JP Morgan Chase 2008 Annual Report Download - page 44

Management’s discussion and analysis
42 JPMorgan Chase & Co./ 2008 Annual Report
actions to stabilize and provide liquidity to the U.S. financial markets,
including the purchase by the U.S. Treasury of certain troubled assets
from financial institutions (the “Troubled Asset Relief Program”) and
the direct purchase by the U.S. Treasury of equity of financial institu-
tions (the “Capital Purchase Program”).
The efforts to restore confidence in the financial markets and promote
economic growth continue in 2009, with initiatives including a fiscal
stimulus bill, the American Reinvestment and Recovery Act of 2009,
which was signed into law by President Barack Obama on February
17, 2009. Also in February, the U.S. Treasury outlined a plan to restore
stability to the financial system and President Obama proposed a plan
to help distressed homeowners. The Federal Reserve, working with
other government and regulatory agencies, has also implemented a
number of new programs to promote the proper functioning of the
credit markets and reintroduce liquidity to the financial system. Such
actions taken by U.S. regulatory agencies include the introduction of
programs to restore liquidity to money market mutual funds, the com-
mercial paper market, and other fixed-income securities markets. In
addition, the FDIC issued a temporary liquidity guarantee program
(the “TLG Program”) for the senior debt of all FDIC-insured institu-
tions, as well as deposits in noninterest-bearing transaction deposit
accounts.
Despite the difficult operating environment and overall drop in earn-
ings, JPMorgan Chase maintained a strong balance sheet and pro-
duced underlying growth in many business areas. The Tier 1 capital
ratio was 10.9% at year-end; Treasury & Securities Services and
Commercial Banking each reported record revenue and net income
for the second straight year; the consumer businesses opened millions
of new checking and credit card accounts; Asset Management experi-
enced record net inflows in assets under management; and the
Investment Bank gained market share in all major fee categories. The
diversified nature of the Firm’s businesses and its strong capital posi-
tion enabled it to weather the recessionary environment during 2008.
JPMorgan Chase has taken a leadership role in helping to stabilize
the financial markets. It assumed the risk and expended the necessary
resources to acquire Bear Stearns and the banking operations of
Washington Mutual. In October 2008, the Firm agreed to accept a
$25 billion capital investment by the U.S. Treasury under the Capital
Purchase Program. JPMorgan Chase has continued to lend to clients
in a safe and sound manner and to provide liquidity to multiple finan-
cial markets. The Firm has implemented programs that have prevented
more than 300,000 foreclosures, with plans to help more than
400,000 more families keep their homes through Chase-owned mort-
gage modifications over the next two years. The Firm has expanded
this effort to include over $1.1 trillion of investor-owned mortgages.
The discussion that follows highlights the performance of each busi-
ness segment compared with the prior year, and discusses results on a
managed basis unless otherwise noted. For more information about
managed basis, see Explanation and reconciliation of the Firm’s use of
non-GAAP financial measures on pages 50–51 of this Annual Report.
Investment Bank reported a net loss for the year, compared with
net income in 2007. The significant decline in results reflected lower
total net revenue, a higher provision for credit losses and higher total
noninterest expense. Markdowns of over $10 billion on mortgage-
related positions and leveraged lending funded and unfunded com-
mitments drove fixed income trading revenue lower; investment
banking fees and equity trading revenue declined as well. These
decreases were offset by record performance in rates and currencies,
credit trading, commodities and emerging markets, as well as strong
equity client revenue, and gains from the widening of the Firm’s
credit spread on certain structured liabilities and derivatives. The pro-
vision for credit losses rose from the 2007 level, predominantly
reflecting a higher allowance for credit losses, driven by a weakening
credit environment, as well as the effect of the transfer of $4.9 bil-
lion of funded and unfunded leveraged lending commitments to
retained loans from held-for-sale in the first quarter of 2008. The
increase in total noninterest expense was largely driven by additional
expense relating to the Bear Stearns merger, offset partially by lower
performance-based compensation expense. In addition, IB benefited
from a reduction in deferred tax liabilities on overseas earnings.
Retail Financial Services net income declined, reflecting a signifi-
cant increase in the provision for credit losses, predominantly offset by
positive mortgage servicing rights (“MSR”) risk management results
and the positive impact of the Washington Mutual transaction.
Additional drivers of revenue growth included wider loan and deposit
spreads and higher loan and deposit balances. The provision for credit
losses increased as housing price declines have continued to result in
significant increases in estimated losses, particularly for high loan-to-
value home equity and mortgage loans. The provision was also affect-
ed by an increase in estimated losses for the auto, student and busi-
ness banking loan portfolios. Total noninterest expense rose from the
2007 level, reflecting the impact of the Washington Mutual transac-
tion, higher mortgage reinsurance losses, increased mortgage servic-
ing expense and investments in the retail distribution network.
Card Services net income declined, driven by a higher provision for
credit losses partially offset by higher managed total net revenue. The
growth in managed total net revenue was driven by the impact of
the Washington Mutual transaction, higher average managed loan
balances, wider loan spreads and increased interchange income, off-
set predominantly by increased rewards expense and higher volume-
driven payments to partners, as well as the effect of higher revenue
reversals associated with higher charge-offs. The managed provision
for credit losses increased from the prior year due to an increase in
the allowance for loan losses and a higher level of charge-offs. Total
noninterest expense rose from last year, largely due to the impact of
the Washington Mutual transaction.
Commercial Banking net income increased, surpassing the record
level posted in 2007. The results were driven by record total net rev-
enue, partially offset by an increase in the provision for credit losses.
The increase in revenue was driven by double-digit growth in liability
and loan balances, the impact of the Washington Mutual transaction,
higher deposit and lending-related fees, and increases in other fee