JP Morgan Chase 2008 Annual Report Download - page 201

JPMorgan Chase & Co./ 2008 Annual Report 199
Goodwill and other intangible assets consist of the following.
December 31, (in millions) 2008 2007
Goodwill $ 48,027 $45,270
Mortgage servicing rights 9,403 8,632
Purchased credit card relationships 1,649 2,303
All other intangibles:
Other credit card–related intangibles $ 743 $ 346
Core deposit intangibles 1,597 2,067
Other intangibles 1,592 1,383
Total all other intangible assets $ 3,932 $ 3,796
Goodwill
The $2.8 billion increase in goodwill from the prior year primarily
resulted from the dissolution of the Chase Paymentech Solutions
joint venture, the merger with Bear Stearns, the purchase of an addi-
tional equity interest in Highbridge and the tax-related purchase
accounting adjustments associated with the Bank One merger, which
increased goodwill attributed to IB. The decrease in goodwill attrib-
uted to TSS predominantly resulted from the sale of a previously con-
solidated subsidiary. For additional information see Note 2 on pages
135–140 of this Annual Report.
Goodwill was not impaired at December 31, 2008, or 2007, nor was
any goodwill written off due to impairment during 2008 and 2007.
Goodwill attributed to the business segments was as follows.
December 31, (in millions) 2008 2007
Investment Bank $ 4,765 $ 3,578
Retail Financial Services 16,840 16,848
Card Services 13,977 12,810
Commercial Banking 2,870 2,873
Treasury & Securities Services 1,633 1,660
Asset Management 7,565 7,124
Corporate/Private Equity 377 377
Total goodwill $ 48,027 $45,270
Mortgage servicing rights
JPMorgan Chase recognizes as intangible assets mortgage servicing
rights, which represent the right to perform specified mortgage serv-
icing activities (predominantly with respect to residential mortgages)
for others. MSRs are either purchased from third parties or retained
upon sale or securitization of mortgage loans. Servicing activities
include collecting principal, interest, and escrow payments from bor-
rowers; making tax and insurance payments on behalf of borrowers;
monitoring delinquencies and executing foreclosure proceedings; and
accounting for and remitting principal and interest payments to the
investors of the mortgage-backed securities.
As permitted by SFAS 156, the Firm elected to fair value MSRs as
one class of servicing assets. The Firm defined MSRs as one class
based on the availability of market inputs to measure MSR fair value
and its treatment of MSRs as one aggregate pool for risk manage-
ment purposes.
The Firm initially capitalizes MSRs based on the estimated fair value
at the time of initial recognition. The Firm estimates the fair value of
MSRs for initial capitalization and ongoing valuation using an
option-adjusted spread model, which projects MSR cash flows over
multiple interest rate scenarios in conjunction with the Firm’s propri-
etary prepayment model and then discounts these cash flows at risk-
adjusted rates. The model considers portfolio characteristics, contrac-
tually specified servicing fees, prepayment assumptions, delinquency
rates, late charges, other ancillary revenue and costs to service, and
other economic factors. The Firm reassesses and periodically adjusts
the underlying inputs and assumptions used in the OAS model to
reflect market conditions and assumptions that a market participant
would consider in valuing the MSR asset. During 2007 and 2008, the
Firm continued to refine its proprietary payment model based upon a
number of market-related factors, including a downward trend in
home prices, general tightening of credit underwriting standards and
the associated impact on refinancing activity. The Firm compares fair
value estimates and assumptions to observable market data where
available and to recent market activity and actual portfolio experi-
ence.
The fair value of MSRs is sensitive to changes in interest rates,
including their effect on prepayment speeds. JPMorgan Chase uses
or has used combinations of derivatives and trading instruments to
manage changes in the fair value of MSRs. The intent is to offset any
changes in the fair value of MSRs with changes in the fair value of
the related risk management instruments. MSRs decrease in value
when interest rates decline. Conversely, securities (such as mortgage-
backed securities), principal-only certificates and certain derivatives
(when the Firm receives fixed-rate interest payments) increase in
value when interest rates decline.