JP Morgan Chase 2009 Annual Report Download - page 216

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report
214
Note 16 – Variable interest entities
Refer to Note 1 on page 150 of this Annual Report for a further
description of JPMorgan Chase’s policies regarding consolidation of
variable interest entities.
JPMorgan Chase’s principal involvement with VIEs occurs in the
following business segments:
• Investment Bank: Utilizes VIEs to assist clients in accessing the
financial markets in a cost-efficient manner. IB is involved with
VIEs through multi-seller conduits and for investor intermedia-
tion purposes, as discussed below. IB also securitizes loans
through QSPEs, to create asset-backed securities, as further dis-
cussed in Note 15 on pages 206–213 of this Annual Report.
• Asset Management (“AM”): The legal entity structures for a
limited number of funds sponsored and managed by asset man-
agement include certain entities within the structure which are
deemed VIEs. As asset manager of the funds, AM earns a fee
based on assets managed; the fee varies with each fund's in-
vestment objective and is competitively priced. For those limited
number of funds that qualify as VIEs, AM’s relationship with
such funds are not considered significant variable interests under
U.S. GAAP.
• Treasury & Securities Services: Provides services to a number of
VIEs that are similar to those provided to non-VIEs. TSS earns
market-based fees for the services it provides. The relationships
resulting from TSS’ services are not considered to be significant
variable interests.
• Commercial Banking (“CB”): Utilizes VIEs to assist clients in
accessing the financial markets in a cost-efficient manner. This is
often accomplished through the use of products similar to those
offered in IB. CB may assist in the structuring and/or ongoing
administration of these VIEs and may provide liquidity, letters of
credit and/or derivative instruments in support of the VIE. The
relationships resulting from CB’s services are not considered to
be significant variable interests.
• Corporate/Private Equity: Corporate utilizes VIEs to issue guaran-
teed capital debt securities. See Note 22 on pages 228–229 for
further information. The Private Equity business, within Corpo-
rate/Private Equity, may be involved with entities that could be
deemed VIEs. Private equity entities are typically investment
companies as defined in the investment company accounting
guidance and, as such, are not required to utilize the accounting
guidance for the consolidation of VIEs. Had the guidance for
consolidation of VIEs been applied to these entities, the impact
would have been immaterial to the Firm’s Consolidated Financial
Statements as of December 31, 2009.
As noted above, IB is predominantly involved with multi-seller
conduits and VIEs associated with investor intermediation activities.
These nonconsolidated VIEs that are sponsored by JPMorgan Chase
are discussed below. The Firm considers a “sponsored” VIE to
include any entity where: (1) JPMorgan Chase is the principal
beneficiary of the structure; (2) the VIE is used by JPMorgan Chase
to securitize Firm assets; (3) the VIE issues financial instruments
associated with the JPMorgan Chase brand name; or (4) the entity
is a JPMorgan Chase–administered asset-backed commercial paper
(“ABCP”) conduit.
Multi-seller conduits
Funding and liquidity
The Firm is an active participant in the asset-backed securities
business, and it helps customers meet their financing needs by
providing access to the commercial paper markets through VIEs
known as multi-seller conduits. Multi-seller conduit entities are
separate bankruptcy remote entities that purchase interests in, and
make loans secured by, pools of receivables and other financial
assets pursuant to agreements with customers of the Firm. The
conduits fund their purchases and loans through the issuance of
highly rated commercial paper to third-party investors. The primary
source of repayment of the commercial paper is the cash flow from
the pools of assets. In most instances, the assets are structured
with deal-specific credit enhancements provided by the customers
(i.e., sellers) to the conduits or other third parties. Deal-specific
credit enhancements are generally structured to cover a multiple of
historical losses expected on the pool of assets, and are typically in
the form of overcollateralization provided by the seller, but also
may include any combination of the following: recourse to the seller
or originator, cash collateral accounts, letters of credit, excess
spread, retention of subordinated interests or third-party guaran-
tees. The deal-specific credit enhancements mitigate the Firm’s
potential losses on its agreements with the conduits.
JPMorgan Chase receives fees for structuring multi-seller conduit
transactions and compensation from the multi-seller conduits for its
role as administrative agent, liquidity provider, and provider of
program-wide credit enhancement.
To ensure timely repayment of the commercial paper, each asset
pool financed by the conduits has a minimum 100% deal-specific
liquidity facility associated with it. Deal-specific liquidity facilities
are the primary source of liquidity support for the conduits. The
deal-specific liquidity facilities are typically in the form of asset
purchase agreements and generally structured so the liquidity that
will be provided by the Firm as liquidity provider will be affected by
the Firm purchasing, or lending against, a pool of nondefaulted,
performing assets. In limited circumstances, the Firm may provide
unconditional liquidity.
The conduit’s administrative agent can require the liquidity provider
to perform under its asset purchase agreement with the conduit at
any time. These agreements may cause the liquidity provider,
including the Firm, to purchase an asset from the conduit at an
amount above the asset’s then current fair value – in effect, provid-
ing a guarantee of the initial value of the reference asset as of the
date of the agreement.