted above. For further information regarding the
WMM Trust assets and liabilities, see Note 16 on pages 214–222
of this Annual Report.
The agreements with the credit card securitization trusts require the
Firm to maintain a minimum undivided interest in the trusts (which
generally ranges from 4% to 12%). These undivided interests in the
trusts represent the Firm’s undivided interests in the receivables
transferred to the trust that have not been securitized; these undi-
vided interests are not represented by security certificates, are
carried at historical cost, and are classified within loans. At Decem-
ber 31, 2009 and 2008, the Firm had $16.7 billion and $33.3
billion, respectively, related to its undivided interests in the trusts.
The Firm maintained an average undivided interest in principal
receivables in the trusts of approximately 16% and 22% for the
years ended December 31, 2009 and 2008, respectively.