JP Morgan Chase 2008 Annual Report Download - page 182

Notes to consolidated financial statements
180 JPMorgan Chase & Co./ 2008 Annual Report
The table below summarizes the changes in the allowance for lend-
ing-related commitments.
Year ended December 31, (in millions) 2008 2007 2006
Allowance for lending-related
commitments at January 1 $ 850 $ 524 $ 400
Provision for lending-related commitments
Provision excluding accounting
conformity (215) 326 117
Provision for lending-related commitments
– accounting conformity(a) (43) ——
Total provision for lending-related
commitments (258) 326 117
Addition resulting from Washington Mutual 66 ——
Other(b) 1—7
Allowance for lending-related
commitments at December 31 $ 659 $ 850 $ 524
Components:
Asset-specific $29 $28 $33
Formula-based 630 822 491
Total allowance for lending-
related commitments $ 659 $ 850 $ 524
(a) Related to the Washington Mutual transaction.
(b) The 2006 amount represents the Bank of New York transaction.
Note 16 – Loan securitizations
JPMorgan Chase securitizes and sells a variety of loans, including resi-
dential mortgage, credit card, automobile, student, and commercial
loans (primarily related to real estate). JPMorgan Chase-sponsored
securitizations utilize SPEs as part of the securitization process. These
SPEs are structured to meet the definition of a QSPE (as discussed in
Note 1 on page 134 of this Annual Report); accordingly, the assets
and liabilities of securitization-related QSPEs are not reflected on the
Firm’s Consolidated Balance Sheets (except for retained interests, as
described below). The primary purpose of these securitization vehicles
is to meet investor needs and to generate liquidity for the Firm
through the sale of loans to the QSPEs. These QSPEs are financed
through the issuance of fixed, or floating-rate asset-backed securities.
The Firm records a loan securitization as a sale when the accounting
criteria for a sale are met. Those criteria are: (1) the transferred
assets are legally isolated from the Firm’s creditors; (2) the entity can
pledge or exchange the financial assets, or if the entity is a QSPE, its
investors can pledge or exchange their interests; and (3) the Firm
does not maintain effective control to repurchase the transferred
assets before their maturity or have the ability to unilaterally cause
the holder to return the transferred assets.
For loan securitizations that meet the accounting sales criteria, the
gains or losses recorded depend, in part, on the carrying amount of
the loans sold except for servicing assets which are initially recorded
at fair value. At the time of sale, any retained servicing asset is initially
recognized at fair value. The remaining carrying amount of the loans
sold is allocated between the loans sold and the other interests
retained, based upon their relative fair values on the date of sale.
Gains on securitizations are reported in noninterest revenue.
When quoted market prices are not available, the Firm estimates the
fair value for these retained interests by calculating the present
value of future expected cash flows using modeling techniques.
Such models incorporate management’s best estimates of key vari-
ables, such as expected credit losses, prepayment speeds and the
discount rates appropriate for the risks involved. See Note 4 on
page 144 of this Annual Report for further information on the valu-
ation of retained interests.
The Firm may retain interests in the securitized loans in the form of
undivided seller’s interest, senior or subordinated interest-only strips,
debt and equity tranches, escrow accounts and servicing rights. The
classification of retained interests is dependent upon several factors,
including the type of interest, whether or not the retained interest is
represented by a security certificate and when it was retained. Interests
retained by IB are classified as trading assets. See credit card securiti-
zations and mortgage securitizations sections of the note for further
information on the classification of their related retained interests.
Retained interests classified as AFS that are rated below “AA” by an
external rating agency are subject to the impairment provisions of EITF
99-20, as discussed in Note 12 on page 174 of this Annual Report.