JP Morgan Chase 2008 Annual Report Download - page 86

Management’s discussion and analysis
84 JPMorgan Chase & Co./ 2008 Annual Report
Tier 1 capital was $136.1 billion at December 31, 2008, compared
with $88.7 billion at December 31, 2007, an increase of $47.4 billion.
The following table presents the changes in Tier 1 capital for the year
ended December 31, 2008.
Tier 1 capital, December 31, 2007 (in millions) $ 88,746
Net income 5,605
Issuance of cumulative perpetual preferred stock to
U.S. Treasury 23,750
Warrant issued to U.S. Treasury in connection with
issuance of preferred stock 1,250
Issuance of noncumulative perpetual preferred stock 7,800
Issuance of preferred stock – conversion of Bear Stearns
preferred stock 352
Net issuance of common stock 11,485
Net issuance of common stock under employee stock-based
compensation plans 3,317
Net issuance of common stock in connection with the
Bear Stearns merger 1,198
Dividends declared (6,307)
Net issuance of qualifying trust preferred capital debt
securities 2,619
DVA on structured debt and derivative liabilities (1,475)
Goodwill and other nonqualifying intangibles (net of
deferred tax liabilities) (1,357)
Other (879)
Increase in Tier 1 capital 47,358
Tier 1 capital, December 31, 2008 $136,104
Additional information regarding the Firm’s capital ratios and the
federal regulatory capital standards to which it is subject, and the
capital ratios for the Firm’s significant banking subsidiaries at
December 31, 2008 and 2007, are presented in Note 30 on pages
212–213 of this Annual Report.
Capital Purchase Program
Pursuant to the Capital Purchase Program, on October 28, 2008, the
Firm issued to the U.S. Treasury, for total proceeds of $25.0 billion, (i)
2.5 million shares of Series K Preferred Stock, and (ii) a warrant to pur-
chase up to 88,401,697 shares of the Firm’s common stock, at an exer-
cise price of $42.42 per share, subject to certain antidilution and other
adjustments. The Series K Preferred Stock qualifies as Tier 1 capital.
The Series K Preferred Stock bears cumulative dividends at a rate of
5% per year for the first five years and 9% per year thereafter. The
Series K Preferred Stock ranks equally with the Firm’s existing 6.15%
Cumulative Preferred Stock, Series E; 5.72% Cumulative Preferred
Stock, Series F; 5.49% Cumulative Preferred Stock, Series G; Fixed-
to-Floating Rate Noncumulative Perpetual Preferred Stock, Series I;
and 8.63% Noncumulative Perpetual Preferred Stock, Series J, in
terms of dividend payments and upon liquidation of the Firm.
Any accrued and unpaid dividends on the Series K Preferred Stock
must be fully paid before dividends may be declared or paid on stock
ranking junior or equally with the Series K Preferred Stock. Pursuant
to the Capital Purchase Program, until October 28, 2011, the U.S.
Treasury’s consent is required for any increase in dividends on the
Firm’s common stock from the amount of the last quarterly stock div-
idend declared by the Firm prior to October 14, 2008, unless the
Series K Preferred Stock is redeemed in whole before then, or the
U.S. Treasury has transferred all of the Series K Preferred Stock it
owns to third parties.
The Firm may not repurchase or redeem any common stock or other
equity securities of the Firm, or any trust preferred securities issued
by the Firm or any of its affiliates, without the prior consent of the
U.S. Treasury (other than (i) repurchases of the Series K Preferred
Stock and (ii) repurchases of junior preferred shares or common
stock in connection with any employee benefit plan in the ordinary
course of business consistent with past practice).
Basel II
The minimum risk-based capital requirements adopted by the U.S.
federal banking agencies follow the Capital Accord of the Basel
Committee on Banking Supervision. In 2004, the Basel Committee
published a revision to the Accord (“Basel II”). The goal of the new
Basel II Framework is to provide more risk-sensitive regulatory capital
calculations and promote enhanced risk management practices
among large, internationally active banking organizations. U.S. bank-
ing regulators published a final Basel II rule in December 2007, which
will require JPMorgan Chase to implement Basel II at the holding
company level, as well as at certain of its key U.S. bank subsidiaries.
Prior to full implementation of the new Basel II Framework,
JPMorgan Chase will be required to complete a qualification period
of four consecutive quarters during which it will need to demonstrate
that it meets the requirements of the new rule to the satisfaction of
its primary U.S. banking regulators. The U.S. implementation
timetable consists of the qualification period, starting any time
between April 1, 2008, and April 1, 2010, followed by a minimum
transition period of three years. During the transition period, Basel II
risk-based capital requirements cannot fall below certain floors
based on current (“Basel l”) regulations. JPMorgan Chase expects to
be in compliance with all relevant Basel II rules within the estab-
lished timelines. In addition, the Firm has adopted, and will continue
to adopt, based upon various established timelines, Basel II in certain
non-U.S. jurisdictions, as required.
Broker-dealer regulatory capital
JPMorgan Chase’s principal U.S. broker-dealer subsidiaries are J.P.
Morgan Securities Inc. (“JPMorgan Securities”) and J.P. Morgan
Clearing Corp. (formerly known as Bear Stearns Securities Corp.).
JPMorgan Securities and J.P. Morgan Clearing Corp. are each subject to
Rule 15c3-1 under the Securities Exchange Act of 1934 (“Net Capital
Rule”). JPMorgan Securities and J.P. Morgan Clearing Corp. are also
registered as futures commission merchants and subject to Rule 1.17
under the Commodity Futures Trading Commission (“CFTC”).
JPMorgan Securities and J.P. Morgan Clearing Corp. have elected to
compute their minimum net capital requirements in accordance with
the “Alternative Net Capital Requirement” of the Net Capital Rule. At
December 31, 2008, JPMorgan Securities’ net capital, as defined by
the Net Capital Rule, of $7.2 billion exceeded the minimum require-
ment by $6.6 billion. In addition to its net capital requirements,
JPMorgan Securities is required to hold tentative net capital in excess
JPMorgan Chase & Co./ 2008 Annual Report84