JP Morgan Chase 2008 Annual Report Download - page 90

Management’s discussion and analysis
88 JPMorgan Chase & Co./ 2008 Annual Report
LIQUIDITY RISK MANAGEMENT
The ability to maintain a sufficient level of liquidity is crucial to finan-
cial services companies, particularly maintaining appropriate levels of
liquidity during periods of adverse conditions. The Firm’s funding
strategy is to ensure liquidity and diversity of funding sources to
meet actual and contingent liabilities through both stable and
adverse conditions.
JPMorgan Chase uses a centralized approach for liquidity risk man-
agement. Global funding is managed by Corporate Treasury, using
regional expertise as appropriate. Management believes that a cen-
tralized framework maximizes liquidity access, minimizes funding costs
and permits identification and coordination of global liquidity risk.
Recent events
During the second half of 2008, global markets exhibited extraordi-
nary levels of volatility and increasing signs of stress. Throughout this
period, access by market participants to the debt, equity, and con-
sumer loan securitization markets was constrained and funding
spreads widened sharply. In response to strains in financial markets,
U.S. government and regulatory agencies introduced various programs
to inject liquidity into the financial system. JPMorgan Chase partici-
pated in a number of these programs, two of which were the Capital
Purchase Program and the FDIC’s TLG Program. On October 28, 2008,
JPMorgan Chase issued $25.0 billion of preferred stock as well as a
warrant to purchase up to 88,401,697 shares of the Firm’s common
stock to the U.S. Treasury under the Capital Purchase Program, which
enhanced the Firm’s capital and liquidity positions. In addition, on
December 4, 2008, JPMorgan Chase elected to continue to partici-
pate in the FDIC’s TLG Program, which facilitated long-term debt
issuances at rates (including the guarantee fee charged by the FDIC)
more favorable than those for non-FDIC guaranteed debt issuances.
Under the TLG Program, the FDIC guarantees certain senior unsecured
debt of JPMorgan Chase, and in return for the guarantees, the FDIC is
paid a fee based on the amount and maturity of the debt. Under the
TLG Program, the FDIC will pay the unpaid principal and interest on
an FDIC-guaranteed debt instrument upon the uncured failure of the
participating entity to make a timely payment of principal or interest
in accordance with the terms of the instrument. During the fourth
quarter of 2008, pursuant to the TLG Program, the Firm issued $20.8
billion of bonds guaranteed by the FDIC, further enhancing the Firm’s
liquidity position. At December 31, 2008, all of the FDIC-guaranteed
debt was outstanding and had a carrying value of $21.0 billion, net
of hedges. In the interest of promoting deposit stability, during the
fourth quarter, the FDIC also (i) temporarily increased, through 2009,
insurance coverage on bank deposits to $250,000 per customer from
$100,000 per customer, and (ii) for qualified institutions who partici-
pated in the TLG Program (such as the Firm), provided full deposit
insurance coverage for noninterest-bearing transaction accounts.
During the second half of 2008, the Firm’s deposits (excluding those
assumed in connection with the Washington Mutual transaction)
increased substantially, as the Firm benefited from the heightened
volatility and credit concerns affecting the markets.
On May 30, 2008, JPMorgan Chase completed the merger with Bear
Stearns. Due to the structure of the transaction and the de-risking of
positions over time, the merger with Bear Stearns had no material
impact on the Firm’s liquidity. On September 25, 2008, JPMorgan
Chase acquired the banking operations of Washington Mutual from
the FDIC. As part of the Washington Mutual transaction, JPMorgan
Chase assumed Washington Mutual’s deposits as well as its obliga-
tions to its credit card securitization-related master trusts, covered
bonds, and liabilities to certain Federal Home Loan Banks. The
Washington Mutual transaction had an insignificant impact on the
Firm’s overall liquidity position.
Both S&P and Moody’s lowered the Firm’s ratings one notch on
December 19, 2008 and January 15, 2009, respectively. These rating
actions did not have a material impact on the cost or availability of
funding to the Firm. For a further discussion of credit ratings, see the
Credit Ratings caption of this Liquidity Risk Management section on
pages 91–92 of this Annual Report.
Notwithstanding the market events during the latter half of 2008, the
Firm’s liquidity position remained strong based on its liquidity metrics
as of December 31, 2008. The Firm believes that its unsecured and
secured funding capacity is sufficient to meet on- and off- balance
sheet obligations. JPMorgan Chase’s long-dated funding, including
core liabilities, exceeded illiquid assets. In addition, during the course
of 2008, the Firm raised funds at the parent holding company in
excess of its minimum threshold to cover its obligations and those of
its nonbank subsidiaries that mature over the next 12 months.
Governance
The Asset-Liability Committee approves and oversees the execution
of the Firm’s liquidity policy and contingency funding plan. Corporate
Treasury formulates the Firm’s liquidity and contingency planning
strategies and is responsible for measuring, monitoring, reporting
and managing the Firm’s liquidity risk profile.
Liquidity monitoring
The Firm monitors liquidity trends, tracks historical and prospective
on- and off-balance sheet liquidity obligations, identifies and meas-
ures internal and external liquidity warning signals to permit early
detection of liquidity issues, and manages contingency planning
(including identification and testing of various company-specific and
market-driven stress scenarios). Various tools, which together con-
tribute to an overall firmwide liquidity perspective, are used to moni-
tor and manage liquidity. Among others, these include: (i) analysis of
the timing of liquidity sources versus liquidity uses (i.e., funding
gaps) over periods ranging from overnight to one year; (ii) manage-
ment of debt and capital issuances to ensure that the illiquid portion
of the balance sheet can be funded by equity, long-term debt, trust
preferred capital debt securities and deposits the Firm believes to be
stable; and (iii) assessment of the Firm’s capacity to raise incremental
unsecured and secured funding.