JP Morgan Chase 2003 Annual Report Download - page 106

Notes to consolidated financial statements
J.P. M organ Chase & Co.
104 J.P. Morgan Chase & Co./ 2003 Annual Report
Notes to consolidated financial statements
J.P. M organ Chase & Co.
conduits. Commercial paper issued by conduits for w hich the Firm
acts as administrator aggregated $11.7 billion at December 31,
2003, and $17.5 billion at December 31, 2002. The commercial
paper issued is backed by sufficient collateral, credit enhance-
ments and commitments to provide liquidity to support receiving
at least an A-1, P-1 and, in certain cases, an F1 rating.
The Firm had commitments to provide liquidity on an asset-
specific basis to these vehicles in an amount up to $18.0 billion
at December 31, 2003, and $23.5 billion at December 31,
2002. Third-party banks had commitments to provide liquidity
on an asset-specific basis to these vehicles in an amount up to
$700 million at December 31, 2003, and up to $900 million
at December 31, 2002. Asset-specific liquidity is the primary
source of liquidity support for the conduits. In addition,
program-w ide liquidity is provided by JPM organ Chase to these
vehicles in the event of short-term disruptions in the commer-
cial paper market; these commitments totaled $2.6 billion and
$2.7 billion at December 31, 2003 and 2002, respectively. For
certain multi-seller conduits, JPM organ Chase also provides lim-
ited credit enhancement, primarily through the issuance of
letters of credit. Commitments under these letters of credit
totaled $1.9 billion and $3.4 billion at December 31, 2003 and
2002, respectively. JPM organ Chase applies the same
underw riting standards in making liquidity commitments to
conduits as the Firm w ould w ith other extensions of credit.
If JPM organ Chase w ere dow ngraded below A-1, P-1 and, in
certain cases, F1, the Firm could also be required to provide
funding under these liquidity commitments, since commercial
paper rated below A-1, P-1 or F1 w ould generally not be
issuable by the vehicle. Under these circumstances, the Firm
could either replace itself as liquidity provider or facilitate the
sale or refinancing of the assets held in the VIE in other
markets.
JPM organ Chase’s maximum credit exposure to these vehicles
at December 31, 2003, is $18.7 billion, as the Firm cannot be
obligated to fund the entire notional amounts of asset-specific
liquidity, program-w ide liquidity and credit enhancement facili-
ties at the same time. How ever, the Firm view s its credit
exposure to multi-seller conduit transactions as limited. This is
because, for the most part, the Firm is not required to fund
under the liquidity facilities if the assets in the VIE are in default.
Additionally, the Firm’s obligations under the letters of credit are
secondary to the risk of first loss provided by the client or other
third parties – for example, by the overcollateralization of the
VIE w ith the assets sold to it.
JPM organ Chase consolidated these asset-backed commercial
paper conduits at July 1, 2003, in accordance w ith FIN 46
and recorded the assets and liabilities of the conduits on its
Consolidated balance sheet. In December 2003, one of the
multi-seller conduits was restructured with the issuance of
preferred securities acquired by an independent third-party
investor, w ho w ill absorb the majority of the expected losses
Notes to consolidated financial statements
J.P. M organ Chase & Co.
of the conduit. In determining the primary beneficiary of the
conduit, the Firm leveraged an existing rating agency model
that is an independent market standard to size the expected
losses and considered the relative rights and obligations of each
of the variable interest holders. As a result of the restructuring,
JPM organ Chase deconsolidated approximately $5.4 billion of
the vehicle’s assets and liabilities as of December 31, 2003.
The remaining conduits continue to be consolidated on the
Firm’s balance sheet at December 31, 2003: $4.8 billion of
assets recorded in Loans, and $1.5 billion of assets recorded in
Available-for-sale securities.
Client intermediation
As a financial intermediary, the Firm is involved in structuring
VIE transactions to meet investor and client needs. The Firm inter-
mediates various types of risks (including, for example, fixed
income, equity and credit), typically using derivative instruments.
In certain circumstances, the Firm also provides liquidity and
other support to the VIEs to facilitate the transaction. The Firm’s
current exposure to nonconsolidated VIEs is reflected in its
Consolidated balance sheet or in the Notes to consolidated
financial statements. The risks inherent in derivative instruments
or liquidity commitments are managed similarly to other credit,
market and liquidity risks to w hich the Firm is exposed.
Assets held by certain client intermediation–related VIEs at
December 31, 2003 and 2002, w ere as follow s:
December 31, (in billions) 2003 2002
Structured commercial loan vehicles $5.3 $ 7.2
Credit-linked note vehicles 17.7 9.2
Municipal bond vehicles 5.5 5.0
Other client intermediation vehicles 5.8 7.4
The Firm has created structured commercial loan vehicles
managed by third parties, in w hich loans are purchased from
third parties or through the Firm’s syndication and trading func-
tions and funded by issuing commercial paper. Investors provide
collateral and have a first risk of loss up to the amount of collat-
eral pledged. The Firm retains a second-risk-of-loss position for
these vehicles and does not absorb a majority of the expected
losses of the vehicles. Documentation includes provisions intended,
subject to certain conditions, to enable JPM organ Chase to termi-
nate the transactions related to a particular loan vehicle if the
value of the relevant portfolio declines below a specified level.
The amount of the commercial paper issued by these vehicles
totaled $5.3 billion as of December 31, 2003, and $7.2 billion as
of December 31, 2002. JPM organ Chase was committed to pro-
vide liquidity to these VIEs of up to $8.0 billion at December 31,
2003, and $12.0 billion at December 31, 2002. The Firm’s maxi-
mum exposure to loss to these vehicles at December 31, 2003,
w as $5.5 billion, w hich reflects the netting of collateral and other
program limits.