JP Morgan Chase 2008 Annual Report Download - page 100

Management’s discussion and analysis
98 JPMorgan Chase & Co./ 2008 Annual Report
(a) Rankings are based upon exposure at December 31, 2008. The industries presented
in 2007 table reflect the rankings in the 2008 table.
(b) For more information on exposures to SPEs included in all other, see Note 17 on
pages 189–198 of this Annual Report.
(c) Loans held-for-sale and loans at fair value relate primarily to syndicated loans and
loans transferred from the retained portfolio.
(d) Credit exposure is net of risk participations and excludes the benefit of credit deriva-
tive hedges and collateral held against derivative receivables or loans.
(e) Represents the net notional amounts of protection purchased and sold of single-
name and portfolio credit derivatives used to manage the credit exposures; these
derivatives do not qualify for hedge accounting under SFAS 133.
(f) Represents other liquid securities collateral held by the Firm as of December 31,
2008 and 2007, respectively.
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar
to a rating of “CCC+”/”Caa1” and lower, as defined by S&P and
Moody’s.The total criticized component of the portfolio, excluding
loans held-for-sale and loans at fair value, increased to $26.0 billion at
December 31, 2008, from $6.8 billion at year-end 2007. The increase
was driven primarily by downgrades in the wholesale portfolio.
Industry concentrations for wholesale criticized exposure as of
December 31, 2008 and 2007, were as follows.
2008 2007
December 31, Credit % of Credit % of
(in millions, except ratios) exposure portfolio exposure portfolio
Exposure by industry(a)
Real estate $ 7,737 30% $1,070 16%
Banks and finance companies 2,849 11 498 7
Automotive 1,775 7 1,338 20
Media 1,674 6 303 4
Building materials/construction 1,363 5 345 5
Retail and consumer services 1,311 5 550 8
State and municipal government 847 3 12 —
Asset managers 819 3 212 3
Consumer products 792 3 239 4
Agriculture/paper manufacturing 726 3 138 2
Insurance 712 3 17 —
Chemicals/plastics 591 2 288 4
Healthcare 436 2 246 4
Transportation 319 1 74 1
Metals/mining 262 1 111 2
All other 3,784 15 1,397 20
Total excluding loans
held-for-sale and loans
at fair value $25,997 100% $6,838 100%
Loans held-for-sale and
loans at fair value(b) 2,258 205
Receivables from customers ——
Total $28,255 $7,043
(a) Rankings are based upon exposure at December 31, 2008. The industries presented
in the 2007 table reflect the rankings in the 2008 table.
(b) Loans held-for-sale and loans at fair value relate primarily to syndicated loans and
loans transferred from the retained portfolio.
Presented below is a discussion of several industries to which the
Firm has significant exposure, as well as industries the Firm contin-
ues to monitor because of actual or potential credit concerns. For
additional information, refer to the tables above and on the preced-
ing page.
• Real estate: Exposure to this industry grew in 2008 due to the
Washington Mutual transaction, with approximately 70% of this
increase consisting of exposure to multi-family lending.
Approximately 45% of the real estate exposure is to large real
estate companies and institutions (e.g. REITS), professional real
estate developers, owners, or service providers, and generally
involves real estate leased to third-party tenants. Commercial
construction and development accounted for approximately 13%
of the real estate portfolio at 2008 year-end. Exposure to nation-
al and regional single family homebuilders decreased 31% from
2007 and represented 5% of the portfolio at 2008 year-end. The
increase in criticized exposure was largely a result of downgrades
to select names within the portfolio, primarily in IB, reflecting the
weakening credit environment. The remaining increase in criti-
cized exposure reflected exposures acquired in the Washington
Mutual transaction.
• Banks and finance companies: Exposure to this industry increased
primarily as a result of higher derivative exposure to commercial
banks due to higher volatility and greater trade volume and to
the addition of derivative positions from the Bear Stearns merger.
The percentage of the portfolio that is investment grade has
declined slightly from 2007 as a result of the impact of the
weakening credit environment on financial counterparties. The
growth in criticized exposure was primarily a result of down-
grades to specialty finance companies, reflected in loans and
lending-related commitments.
• Automotive: Industry conditions deteriorated significantly in
2008, particularly in North America, and are expected to remain
under pressure in 2009. The largest percentage of the Firm’s
wholesale criticized exposure in this segment is related to
Original Equipment Manufacturers. However, a majority of the
year-over-year increase in criticized exposure related to automo-
tive suppliers which were negatively affected by significant
declines in automotive production. Most of the Firm’s criticized
exposure in this segment remains performing and is substantially
secured.
• Asset Managers: Exposure in this industry grew from 2007 as a
result of increased derivative exposure to primarily investment
grade funds and the acquisition of loans and lending-related
commitments to this industry due to the Bear Stearns merger.
• All other: All other in the wholesale credit exposure concentration
table on page 97 of this Annual Report at December 31, 2008
included $278.1 billion of credit exposure to 17 industry seg-
ments. Exposures related to SPEs and high-net-worth individuals
were 37% and 19%, respectively, of this category. SPEs provide
secured financing (generally backed by receivables, loans or