JP Morgan Chase 2006 Annual Report Download - page 100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
98 JPMorgan Chase & Co. / 2006 Annual Report
Note 4 – Principal transactions
Principal transactions is a new caption, effective January 1, 2006, in the
Consolidated statements of income. Principal transactions revenue consists of:
realized and unrealized gains and losses from trading activities (including
physical commodities inventories that are accounted for at the lower of cost
or fair value); changes in fair value associated with structured notes to which
the SFAS 155 fair value election has been applied, and Private equity gains and
losses. The prior-period presentation of Trading revenue and Private equity
gains (losses) has been reclassified to this new caption. The following table
presents Principal transactions revenue:
Year ended December 31, (in millions) 2006 2005 2004(a)
Trading revenue $ 8,986 $ 5,860 $ 3,612
Private equity gains 1,360 1,809 1,536
Principal transactions $10,346 $ 7,669 $ 5,148
(a) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
Trading assets and liabilities
Trading assets include debt and equity securities held for trading purposes
that JPMorgan Chase owns (“long” positions). Trading liabilities include debt
and equity securities that the Firm has sold to other parties but does not own
(“short” positions). The Firm is obligated to purchase securities at a future
date to cover the short positions. Included in Trading assets and Trading liabil-
ities are the reported receivables (unrealized gains) and payables (unrealized
losses) related to derivatives. Loans are classified as trading where positions
are bought and sold to make profits from short-term movements in price.
Trading positions are carried at fair value on the Consolidated balance sheets.
The following table presents the fair value of Trading assets and Trading
liabilities for the dates indicated:
December 31, (in millions) 2006 2005
Trading assets
Debt and equity instruments:
U.S. government and federal agency obligations $ 17,358 $ 16,283
U.S. government-sponsored enterprise obligations 28,544 24,172
Obligations of state and political subdivisions 9,569 9,887
Certificates of deposit, bankers’ acceptances
and commercial paper 8,204 5,652
Debt securities issued by non-U.S. governments 58,387 48,671
Corporate securities and other 188,075 143,925
Total debt and equity instruments 310,137 248,590
Derivative receivables:(a)(b)
Interest rate 28,932 28,113
Foreign exchange 4,260 2,855
Equity 6,246 5,575
Credit derivatives 5,732 3,464
Commodity 10,431 9,780
Total derivative receivables 55,601 49,787
Total trading assets $ 365,738 $ 298,377
December 31, (in millions) 2006 2005
Trading liabilities
Debt and equity instruments(c) $ 90,488 $ 94,157
Derivative payables:(a)(b)
Interest rate 22,738 26,930
Foreign exchange 4,820 3,453
Equity 16,579 11,539
Credit derivatives 6,003 2,445
Commodity 7,329 7,406
Total derivative payables 57,469 51,773
Total trading liabilities $ 147,957 $ 145,930
(a) 2005 has been adjusted to reflect more appropriate product classifications of certain bal-
ances.
(b) Included in Trading assets and Trading liabilities are the reported receivables (unrealized
gains) and payables (unrealized losses) related to derivatives. These amounts are reported
net of cash received and paid of $23.0 billion and $18.8 billion, respectively, at December
31, 2006, and $26.7 billion and $18.9 billion, respectively, at December 31, 2005, under
legally enforceable master netting agreements.
(c) Primarily represents securities sold, not yet purchased.
Average Trading assets and liabilities were as follows for the periods indicated:
Year ended December 31, (in millions) 2006 2005 2004(b)
Trading assets – debt and
equity instruments $280,079 $ 237,073 $ 200,389
Trading assets – derivative receivables 57,368 57,365 59,522
Trading liabilities – debt and
equity instruments(a) $102,794 $ 93,102 $ 82,204
Trading liabilities – derivative payables 57,938 55,723 52,761
(a) Primarily represents securities sold, not yet purchased.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
Private equity
The following table presents the carrying value and cost of the Private equity
investment portfolio for the dates indicated:
December 31, 2006 2005
(in millions) Carrying value Cost Carrying value Cost
Total private equity
investments $ 6,359 $ 7,560 $ 6,374 $ 8,036
Private equity investments are held primarily by the Private equity business within
Corporate (which includes investments made by JPMorgan Partners and ONE
Equity Partners). The Private Equity business invests in buyouts, growth equity and
venture opportunities. These investments are accounted for under investment
company guidelines. Accordingly, these investments, irrespective of the percentage
of equity ownership interest held by Private equity, are carried on the Consolidated
balance sheets at fair value. Realized and unrealized gains and losses arising from
changes in value are reported in Principal transactions revenue in the Consolidated
statements of income in the period that the gains or losses occur.
Privately held investments are initially valued based upon cost. The carrying val-
ues of privately held investments are adjusted from cost to reflect both positive
and negative changes evidenced by financing events with third-party capital
providers. In addition, these investments are subject to ongoing impairment
reviews by Private equity senior investment professionals. A variety of factors are
reviewed and monitored to assess impairment including, but not limited to,
operating performance of, and future expectations regarding, the particular port-
folio investment; industry valuations of comparable public companies; changes
in market outlook; and the third-party financing environment over time.