JP Morgan Chase 2009 Annual Report Download - page 84

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report 82
CORPORATE/PRIVATE EQUITY
The Corporate/Private Equity sector comprises Private
Equity, Treasury, the Chief Investment Office, corporate
staff units and expense that is centrally managed. Treas-
ury and the Chief Investment Office manage capital,
liquidity, interest rate and foreign exchange risk and
the investment portfolio for the Firm. The corporate
staff units include Central Technology and Operations,
Internal Audit, Executive Office, Finance, Human Re-
sources, Marketing & Communications, Legal & Compli-
ance, Corporate Real Estate and General Services, Risk
Management, Corporate Responsibility and Strategy &
Development. Other centrally managed expense includes
the Firm’s occupancy and pension-related expense, net
of allocations to the business.
Selected income statement data
Year ended December 31,
(in millions)
2009
2008 2007
Revenue
Principal transactions(a)(b) $
1,574
$ (3,588) $ 4,552
Securities gains/(losses)(c)
1,139
1,637 39
All other income(d)
58
1,673 465
Noninterest revenue
2,771
(278) 5,056
Net interest income/(expense)
3,863
347 (637 )
Total net revenue
6,634
69 4,419
Provision for credit losses
80
447(i)(j) (11 )
Provision for credit losses –
accounting conformity(e)
—
1,534 —
Noninterest expense
Compensation expense
2,811
2,340 2,754
Noncompensation expense(f)
3,597
1,841 3,025
Merger costs
481
432 209
Subtotal
6,889
4,613 5,988
Net expense allocated to other
businesses
(4,994
) (4,641) (4,231 )
Total noninterest expense
1,895
(28) 1,757
Income/(loss) before income
tax expense/(benefit) and
extraordinary gain
4,659
(1,884) 2,673
Income tax expense/(benefit)(g)
1,705
(535) 788
Income/(loss) before
extraordinary gain
2,954
(1,349) 1,885
Extraordinary gain(h)
76
1,906 —
Net income $
3,030
$ 557 $ 1,885
(a) Included losses on preferred equity interests in Fannie Mae and Freddie Mac in
2008.
(b) The Firm adopted the new guidance for fair value in the first quarter of 2007.
See Note 3 on pages 156–173 of this Annual Report for additional information.
(c) Included gain on sale of MasterCard shares in 2008.
(d) Included a gain from the dissolution of the Chase Paymentech Solutions joint
venture and proceeds from the sale of Visa shares in its initial public offering in
2008.
(e) Represents an accounting conformity loan loss reserve provision related to the
acquisition of Washington Mutual Bank’s banking operations.
(f) Included $675 million FDIC special assessment during second quarter of 2009
and a release of credit card litigation reserves in 2008 and insurance recoveries
related to settlement of the Enron and WorldCom class action litigations.
(g) Includes tax benefits recognized upon resolution of tax audits.
(h) Effective September 25, 2008, JPMorgan Chase acquired Washington Mutual’s
banking operations from the FDIC for $1.9 billion. The fair value of the Washing-
ton Mutual net assets acquired exceeded the purchase price, which resulted in
negative goodwill. In accordance with U.S. GAAP for business combinations,
nonfinancial assets that are not held-for-sale were written down against that
negative goodwill. The negative goodwill that remained after writing down non-
financial assets was recognized as an extraordinary gain in 2008. As a result of
the final refinement of the purchase price allocation during the third quarter
of 2009, the Firm recognized a $76 million increase in the extraordinary gain.
(i) In November 2008, the Firm transferred $5.8 billion of higher quality credit card
loans from the legacy Chase portfolio to a securitization trust previously estab-
lished by Washington Mutual (“the Trust”). As a result of converting higher
credit quality Chase-originated on-book receivables to the Trust’s seller’s interest
which has a higher overall loss rate reflective of the total assets within the Trust,
approximately $400 million of incremental provision expense was recorded dur-
ing the fourth quarter. This incremental provision expense was recorded in the
Corporate segment as the action related to the acquisition of Washington Mu-
tual's banking operations. For further discussion of credit card securitizations,
see Note 15 on pages 206–213 of this Annual Report.
(j) Includes $9 million of credit card securitizations related to the Washington
Mutual transaction.
2009 compared with 2008
Net income was $3.0 billion compared with $557 million in the
prior year.
Net loss for Private Equity was $78 million compared with a net loss
of $690 million in the prior year. Net revenue was $18 million, an
increase of $981 million, reflecting Private Equity losses of $54 mil-
lion compared with losses of $894 million. Noninterest expense was
$141 million, an increase of $21 million.
Net income for Corporate was $3.7 billion, compared with $1.5
billion in the prior year. Current year results reflect higher levels of
trading gains and net interest income, securities gains, an after-tax
gain of $150 million from the sale of MasterCard shares, partially
offset by a $419 million FDIC special assessment. Trading gains and
net interest income increased due to the Chief Investment Office’s
(“CIO”) significant purchases of mortgage-backed securities guaran-
teed by U.S. government agencies, corporate debt securities, U.S.
Treasury and government agency securities and other asset-backed
securities. These investments were generally associated with the
management of interest rate risk and investment of cash resulting
from the excess funding the Firm continued to experience during
2009. The increase in securities was partially offset by sales of higher-
coupon instruments (part of repositioning the investment portfolio) as
well as prepayments and maturities.
Selected income statement and balance sheet data for
Treasury and CIO
Year ended December 31,
(in millions) 2009 2008 2007
Treasury
Securities gains(a) $ 1,147 $ 1,652 $ 37
Investment securities portfolio (average)(b) 324,037 113,010 88,037
Investment securities portfolio (ending)(b) 340,163 192,564 76,480
Mortgage loans (average) 7,427 7,059 5,639
Mortgage loans (ending) 8,023 7,292 6,635
(a) Results for 2008 included a gain on the sale of MasterCard shares. All periods reflect
repositioning of the Corporate investment securities portfolio and exclude
gains/losses on securities used to manage risk associated with MSRs.
(b) Beginning in second quarter 2009, balances reflect Treasury and Chief Investment
Office securities. Prior periods have been revised to conform with this change.
For further information on the investment portfolio, see Note 3 and
Note 11 on pages 156–173 and 195–199, respectively, of this
Annual Report. For further information on CIO VaR and the Firm’s
earnings-at-risk, see the Market Risk Management section on pages
126–132 of this Annual Report.
Prior year results included $955 million proceeds from the sale of Visa
shares in its initial public offering, $627 million from the dissolution