JP Morgan Chase 2003 Annual Report Download - page 79

J.P. Morgan Chase & Co. / 2003 Annual Report 77
Loans held-f or-sale
The fair value of loans in the held-for-sale portfolio is generally
based on observable market prices of similar instruments,
including bonds, credit derivatives and loans w ith similar
characteristics. If market prices are not available, fair value is
based on the estimated cash flow s, adjusted for credit risk that
is discounted using a rate appropriate for each maturity that
incorporates the effects of interest rate changes.
Privat e equity investment s
Valuation of private investments held by JPM P requires signifi-
cant management judgment due to the absence of quoted
market prices, inherent lack of liquidity and long-term nature of
such assets. Private investments are initially valued based on
cost. The carrying values of private investments are adjusted
from cost to reflect both positive and negative changes evi-
denced by financing events with third-party capital providers. In
addition, these investments are subject to ongoing impairment
reviews by JPM P’s senior investment professionals. A variety of
factors are review ed and monitored to assess impairment
including, but not limited to, operating performance and future
expectations, industry valuations of comparable public compa-
nies, changes in market outlook and the third-party financing
environment over time. The Valuation Control Group w ithin the
Finance area is responsible for review ing the accuracy of the
carrying values of private investments held by JPM P. For addi-
tional information about private equity investments, see the
Private equity risk management discussion on page 74 and
Note 15 on page 106 of this Annual Report.
MSRs and cert ain ot her retained int erest s
M SRs and certain other retained interests from securitization
activities do not trade in an active, open market w ith readily
observable prices. For example, sales of M SRs do occur, but the
precise terms and conditions are typically not readily available.
Accordingly, the Firm estimates the fair value of M SRs and cer-
tain other retained interests using a discounted future cash flow
model. The model considers portfolio characteristics, contractu-
ally specified servicing fees and prepayment assumptions, delin-
quency rates, late charges, other ancillary revenues, costs to
service and other economic factors. The Firm compares its fair
value estimates and assumptions to observable market data
w here available, to recent market activity and to actual portfolio
experience. M anagement believes that the fair values and related
assumptions are comparable to those used by other market partici-
pants. For a further discussion of the most significant assumptions
used to value these retained interests, as w ell as the applicable
stress tests for those assumptions, see Notes 13 and 16 on pages
100–103 and 107–109, respectively, of this Annual Report.
Nonexchange-traded commodity contracts at fair value
In the normal course of business, JPM organ Chase trades
nonexchange-traded commodity contracts. To determine the
fair value of these contracts, the Firm uses various fair value
estimation techniques, which are primarily based on internal
models w ith significant observable market parameters. The Firm’s
nonexchange-traded commodity contracts are primarily energy-
related contracts. The follow ing table summarizes the changes in
fair value for nonexchange-traded commodity contracts for the
year ended December 31, 2003:
For the year ended December 31, 2003 (in millions) Asset position Liability position
Net fair value of contracts outstanding at January 1, 2003 $1,938 $ 839
Effect of legally enforceable master netting agreements 1,279 1,289
Gross fair value of contracts outstanding at January 1, 2003 3,217 2,128
Contracts realized or otherwise settled during the period (2,559) (2,465)
Fair value of new contracts 303 291
Changes in fair values attributable to changes in valuation techniques and assumptions — —
Other changes in fair value 1,370 1,716
Gross fair value of contracts outstanding at December 31, 2003 2,331 1,670
Effect of legally enforceable master netting agreements (834) (919)
Net fair value of contracts outstanding at December 31, 2003 $1,497 $ 751
The follow ing table indicates the schedule of maturities of nonexchange-traded commodity contracts at December 31, 2003:
At December 31, 2003 (in millions) Asset position Liability position
Maturity less than 1 year $842 $ 901
Maturity 1–3 years 1,128 550
Maturity 4–5 years 356 212
Maturity in excess of 5 years 57
Gross fair value of contracts outstanding at December 31, 2003 2,331 1,670
Effects of legally enforceable master netting agreements (834) (919)
Net fair value of contracts outstanding at December 31, 2003 $1,497 $ 751