JP Morgan Chase 2009 Annual Report Download - page 222

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report
220
Exposure to nonconsolidated asset swap VIEs at December 31, 2009 and 2008, was as follows.
2009 2008
December 31,
(in billions)
Derivative
receivables/
(payables)
Trading
assets(b)
Total
exposure(c)
Par value of
collateral held
by VIEs(d)
Derivative
receivables/
(payables)
Trading
assets(b)
Total
exposure(c)
Par value of
collateral held
by VIEs(d)
Nonconsolidated
asset swap vehicles(a) $ 0.1 $ — $ 0.1 $ 10.2 $ (0.2) $ — $ (0.2) $ 7.3
(a) Excluded fair value of collateral of $623 million and $1.0 billion at December 31, 2009 and 2008, respectively, which was consolidated as the Firm, in its role as
secondary market maker, held a majority of the issued notes of certain vehicles.
(b) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.
(c) On-balance sheet exposure that includes derivative receivables and trading assets.
(d) The Firm’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives.
The Firm relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the
collateral is expected to be sufficient to pay amounts due under the derivative contracts.
Collateralized Debt Obligations vehicles
A CDO typically refers to a security that is collateralized by a pool of
bonds, loans, equity, derivatives or other assets. The Firm’s in-
volvement with a particular CDO vehicle may take one or more of
the following forms: arranger, warehouse funding provider, place-
ment agent or underwriter, secondary market-maker for securities
issued, or derivative counterparty.
As of December 31, 2009 and 2008, the Firm had funded nonin-
vestment-grade loans of $156 million and $405 million, respec-
tively, to nonconsolidated CDO warehouse VIEs. The Firm’s
maximum exposure to loss related to the nonconsolidated CDO
warehouse VIEs was $156 million and $1.1 billion as of December
31, 2009 and 2008, respectively.
Once the CDO vehicle closes and issues securities, the Firm has no
obligation to provide further support to the vehicle. At the time of
closing, the Firm may hold unsold securities that it was not able to
place with third-party investors. In addition, the Firm may on occa-
sion hold some of the CDO vehicles’ securities as a secondary
market-maker or as a principal investor, or it may be a derivative
counterparty to the vehicles. At December 31, 2009 and 2008,
these amounts were not significant.
VIEs sponsored by third parties
Investment in a third-party credit card securitization trust
The Firm holds a note in a third-party-sponsored VIE, which is a
credit card securitization trust that owns credit card receivables
issued by a national retailer. The note is structured so that the
principal amount can float up to 47% of the principal amount of
the receivables held by the trust, not to exceed $4.2 billion.
The Firm is not the primary beneficiary of the trust and accounts for
its investment at fair value within AFS investment securities. At
December 31, 2009 and 2008, the amortized cost of the note was
$3.5 billion and $3.6 billion, respectively, and the fair value was
$3.5 billion and $2.6 billion, respectively. For more information on
AFS securities, see Note 11 on pages 195–199 of this Annual
Report.
VIE used in FRBNY transaction
In conjunction with the Bear Stearns merger, in June 2008, the
Federal Reserve Bank of New York (“FRBNY”) took control,
through an LLC formed for this purpose, of a portfolio of $30.0
billion in assets, based on the value of the portfolio as of March 14,
2008. The assets of the LLC were funded by a $28.85 billion term
loan from the FRBNY and a $1.15 billion subordinated loan from
JPMorgan Chase. The JPMorgan Chase loan is subordinated to the
FRBNY loan and will bear the first $1.15 billion of any losses of the
portfolio. Any remaining assets in the portfolio after repayment of
the FRBNY loan, repayment of the JPMorgan Chase loan and the
expense of the LLC will be for the account of the FRBNY. The extent
to which the FRBNY and JPMorgan Chase loans will be repaid will
depend on the value of the asset portfolio and the liquidation
strategy directed by the FRBNY.
Other VIEs sponsored by third parties
The Firm enters into transactions with VIEs structured by other
parties. These include, for example, acting as a derivative counter-
party, liquidity provider, investor, underwriter, placement agent,
trustee or custodian. These transactions are conducted at arm’s
length, and individual credit decisions are based on the analysis of
the specific VIE, taking into consideration the quality of the underly-
ing assets. Where these activities do not cause JPMorgan Chase to
absorb a majority of the expected losses, or to receive a majority of
the residual returns, the Firm records and reports these positions on
its Consolidated Balance Sheets, similarly to the way it would
record and report positions from any other third-party transaction.
These transactions are not considered significant.