JP Morgan Chase 2008 Annual Report Download - page 176

Notes to consolidated financial statements
174 JPMorgan Chase & Co./ 2008 Annual Report
card-related asset-backed securities, mortgage-backed securities
issued by private issuers and commercial and industrial asset-backed
securities. Of the $2.0 billion of unrealized losses related to credit
card-related asset-backed securities, $1.7 billion relates to purchased
credit card-related asset-backed securities, and $304 million relates
to retained interests in the Firm’s own credit card receivable securiti-
zations. The credit card-related asset-backed securities include
“AAA”, “A” and “BBB” ratings. Based on the levels of excess spread
available to absorb credit losses, and based on the value of interests
subordinate to the Firm’s interests where applicable, the Firm does
not believe it is probable that it will not recover its investments.
Where applicable under EITF 99-20, the collateral and credit
enhancement features are at levels sufficient to ensure that an
adverse change in expected future cash flows has not occurred. Of
the remaining unrealized losses as of December 31, 2008, related to
securities that have been in an unrealized loss position for less than
12 months, $2.7 billion relates to mortgage-backed securities issued
by private issuers and $820 million relates to commercial and indus-
trial asset-backed securities. The mortgage-backed securities and
commercial and industrial asset-backed securities are predominantly
rated “AAA”. Based on an analysis of the performance indicators
noted above for mortgage-backed securities and asset-backed securi-
ties, which have been applied to the loans underlying these securi-
ties, the Firm does not believe it is probable that it will not recover
its investments in these securities.
The Firm intends to hold the securities in an unrealized loss position
for a period of time sufficient to allow for an anticipated recovery in
fair value or maturity. The Firm has sufficient capital and liquidity to
hold these securities until recovery in fair value or maturity. Based on
the Firm’s evaluation of the factors and other objective evidence
described above, the Firm believes that the securities are not other-
than-temporarily impaired as of December 31, 2008.
The following table presents the amortized cost, estimated fair value and average yield at December 31, 2008, of JPMorgan Chase’s AFS and
HTM securities by contractual maturity.
By remaining maturity at Available-for-sale securities Held-to-maturity securities
December 31, 2008 Amortized Fair Average Amortized Fair Average
(in millions, except ratios) cost value yield(b) cost value yield(b)
Due in one year or less $ 24,163 $ 24,056 2.80% $ — $ — —%
Due after one year through five years 26,115 25,075 2.46 — — —
Due after five years through ten years 13,105 12,436 3.78 31 32 6.89
Due after ten years(a) 145,945 144,342 5.19 3 3 5.69
Total securities $ 209,328 $ 205,909 4.49% $ 34 $ 35 6.78%
(a) Includes securities with no stated maturity. Substantially all of the Firm’s mortgage-backed securities and collateralized mortgage obligations are due in ten years or more based upon
contractual maturity. The estimated duration, which reflects anticipated future prepayments based upon a consensus of dealers in the market, is approximately four years for mortgage-
backed securities and collateralized mortgage obligations.
(b) The average yield is based upon amortized cost balances at year-end. Yields are derived by dividing interest income by total amortized cost. Taxable-equivalent yields are used where
applicable.
Note 13 – Securities financing activities
JPMorgan Chase enters into resale agreements, repurchase agree-
ments, securities borrowed transactions and securities loaned trans-
actions, primarily to finance the Firm’s inventory positions, acquire
securities to cover short positions and settle other securities obliga-
tions. The Firm also enters into these transactions to accommodate
customers’ needs.
Resale agreements and repurchase agreements are generally treated
as collateralized financing transactions carried on the Consolidated
Balance Sheets at the amounts the securities will be subsequently
sold or repurchased, plus accrued interest. On January 1, 2007, pur-
suant to the adoption of SFAS 159, the Firm elected fair value meas-
urement for certain resale and repurchase agreements. In 2008, the
Firm elected fair value measurement for certain newly transacted
securities borrowed and securities lending agreements. For a further
discussion of SFAS 159, see Note 5 on pages 156–158 of this
Annual Report. The securities financing agreements for which the fair
value option was elected continue to be reported within securities
purchased under resale agreements; securities loaned or sold under
repurchase agreements; securities borrowed; and other borrowed
funds on the Consolidated Balance Sheets. Generally, for agreements
carried at fair value, current-period interest accruals are recorded
within interest income and interest expense, with changes in fair
value reported in principal transactions revenue. However, for finan-
cial instruments containing embedded derivatives that would be sep-
arately accounted for in accordance with SFAS 133, all changes in
fair value, including any interest elements, are reported in principal
transactions revenue. Where appropriate, resale and repurchase
agreements with the same counterparty are reported on a net basis
in accordance with FIN 41. JPMorgan Chase takes possession of
securities purchased under resale agreements. On a daily basis,
JPMorgan Chase monitors the market value of the underlying collat-
eral, primarily U.S. and non-U.S. government and agency securities,
that it has received from its counterparties, and requests additional
collateral when necessary.
Transactions similar to financing activities that do not meet the SFAS
140 definition of a repurchase agreement are accounted for as
“buys” and “sells” rather than financing transactions. These transac-
tions are accounted for as a purchase (sale) of the underlying securi-
ties with a forward obligation to sell (purchase) the securities. The
forward purchase (sale) obligation, a derivative, is recorded on the
Consolidated Balance Sheets at its fair value, with changes in fair
value recorded in principal transactions revenue.