JP Morgan Chase 2009 Annual Report Download - page 99

JPMorgan Chase & Co./2009 Annual Report 97
the program in an orderly manner. On October 22, 2009, the Firm
notified the FDIC that, as of January 1, 2010, it would no longer
participate in the TAG Program. As a result of the Firm’s decision
to opt out of the program, after December 31, 2009, funds held
in noninterest-bearing transaction accounts will no longer be
guaranteed in full, but will be insured up to $250,000 under the
FDIC’s general deposit rules. The insurance amount of $250,000
per depositor is in effect through December 31, 2013. On January
1, 2014, the insurance amount will return to $100,000 per de-
positor for all account categories except Individual Retirement
Accounts (“IRAs”) and certain other retirement accounts, which
will remain at $250,000 per depositor.
Funding
Sources of funds
The deposits held by the RFS, CB, TSS and AM lines of business are
generally stable sources of funding for JPMorgan Chase Bank, N.A.
As of December 31, 2009, total deposits for the Firm were $938.4
billion, compared with $1.0 trillion at December 31, 2008. A signifi-
cant portion of the Firm’s deposits are retail deposits (38% at
December 31, 2009), which are less sensitive to interest rate
changes or market volatility and therefore are considered more
stable than market-based (i.e., wholesale) liability balances. In
addition, through the normal course of business, the Firm benefits
from substantial liability balances originated by RFS, CB, TSS and
AM. These franchise-generated liability balances include deposits,
as well as deposits that are swept to on–balance sheet liabilities
(e.g., commercial paper, federal funds purchased, and securities
loaned or sold under repurchase agreements), a significant portion
of which are considered to be stable and consistent sources of
funding due to the nature of the businesses from which they are
generated. For further discussions of deposit and liability balance
trends, see the discussion of the results for the Firm’s business
segments and the Balance sheet analysis on pages 63–81 and 84–
86, respectively, of this Annual Report.
Additional sources of funding include a variety of unsecured short-
and long-term instruments, including federal funds purchased,
certificates of deposit, time deposits, bank notes, commercial paper,
long-term debt, trust preferred capital debt securities, preferred
stock and common stock. Secured sources of funding include
securities loaned or sold under repurchase agreements, asset-
backed securitizations, and borrowings from the Chicago, Pitts-
burgh and San Francisco Federal Home Loan Banks. The Firm also
borrows from the Federal Reserve (including discount-window
borrowings, the Primary Dealer Credit Facility and the Term Auction
Facility); however, the Firm does not view such borrowings from the
Federal Reserve as a primary means of funding.
Issuance
Funding markets are evaluated on an ongoing basis to achieve an
appropriate global balance of unsecured and secured funding at
favorable rates. Generating funding from a broad range of
sources in a variety of geographic locations enhances financial
flexibility and limits dependence on any one source.
During 2009 and 2008, the Firm issued $19.7 billion and $20.8
billion, respectively, of FDIC-guaranteed long-term debt under the
TLG Program, which became effective in October 2008. In 2009 the
Firm also issued non-FDIC guaranteed debt of $16.1 billion, includ-
ing $11.0 billion of senior notes and $2.5 billion of trust preferred
capital debt securities, in the U.S. market, and $2.6 billion of senior
notes in the European markets. In 2008 the Firm issued non-FDIC
guaranteed debt of $23.6 billion, including $12.2 billion of senior
notes and $1.8 billion of trust preferred capital debt securities in the
U.S. market and $9.6 billion of senior notes in non-U.S. markets.
Issuing non-FDIC guaranteed debt in the capital markets in 2009
was a prerequisite to redeeming the $25.0 billion of Series K Pre-
ferred Stock. In addition, during 2009 and 2008, JPMorgan Chase
issued $15.5 billion and $28.0 billion, respectively, of IB structured
notes that are included within long-term debt. During 2009 and
2008, $55.7 billion and $62.7 billion, respectively, of long-term
debt (including trust preferred capital debt securities) matured or
was redeemed, including $27.2 billion and $35.8 billion, respec-
tively, of IB structured notes; the maturities or redemptions in 2009
offset the issuances during the period. During 2009 and 2008, the
Firm also securitized $26.5 billion and $21.4 billion, respectively, of
credit card loans.
Replacement capital covenants
In connection with the issuance of certain of its trust preferred
capital debt securities and its noncumulative perpetual preferred
stock, the Firm has entered into Replacement Capital Covenants
(“RCCs”). These RCCs grant certain rights to the holders of “cov-
ered debt,” as defined in the RCCs, that prohibit the repayment,
redemption or purchase of such trust preferred capital debt securi-
ties and noncumulative perpetual preferred stock except, with
limited exceptions, to the extent that JPMorgan Chase has received,
in each such case, specified amounts of proceeds from the sale of
certain qualifying securities. Currently, the Firm’s covered debt is its
5.875% Junior Subordinated Deferrable Interest Debentures, Series
O, due in 2035. For more information regarding these covenants,
reference is made to the respective RCCs (including any supple-
ments thereto) entered into by the Firm in relation to such trust
preferred capital debt securities and noncumulative perpetual
preferred stock, which are available in filings made by the Firm
with the U.S. Securities and Exchange Commission.
Cash flows
For the years ended December 31, 2009, 2008 and 2007, cash
and due from banks decreased $689 million, $13.2 billion and
$268 million, respectively. The following discussion highlights the
major activities and transactions that affected JPMorgan Chase’s
cash flows during 2009, 2008 and 2007.
Cash flows from operating activities
JPMorgan Chase’s operating assets and liabilities support the
Firm’s capital markets and lending activities, including the origi-
nation or purchase of loans initially designated as held-for-sale.
Operating assets and liabilities can vary significantly in the normal
course of business due to the amount and timing of cash flows,
which are affected by client-driven activities, market conditions