JP Morgan Chase 2009 Annual Report Download - page 242

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report
240
purchase agreements, standby letters of credit and financial guar-
antees, securities lending indemnifications, certain indemnification
agreements included within third-party contractual arrangements
and certain derivative contracts. The amount of the liability related
to guarantees recorded at December 31, 2009 and 2008, excluding
the allowance for credit losses on lending-related commitments and
derivative contracts discussed below, was $475 million and $535
million, respectively.
Asset purchase agreements
Asset purchase agreements are principally used as a mechanism to
provide liquidity to SPEs, predominantly multi-seller conduits, as
described in Note 16 on pages 214–222 of this Annual Report.
The carrying value of asset purchase agreements was $126 million
and $147 million at December 31, 2009 and 2008, respectively,
which was classified in accounts payable and other liabilities on the
Consolidated Balance Sheets; the carrying values include $18
million and $9 million, respectively, for the allowance for lending-
related commitments, and $108 million and $138 million, respec-
tively, for the fair value of the guarantee liability.
Standby letters of credit
Standby letters of credit (“SBLC”) and financial guarantees are
conditional lending commitments issued by the Firm to guarantee
the performance of a customer to a third party under certain ar-
rangements, such as commercial paper facilities, bond financings,
acquisition financings, trade and similar transactions. The carrying
values of standby and other letters of credit were $920 million and
$673 million at December 31, 2009 and 2008, respectively, which
was classified in accounts payable and other liabilities on the
Consolidated Balance Sheets; these carrying values include $553
million and $276 million, respectively, for the allowance for lend-
ing-related commitments, and $367 million and $397 million,
respectively, for the fair value of the guarantee liability.
The following table summarizes the type of facilities under which standby letters of credit and other letters of credit arrangements are out-
standing by the ratings profiles of the Firm’s customers as of December 31, 2009 and 2008. The ratings scale represents the current status of
the payment or performance risk of the guarantee, and is based on the Firm’s internal risk ratings, which generally correspond to ratings
defined by S&P and Moody’s.
2009 2008
December 31, (in millions)
Standby letters
of credit and other
financial guarantees
Other letters
of credit
Standby letters
of credit and other
financial guarantees
Other letters
of credit(d)
Investment-grade(a) $ 66,786 $ 3,861 $ 73,394 $ 3,772
Noninvestment-grade(a) 24,699 1,306 21,958 1,155
Total contractual amount(b) $ 91,485(c) $ 5,167 $ 95,352(c) $ 4,927
Allowance for lending-related commitments $ 552 $ 1 $ 274 $ 2
Commitments with collateral 31,454 1,315 30,972 1,000
(a) Ratings scale is based on the Firm’s internal ratings which generally correspond to ratings defined by S&P and Moody’s.
(b) Represents the contractual amount net of risk participations totaling $24.6 billion and $26.4 billion for standby letters of credit and other financial guarantees at
December 31, 2009 and 2008, respectively, and $690 million and $1.1 billion for other letters of credit at December 31, 2009 and 2008, respectively. In regulatory
filings with the Federal Reserve Board these commitments are shown gross of risk participations.
(c) Includes unissued standby letters of credit commitments of $38.4 billion and $39.5 billion at December 31, 2009 and 2008, respectively.
(d) The investment-grade and noninvestment-grade amounts have been revised from previous disclosures.
Derivatives qualifying as guarantees
In addition to the contracts described above, the Firm transacts certain
derivative contracts that meet the characteristics of a guarantee under
U.S. GAAP. These contracts include written put options that require the
Firm to purchase assets upon exercise by the option holder at a speci-
fied price by a specified date in the future. The Firm may enter into
written put option contracts in order to meet client needs, or for trading
purposes. The terms of written put options are typically five years or
less. Derivative guarantees also include contracts such as stable value
derivatives that require the Firm to make a payment of the difference
between the market value and the book value of a counterparty’s
reference portfolio of assets in the event that market value is less than
book value and certain other conditions have been met. Stable value
derivatives, commonly referred to as “stable value wraps”, are trans-
acted in order to allow investors to realize investment returns with less
volatility than an unprotected portfolio and are typically longer-term or
may have no stated maturity, but allow the Firm to terminate the
contract under certain conditions.
Derivative guarantees are recorded on the Consolidated Balance
Sheets at fair value in trading assets and trading liabilities. The total
notional value of the derivatives that the Firm deems to be guaran-
tees was $87.2 billion and $83.8 billion at December 31, 2009 and
2008, respectively. The notional value generally represents the Firm’s
maximum exposure to derivatives qualifying as guarantees, although
exposure to certain stable value derivatives is contractually limited to
a substantially lower percentage of the notional value. The fair value
of the contracts reflects the probability of whether the Firm will be
required to perform under the contract. The fair value related to
derivative guarantees were derivative receivables of $219 million and
$184 million and derivative payables of $981 million and $5.6 billion
at December 31, 2009 and 2008, respectively. The Firm reduces
exposures to these contracts by entering into offsetting transactions,
or by entering into contracts that hedge the market risk related to the
derivative guarantees.
In addition to derivative contracts that meet the characteristics of a
guarantee, the Firm is both a purchaser and seller of credit protection
in the credit derivatives market. For a further discussion of credit
derivatives, see Note 5 on pages 175–183 of this Annual Report.
Securities lending indemnification
Through the Firm’s securities lending program, customers’ securi-
ties, via custodial and non-custodial arrangements, may be lent to