JP Morgan Chase 2006 Annual Report Download - page 136

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
134 JPMorgan Chase & Co. / 2006 Annual Report
Exchange and clearinghouse guarantees
The Firm is a member of several securities and futures exchanges and clearing-
houses, both in the United States and other countries. Membership in some of
these organizations requires the Firm to pay a pro rata share of the losses
incurred by the organization as a result of the default of another member. Such
obligations vary with different organizations. These obligations may be limited
to members who dealt with the defaulting member or to the amount (or a
multiple of the amount) of the Firm’s contribution to a members’ guaranty
fund, or, in a few cases, it may be unlimited. It is difficult to estimate the Firm’s
maximum exposure under these membership agreements, since this would
require an assessment of future claims that may be made against the Firm that
have not yet occurred. However, based upon historical experience, manage-
ment expects the risk of loss to be remote.
Derivative guarantees
In addition to the contracts described above, there are certain derivative
contracts to which the Firm is a counterparty that meet the characteristics of a
guarantee under FIN 45. These derivatives are recorded on the Consolidated bal-
ance sheets at fair value. These contracts include written put options that require
the Firm to purchase assets from the option holder at a specified price by a spec-
ified date in the future, as well as derivatives that effectively guarantee the
return on a counterparty’s reference portfolio of assets. The total notional value
of the derivatives that the Firm deems to be guarantees was $72 billion and $62
billion at December 31, 2006 and 2005, respectively. The Firm reduces exposures
to these contracts by entering into offsetting transactions or by entering into
contracts that hedge the market risk related to these contracts. The fair value
related to these contracts was a derivative receivable of $230 million and $198
million, and a derivative payable of $987 million and $767 million at December
31, 2006 and 2005, respectively. Finally, certain written put options and credit
derivatives permit cash settlement and do not require the option holder or the
buyer of credit protection to own the reference asset. The Firm does not consider
these contracts to be guarantees under FIN 45.
Note 30 – Credit risk concentrations
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities or activities in the same geographic region, or when they
have similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions.
JPMorgan Chase regularly monitors various segments of the credit risk portfolio
to assess potential concentration risks and to obtain collateral when deemed
necessary. In the Firm’s wholesale portfolio, risk concentrations are evaluated
primarily by industry and by geographic region. In the consumer portfolio,
concentrations are evaluated primarily by product and by U.S. geographic region.
The Firm does not believe exposure to any one loan product with varying terms
(e.g., interest-only payments for an introductory period) or exposure to loans
with high loan-to-value ratios would result in a significant concentration of credit
risk. Terms of loan products and collateral coverage are included in the Firm’s
assessment when extending credit and establishing its Allowance for loan losses.
For further information regarding on–balance sheet credit concentrations
by major product and geography, see Note 12 on pages 112–113 of this
Annual Report. For information regarding concentrations of off–balance sheet
lending-related financial instruments by major product, see Note 29 on
page 132 of this Annual Report. More information about concentrations can
be found in the following tables or discussion in the MD&A:
Credit risk management – risk monitoring Page 64
Wholesale exposure Page 67
Wholesale selected industry concentrations Page 68
Emerging markets country exposure Page 72
Consumer real estate loan portfolio by geographic location Page 74
The table below presents both on – balance sheet and off – balance sheet wholesale- and consumer-related credit exposure as of December 31, 2006 and 2005:
2006 2005
Credit On-balance Off-balance Credit On-balance Off-balance
December 31, (in billions) exposure(b) sheet(b)(c) sheet(d) exposure(b) sheet(b)(c) sheet(d)
Wholesale-related:
Banks and finance companies $ 63.6 $ 28.1 $ 35.5 $ 51.1 $ 20.3 $ 30.8
Real estate 35.9 21.6 14.3 32.5 19.0 13.5
Healthcare 30.1 6.1 24.0 25.5 4.7 20.8
State and municipal governments 27.5 6.9 20.6 25.3 6.1 19.2
Consumer products 27.1 9.1 18.0 26.7 10.0 16.7
All other wholesale 446.6 167.6 279.0 389.6 169.5 220.1
Total wholesale-related 630.8 239.4 391.4 550.7 229.6 321.1
Consumer-related:
Home equity 155.2 85.7 69.5 132.2 73.9 58.3
Mortgage 66.3 59.7 6.6 64.8 58.9 5.9
Auto loans and leases 48.9 41.0 7.9 51.8 46.1 5.7
All other loans 33.5 27.1 6.4 24.8 18.4 6.4
Card Services-reported(a) 743.0 85.9 657.1 651.0 71.7 579.3
Total consumer–related 1,046.9 299.4 747.5 924.6 269.0 655.6
Total exposure $ 1,677.7 $ 538.8 $ 1,138.9 $ 1,475.3 $ 498.6 $ 976.7
(a) Excludes $67.0 billion and $70.5 billion of securitized credit card receivables at December 31, 2006 and 2005, respectively.
(b) Includes HFS loans.
(c) Represents loans, derivative receivables and interests in purchased receivables.
(d) Represents lending-related financial instruments.