JP Morgan Chase 2006 Annual Report Download - page 56

MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
54 JPMorgan Chase & Co. / 2006 Annual Report
Private equity portfolio
2006 compared with 2005
The carrying value of the private equity portfolio declined by $95 million to
$6.1 billion as of December 31, 2006. This decline was due primarily to sales
offset partially by new investment activity. The portfolio represented 8.6% of
the Firm’s stockholders’ equity less goodwill at December 31, 2006, down
from 9.7% at December 31, 2005.
2005 compared with 2004
The carrying value of the private equity portfolio declined by $1.3 billion to
$6.2 billion as of December 31, 2005. This decline was primarily the result of
sales and recapitalizations of direct investments. The portfolio represented
9.7% and 12% of JPMorgan Chase’s stockholders’ equity less goodwill at
December 31, 2005 and 2004, respectively.
Selected income statement and
balance sheet data
Year ended December 31,
(in millions) 2006 2005 2004(d)
Treasury
Securities gains (losses)(a) $ (619) $ (1,486) $ 339
Investment portfolio (average) 63,361 46,520 57,776
Investment portfolio (ending) 82,091 30,741 64,949
Private equity gains (losses)
Realized gains $ 1,223 $ 1,969 $ 1,423
Write-ups / (write-downs) (73) (72) (192)
Mark-to-market gains (losses) 72 (338) 164
Total direct investments 1,222 1,559 1,395
Third-party fund investments 77 132 34
Total private equity gains (losses)(b) 1,299 1,691 1,429
Private equity portfolio information(c)
Direct investments
Public securities
Carrying value $ 587 $ 479 $ 1,170
Cost 451 403 744
Quoted public value 831 683 1,758
Private direct securities
Carrying value 4,692 5,028 5,686
Cost 5,795 6,463 7,178
Third-party fund investments
Carrying value 802 669 641
Cost 1,080 1,003 1,042
Total private equity portfolio
Carrying value $ 6,081 $ 6,176 $ 7,497
Cost $ 7,326 $ 7,869 $ 8,964
(a) Gains/losses reflect repositioning of the Treasury investment securities portfolio. Excludes
gains/losses on securities used to manage risk associated with MSRs.
(b) Included in Principal transactions.
(c) For further information on the Firm’s policies regarding the valuation of the private equity
portfolio, see Critical accounting estimates used by the Firm on pages 84–85 and Note 4 on
pages 98–99 of this Annual Report, respectively.
(d) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.
Net interest income was a loss of $2.8 billion compared with a loss of
$1.2 billion in the prior year. Actions and policies adopted in conjunction
with the Merger and the repositioning of the Treasury investment portfolio
were the main drivers of the increased loss.
Total noninterest expense was $5.3 billion, down $1.1 billion from $6.4 billion
in the prior year. Material litigation charges were $2.8 billion compared with
$3.7 billion in the prior year. Merger costs were $722 million compared with
$1.4 billion in the prior year. These decreases were offset primarily by the cost
of accelerated vesting of certain employee stock options.
On September 15, 2004, JPMorgan Chase and IBM announced the Firm’s plans
to reintegrate the portions of its technology infrastructure – including data
centers, help desks, distributed computing, data networks and voice networks
– that were previously outsourced to IBM. In January 2005, approximately
3,100 employees and 800 contract employees were transferred to the Firm.
Selected metrics
Year ended December 31,
(in millions, except headcount) 2006 2005 2004(e)
Total net revenue
Private equity $ 1,142 $ 1,521 $ 1,211
Treasury (797) (3,278) 81
Corporate other(a) (337) 621 (523)
Total net revenue $ 8 $ (1,136) $ 769
Net income (loss)
Private equity $ 627 $ 821 $ 602
Treasury (560) (2,028) (106)
Corporate other(a)(b)(c) 169 (2,128) (3,337)
Merger costs (189) (448) (847)
Income (loss) from continuing operations 47 (3,783) (3,688)
Income from discontinued operations
(after-tax)(d) 795 229 206
Total net income (loss) $ 842 $ (3,554) $(3,482)
Headcount 23,242 30,666 26,956
(a) Includes a gain of $64 million ($103 million pretax) in 2006 related to the initial public
offering of Mastercard, and a gain of $752 million ($1.3 billion pretax) on the sale of
BrownCo in 2005.
(b) Includes insurance recoveries (after-tax) related to material legal proceedings of $317 mil-
lion and $129 million in 2006 and 2005, respectively. Includes litigation reserve charges
(after-tax) of $1.7 billion and $2.3 billion in 2005 and 2004, respectively.
(c) Includes tax benefits recognized upon resolution of tax audits.
(d) Includes a $622 million gain from exiting the corporate trust business in the fourth quarter of
2006.
(e) 2004 results include six months of the combined Firm’s results and six months of heritage
JPMorgan Chase results.