JP Morgan Chase 2010 Annual Report Download - page 95

JPMorgan Chase & Co./2010 Annual Report
95
OFF–BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
JPMorgan Chase is involved with several types of off–balance sheet
arrangements, including through unconsolidated special-purpose
entities (“SPEs”), which are a type of VIE, and through lending-
related financial instruments (e.g., commitments and guarantees).
Special-purpose entities
SPEs are the most common type of VIE, used in securitization
transactions to isolate certain assets and distribute related cash
flows to investors. The basic SPE structure involves a company
selling assets to the SPE. The SPE funds the purchase of those
assets by issuing securities 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.
As a result of new accounting guidance, certain VIEs were
consolidated on the Firm’s Consolidated Balance Sheets effective
January 1, 2010. Nevertheless, SPEs continue to be an important part
of the financial markets, as they provide 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, investor intermediation activities, and loan
securitizations. See Note 16 on pages 244–259 for further
information on these types of SPEs.
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 has no commitments to issue its own stock to support any
SPE transaction, and its policies require that transactions with SPEs
be conducted at arm’s length and reflect market pricing. Consistent
with this policy, no JPMorgan Chase employee is permitted to
invest in SPEs with which the Firm is involved where such
investment would violate the Firm’s Code of Conduct. These rules
prohibit employees from self-dealing and acting on behalf of the
Firm in transactions with which they or their family have any
significant financial interest.
Implications of a credit rating downgrade to
JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, the Firm could be
required to provide funding if the short-term credit rating of
JPMorgan Chase Bank, N.A., were downgraded below specific
levels, primarily “P-1”, “A-1” and “F1” for Moody’s, Standard &
Poor’s and Fitch, respectively. The aggregate amount of these
liquidity commitments, to both consolidated and nonconsolidated
SPEs, were $34.2 billion at both December 31, 2010 and 2009.
Alternatively, if JPMorgan Chase Bank, N.A., were downgraded,
the Firm could be replaced by another liquidity provider in lieu of
providing funding under the liquidity commitment or, in certain
circumstances, the Firm could facilitate the sale or refinancing of
the assets in the SPE in order to provide liquidity.
Special-purpose entities revenue
The following table summarizes certain revenue information related
to consolidated and nonconsolidated VIEs with which the Firm has
significant involvement. The revenue reported in the table below
primarily represents contractual servicing and credit fee income
(i.e., fee income from acting as administrator, structurer or liquidity
provider). It does not include gains and losses from changes in the
fair value of trading positions (such as derivative transactions)
entered into with VIEs. Those gains and losses are recorded in
principal transactions revenue.
Revenue from VIEs and Securitization Entities(a)
Year ended December 31,
(in millions)
2010
2009 2008
Multi-seller conduits $ 240 $ 460 $ 314
Investor intermediation
49
34 22
Other securitization entities
(b)
2,005 2,510 1,742
Total
$
2,294
$ 3,004 $ 2,078
(a) Includes revenue associated with both consolidated VIEs and significant
nonconsolidated VIEs.
(b) Excludes servicing revenue from loans sold to and securitized by third parties.
Loan modifications
The Firm modifies certain 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. See Consumer Credit Portfolio on pages 129–138 of this
Annual Report for more details on these loan modifications.
Off–balance sheet lending-related financial
instruments and other guarantees
JPMorgan Chase uses lending-related financial instruments (e.g.,
commitments and guarantees) to meet the financing needs of its
customers. The contractual amount of these financial instruments
represents the Firm’s maximum possible credit risk should the
counterparty draw upon the commitment or the Firm be required
to fulfill its obligation under the guarantee, and should the
counterparty subsequently fail to perform according to the terms
of the contract. Most of these commitments and guarantees
expire without being drawn or a default occurring. As a result,
the total contractual amount of these instruments is not, in the
Firm’s view, representative of its actual future credit exposure or
funding requirements. For further discussion of lending-related
commitments and guarantees and the Firm’s accounting for
them, see Lending-related commitments on page 128 and Note
30 on pages 275–280 of this Annual Report.
The accompanying table presents, as of December 31, 2010, the
amounts by contractual maturity of off–balance sheet lending-
related financial instruments and other guarantees. The amounts in
the table for credit card and home equity lending-related
commitments represent the total available credit for these products.