JP Morgan Chase 2009 Annual Report Download - page 244

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report
242
vide customer refunds; and (3) Chase Paymentech does not have
sufficient financial resources to provide customer refunds, JPMor-
gan Chase Bank, N.A., would be liable for the amount of the
transaction. For the year ended December 31, 2009, Chase Pay-
mentech incurred aggregate credit losses of $11 million on $409.7
billion of aggregate volume processed, and at December 31, 2009,
it held $213 million of collateral. For the year ended December 31,
2008, Chase Paymentech incurred aggregate credit losses of $13
million on $713.9 billion of aggregate volume processed, and at
December 31, 2008, it held $222 million of collateral. The Firm
believes that, based on historical experience and the collateral held
by Chase Paymentech, the fair value of the Firm’s charge back-
related obligations, which are representative of the payment or
performance risk to the Firm is immaterial.
Credit card association, exchange and clearinghouse
guarantees
The Firm holds an equity interest in VISA Inc. During October 2007,
certain VISA-related entities completed a series of restructuring
transactions to combine their operations, including VISA USA,
under one holding company, VISA Inc. Upon the restructuring, the
Firm’s membership interest in VISA USA was converted into an
equity interest in VISA Inc. VISA Inc. sold shares via an initial public
offering and used a portion of the proceeds from the offering to
redeem a portion of the Firm’s equity interest in Visa Inc. Prior to
the restructuring, VISA USA’s by-laws obligated the Firm upon
demand by VISA USA to indemnify VISA USA for, among other
things, litigation obligations of Visa USA. The accounting for that
guarantee was not subject to initial recognition at fair value. Upon
the restructuring event, the Firm’s obligation to indemnify Visa Inc.
was limited to certain identified litigations. Such a limitation is
deemed a modification of the indemnity by-law and, accordingly,
became subject to initial recognition at fair value. The value of the
litigation guarantee has been recorded in the Firm’s financial
statements based on its then fair value; the net amount recorded
(within other liabilities) did not have a material adverse effect on
the Firm’s financial statements. In addition to Visa, the Firm is a
member of other associations, including several securities and
futures exchanges and clearinghouses, both in the United States
and other countries. Membership in some of these organizations
requires the Firm to pay a pro rata share of the losses incurred by
the organization as a result of the default of another member. Such
obligations vary with different organizations. These obligations may
be limited to members who dealt with the defaulting member or to
the amount (or a multiple of the amount) of the Firm’s contribution
to a member’s guarantee fund, or, in a few cases, the obligation
may be unlimited. It is difficult to estimate the Firm’s maximum
exposure under these membership agreements, since this would
require an assessment of future claims that may be made against
the Firm that have not yet occurred. However, based on historical
experience, management expects the risk of loss to be remote.
Residual value guarantee
In connection with the Bear Stearns merger, the Firm succeeded to
an operating lease arrangement for the building located at 383
Madison Avenue in New York City (the “Synthetic Lease”). Under
the terms of the Synthetic Lease, the Firm is obligated to make
periodic payments based on the lessor’s underlying interest costs.
The Synthetic Lease expires on November 1, 2010. Under the terms
of the Synthetic Lease, the Firm has the right to purchase the
building for the amount of the then outstanding indebtedness of
the lessor, or to arrange for the sale of the building, with the pro-
ceeds of the sale to be used to satisfy the lessor’s debt obligation. If
the sale does not generate sufficient proceeds to satisfy the lessor’s
debt obligation, the Firm is required to fund the shortfall, up to a
maximum residual value guarantee. As of December 31, 2009,
there was no expected shortfall and the maximum residual value
guarantee was approximately $670 million.
Note 32 – Credit risk concentrations
Concentrations of credit risk arise when a number of customers are
engaged in similar business activities or activities in the same
geographic region, or when they have similar economic features
that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic conditions.
JPMorgan Chase regularly monitors various segments of its credit
portfolio to assess potential concentration risks and to obtain collat-
eral when deemed necessary. Senior management is significantly
involved in the credit approval and review process, and risk levels are
adjusted as needed to reflect management’s risk tolerance.
In the Firm’s wholesale portfolio, risk concentrations are evaluated
primarily by industry and geographic region, and monitored regu-
larly on both an aggregate portfolio level and on an individual
customer basis. Management of the Firm’s wholesale exposure is
accomplished through loan syndication and participation, loan
sales, securitizations, credit derivatives, use of master netting
agreements, and collateral and other risk-reduction techniques. In
the consumer portfolio, concentrations are evaluated primarily by
product and by U.S. geographic region, with a key focus on trends
and concentrations at the portfolio level, where potential risk
concentrations can be remedied through changes in underwriting
policies and portfolio guidelines.
The Firm does not believe that its exposure to any particular loan
product (e.g., option ARMs), portfolio segment (e.g., commercial
real estate) or its exposure to residential real estate loans with high
loan-to-value ratios results in a significant concentration of credit
risk. Terms of loan products and collateral coverage are included in
the Firm’s assessment when extending credit and establishing its
allowance for loan losses.
For further information regarding on–balance sheet credit concen-
trations by major product and geography, see Note 13 on pages
200–204 of this Annual Report. For information regarding concen-
trations of off–balance sheet lending-related financial instruments
by major product, see Note 31 on pages 238–242 of this Annual
Report.