JP Morgan Chase 2008 Annual Report Download - page 223

JPMorgan Chase & Co./ 2008 Annual Report 221
Indemnification agreements – general
In connection with issuing securities to investors, the Firm may enter
into contractual arrangements with third parties that may require the
Firm to make a payment to them in the event of a change in tax law
or an adverse interpretation of tax law. In certain cases, the contract
also may include a termination clause, which would allow the Firm
to settle the contract at its fair value in lieu of making a payment
under the indemnification clause. The Firm may also enter into
indemnification clauses in connection with the licensing of software
to clients (“software licensees”) or when it sells a business or assets
to a third party (“third-party purchasers”), pursuant to which it
indemnifies software licensees for claims of liability or damages that
may occur subsequent to the licensing of the software, or third-party
purchasers for losses they may incur due to actions taken by the Firm
prior to the sale of the business or assets. It is difficult to estimate
the Firm’s maximum exposure under these indemnification arrange-
ments, since this would require an assessment of future changes in
tax law and future claims that may be made against the Firm that
have not yet occurred. However, based upon historical experience,
management expects the risk of loss to be remote.
Loan sale and securitization-related indemnifications
Indemnifications for breaches of representations and warranties
As part of the Firm’s loan sale and securitization activities, as
described in Note 14 and Note 16 on pages 175–178 and 180–188,
respectively, of this Annual Report, the Firm generally makes repre-
sentations and warranties in its loan sale and securitization agree-
ments that the loans sold meet certain requirements. These agree-
ments may require the Firm (including in its roles as a servicer) to
repurchase the loans and/or indemnify the purchaser of the loans
against losses due to any breaches of such representations or war-
ranties. Generally, the maximum amount of future payments the Firm
would be required to make for breaches under these representations
and warranties would be equal to the current amount of assets held
by such securitization-related SPEs plus, in certain circumstances,
accrued and unpaid interest on such loans and certain expense.
At December 31, 2008 and 2007, the Firm had recorded a repur-
chase liability of $1.1 billion and $15 million, respectively.
Loans sold with recourse
The Firm provides servicing for mortgages and certain commercial
lending products on both a recourse and nonrecourse basis. In non-
recourse servicing, the principal credit risk to the Firm is the cost of
temporary servicing advances of funds (i.e., normal servicing
advances). In recourse servicing, the servicer agrees to share credit
risk with the owner of the mortgage loans, such as the Federal
National Mortgage Association or the Federal Home Loan Mortgage
Corporation or a private investor, insurer or guarantor. Losses on
recourse servicing predominantly occur when foreclosure sales pro-
ceeds of the property underlying a defaulted loan are less than the
sum of the outstanding principal balance, plus accrued interest on
the loan and the cost of holding and disposing of the underlying
property. The Firm’s loan sale transactions have primarily been exe-
cuted on a nonrecourse basis, thereby effectively transferring the risk
of future credit losses to the purchaser of the mortgage-backed secu-
rities issued by the trust. At December 31, 2008 and 2007, the
unpaid principal balance of loans sold with recourse totaled $15.0
billion and $557 million, respectively. The increase in loans sold with
recourse between December 31, 2008 and 2007, was driven by the
Washington Mutual transaction. The carrying value of the related lia-
bility that the Firm had recorded, which is representative of the
Firm’s view of the likelihood it will have to perform under this guar-
antee, was $241 million and zero at December 31, 2008 and 2007,
respectively.
Credit card charge-backs
Prior to November 1, 2008, the Firm was a partner with one of the
leading companies in electronic payment services in a joint venture
operating under the name of Chase Paymentech Solutions, LLC (the
“joint venture”). The joint venture was formed in October 2005, as a
result of an agreement by the Firm and First Data Corporation, its
joint venture partner, to integrate the companies’ jointly-owned Chase
Merchant Services and Paymentech merchant businesses. The joint
venture provided merchant processing services in the United States
and Canada. The dissolution of the joint venture was completed on
November 1, 2008, and JPMorgan Chase retained approximately
51% of the business under the Chase Paymentech Solutions name.