JP Morgan Chase 2009 Annual Report Download - page 88

Management’s discussion and analysis
JPMorgan Chase & Co./2009 Annual Report 86
Auction Facility program and a decline to zero in the balance related
to the Federal Reserve Bank of Boston AML Facility, which was ended
on February 1, 2010. For additional information on the Firm’s Liquid-
ity Risk Management and other borrowed funds, see pages 96–100,
and Note 20 on page 227 of this Annual Report.
Accounts payable and other liabilities
Accounts payable and other liabilities consist of accounts payable
to customers (primarily from activities related to IB’s Prime Services
business); payables to brokers, dealers and clearing organizations;
payables from failed securities purchases; accrued expense, includ-
ing interest-bearing liabilities; and all other liabilities, including
obligations to return securities received as collateral. The decrease
in accounts payable and other liabilities primarily reflected lower
customer payables due predominantly to lower balances in the
brokerage accounts of IB’s Prime Services customers.
Beneficial interests issued by consolidated VIEs
JPMorgan Chase uses VIEs to assist clients in accessing the finan-
cial markets in a cost-efficient manner. A VIE is consolidated if the
Firm will absorb a majority of a VIE’s expected losses, receive a
majority of a VIE’s expected residual returns, or both. Included in
the caption “beneficial interests issued by consolidated VIEs” are
interest-bearing beneficial-interest liabilities issued by the consoli-
dated VIEs, which increased as a result of the consolidation during
the second quarter of 2009 of a multi-seller conduit and a credit
card loan securitization trust (Washington Mutual Master Trust).
For additional information on Firm-sponsored VIEs and loan securi-
tization trusts, see Off–Balance Sheet Arrangements and Contrac-
tual Cash Obligations below, and Note 16 on pages 214–222 of
this Annual Report.
Long-term debt
The Firm uses long-term debt (including trust preferred capital debt
securities) to provide cost-effective and diversified sources of funds
and as critical components of the Firm’s liquidity and capital man-
agement activities. Long-term debt decreased slightly, predominantly
due to net redemptions and maturities. The Firm also issued $11.0
billion and $2.6 billion of non-FDIC guaranteed debt in the U.S. and
European markets, respectively, and $2.5 billion of trust preferred
capital debt securities. For additional information on the Firm’s long-
term debt activities, see the Liquidity Risk Management discussion on
pages 96–100 of this Annual Report.
Stockholders’ equity
The decrease in total stockholders’ equity was largely due to the
redemption in the second quarter of 2009 of the $25.0 billion
Series K Preferred Stock issued to the U.S. Treasury pursuant to
TARP, and the declaration of cash dividends on preferred and
common stock. The decrease was almost entirely offset by net
income for 2009; the issuance of $5.8 billion of common equity in
the public markets; a net increase in accumulated other compre-
hensive income, due primarily to net unrealized gains from overall
market spread and market liquidity improvement, as well as
changes in the composition of investments in the AFS securities
portfolio; and net issuances under the Firm’s employee stock-based
compensation plans. For a further discussion, see the Capital Man-
agement section on pages 90–93, Note 23 on pages 230–231 and
Note 26 on page 233 of this Annual Report.
OFF–BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
JPMorgan Chase is involved with several types of off–balance sheet
arrangements, including special purpose entities (“SPEs”) and
lending-related financial instruments (e.g., commitments and
guarantees).
Special-purpose entities
The basic SPE structure involves a company selling assets to the
SPE. The SPE funds the purchase of those assets by issuing securi-
ties to investors in the form of commercial paper, short-term asset-
backed notes, medium-term notes and other forms of interest. SPEs
are generally structured to insulate investors from claims on the
SPE’s assets by creditors of other entities, including the creditors of
the seller of the assets.
SPEs are an important part of the financial markets, providing
market liquidity by facilitating investors’ access to specific portfolios
of assets and risks. These arrangements are integral to the markets
for mortgage-backed securities, commercial paper and other asset-
backed securities.
JPMorgan Chase uses SPEs as a source of liquidity for itself and its
clients by securitizing financial assets, and by creating investment
products for clients. The Firm is involved with SPEs through multi-
seller conduits and investor intermediation activities, and as a result
of its loan securitizations, through qualifying special purpose enti-
ties (“QSPEs”). This discussion focuses mostly on multi-seller con-
duits and investor intermediation. For a detailed discussion of all
SPEs with which the Firm is involved, and the related accounting,
see Note 1, Note 15 and Note 16 on pages 150–151, 206–213
and 214–222, respectively, of this Annual Report.
During the quarter ended June 30, 2009, the Firm took certain
actions related to both the Chase Issuance Trust (the “Trust”) and
the Washington Mutual Master Trust (the “WMM Trust”). These
actions and their impact on the Firm’s Consolidated Balance Sheets
and results of operations are further discussed in Note 15 on pages
206–213 of this Annual Report.
The Firm holds capital, as deemed appropriate, against all SPE-
related transactions and related exposures, such as derivative
transactions and lending-related commitments and guarantees.
The Firm modifies loans that it services, and that were sold to off-
balance sheet SPEs, pursuant to the U.S. Treasury’s Making Home
Affordable (“MHA”) programs and the Firm’s other loss mitigation
programs. For both the Firm’s on–balance sheet loans and loans
serviced for others, approximately 600,000 mortgage modifications
had been offered to borrowers in 2009. Of these, 89,000 have