JP Morgan Chase 2009 Annual Report Download - page 220

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report
218
JPMorgan Chase often serves as the sole liquidity provider and
remarketing agent of the putable floating-rate certificates. The
liquidity provider’s obligation to perform is conditional and is lim-
ited by certain termination events; which include bankruptcy or
failure to pay by the municipal bond issuer or credit enhancement
provider, and the immediate downgrade of the municipal bond to
below investment grade. A downgrade of JPMorgan Chase Bank,
N.A.’s short-term rating does not affect the Firm’s obligation under
the liquidity facility. However, in the event of a downgrade in the
Firm’s credit ratings, holders of the putable floating-rate instru-
ments supported by those liquidity facility commitments might
choose to sell their instruments, which could increase the likelihood
that the liquidity commitments could be drawn. In vehicles in which
third-party investors own the residual interests, in addition to the
termination events, the Firm’s exposure as liquidity provider is
further limited by the high credit quality of the underlying municipal
bonds, the excess collateralization in the vehicle, or the reimburse-
ment agreements with the residual interest holders. In the fourth
quarter of 2008, a drawdown occurred on one liquidity facility as a
result of a failure to remarket putable floating-rate certificates. The
Firm was required to purchase $19 million of putable floating-rate
certificates. Subsequently, the municipal bond vehicle was termi-
nated and the proceeds from the sales of the municipal bonds,
together with the collateral posted by the residual interest holder,
were sufficient to repay the putable floating-rate certificates. In
2009, the Firm did not experience a drawdown on the liquidity
facilities.
As remarketing agent, the Firm may hold putable floating-rate
certificates of the municipal bond vehicles. At December 31, 2009
and 2008, respectively, the Firm held $72 million and $293 million
of these certificates on its Consolidated Balance Sheets. The largest
amount held by the Firm at any time during 2009 was $1.0 billion,
or 6.7%, of the municipal bond vehicles’ outstanding putable
floating-rate certificates. The Firm did not have and continues not
to have any intent to protect any residual interest holder from
potential losses on any of the municipal bond holdings.
The long-term credit ratings of the putable floating-rate certificates
are directly related to the credit ratings of the underlying municipal
bonds, and to the credit rating of any insurer of the underlying mu-
nicipal bond. A downgrade of a bond insurer would result in a down-
grade of the insured municipal bonds, which would affect the rating
of the putable floating-rate certificates. This could cause demand for
these certificates by investors to decline or disappear, as putable
floating-rate certificate holders typically require an “AA-” bond
rating. At December 31, 2009 and 2008, 98% and 97%, respec-
tively, of the municipal bonds held by vehicles to which the Firm
served as liquidity provider were rated “AA-” or better, based on
either the rating of the underlying municipal bond itself, or the
rating including any credit enhancement. At December 31, 2009
and 2008, $2.3 billion and $2.6 billion, respectively, of the bonds
were insured by monoline bond insurers.
The Firm sometimes invests in the residual interests of municipal
bond vehicles. For VIEs in which the Firm owns the residual inter-
ests, the Firm consolidates the VIEs.
The likelihood is remote that the Firm would have to consolidate
VIEs in which the Firm does not own the residual interests and that
are currently off–balance sheet.
Exposure to nonconsolidated municipal bond VIEs at December 31, 2009 and 2008, including the ratings profile of the VIEs’ assets, were as
follows.
2009 2008
December 31,
(in billions)
Fair value of
assets held
by VIEs
Liquidity
facilities(c)
Excess/
(deficit)(d)
Maximum
exposure
Fair value of
assets held
by VIEs
Liquidity
facilities(c)
Excess/
(deficit)(d)
Maximum
exposure
Nonconsolidated
municipal bond
vehicles(a)(b) $ 13.2 $ 8.4 $ 4.8 $ 8.4 $ 10.0 $ 6.9 $ 3.1 $ 6.9
Ratings profile of VIE assets(e)
December 31, Investment-grade
Noninvestment-
grade
(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB
-
BB+ and below
Fair value of
assets held by
VIEs
Wt. avg.
expected
life of assets
(years)
Nonconsolidated municipal bond
vehicles(a)
2009 $ 1.6 $ 11.4 $ 0.2 $ — $ — $ 13.2 10.1
2008 3.8 5.9 0.2 0.1 — 10.0 22.3
(a) Excluded $2.8 billion and $6.0 billion at December 31, 2009 and 2008, respectively, which were consolidated due to the Firm owning the residual interests.
(b) Certain of the municipal bond vehicles are structured to meet the definition of a QSPE (as discussed in Note 1 on page 150 of this Annual Report); accordingly, the assets
and liabilities of QSPEs are not reflected on the Firm’s Consolidated Balance Sheets (except for retained interests reported at fair value). At December 31, 2008, excluded
collateral with a fair value of $603 million related to QSPE municipal bond vehicles in which the Firm owned the residual interests. The Firm did not own residual interests in
QSPE municipal bond vehicles at December 31, 2009.
(c) The Firm may serve as credit enhancement provider for municipal bond vehicles for which it serves as liquidity provider. The Firm provided insurance on underlying
municipal bonds, in the form of letters of credit, of $10 million at both December 31, 2009 and 2008, respectively.
(d) Represents the excess/(deficit) of the fair value of municipal bond assets available to repay the liquidity facilities, if drawn.
(e) The ratings scale is based on the Firm’s internal risk ratings and presented on an S&P-equivalent basis.