JP Morgan Chase 2008 Annual Report Download - page 92

Management’s discussion and analysis
90 JPMorgan Chase & Co./ 2008 Annual Report
preferred stock, which are filed with the U.S. Securities and Exchange
Commission under cover of Forms 8-K.
Cash flows
For the years ended December 31, 2008, 2007 and 2006, cash and
due from banks decreased $13.2 billion, $268 million, and increased
$3.7 billion, respectively. The following discussion highlights the
major activities and transactions that affected JPMorgan Chase’s
cash flows during 2008, 2007 and 2006.
Cash Flows from Operating Activities
JPMorgan Chase’s operating assets and liabilities support the Firm’s
capital markets and lending activities, including the origination or
purchase of loans initially designated as held-for-sale. The operating
assets and liabilities can vary significantly in the normal course of
business due to the amount and timing of cash flows, which are
affected by client-driven activities, market conditions and trading
strategies. Management believes cash flows from operations, avail-
able cash balances and the Firm’s ability to generate cash through
short-and long-term borrowings are sufficient to fund the Firm’s
operating liquidity needs.
For the year ended December 31, 2008, net cash provided by operat-
ing activities was $23.1 billion, while for the years ended December
31, 2007 and 2006, net cash used in operating activities was $110.6
billion and $49.6 billion, respectively. In 2008, net cash generated
from operating activities was higher than net income, largely as a
result of adjustments for operating items such as the provision for
credit losses, depreciation and amortization, stock-based compensa-
tion, and certain other expense. During 2006, 2007 and 2008, cash
was used to fund loans held-for-sale, primarily in IB and RFS. During
2008, proceeds from sales of loans originated or purchased with an
initial intent to sell were slightly higher than cash used to acquire
such loans; but the cash flows from these activities were at a signifi-
cantly lower level than for the same periods in 2007 and 2006 as a
result of current market conditions. In 2007 and 2006, cash used to
acquire such loans was slightly higher than proceeds from sales.
For the years ended December 31, 2007 and 2006, the net cash
used in operating activities supported growth in the Firm’s lending
and capital markets activities. In 2007, when compared with 2006,
there was a significant decline in cash flows from IB loan origina-
tions/purchases and sale/securitization activities as a result of the
difficult wholesale securitization market and capital markets for
leveraged financings, which were affected by a significant deteriora-
tion in liquidity in the second half of 2007. Cash flows in 2007 asso-
ciated with RFS residential mortgage activities grew, reflecting an
increase in originations.
Cash Flows from Investing Activities
The Firm’s investing activities predominantly include originating loans
to be held for investment, other receivables, the available-for-sale
investment portfolio and other short-term investment vehicles. For
the year ended December 31, 2008, net cash of $286.3 billion was
used in investing activities, primarily for: purchases of investment
securities in Corporate’s AFS portfolio to manage the Firm’s exposure
to interest rate movements, as well as to make strategic longer-term
investments; increased deposits with banks as the result of the avail-
ability of excess cash for short-term investment opportunities
through interbank lending, and from deposits with the Federal
Reserve (which is now an investing activity, reflecting a policy change
of the Federal Reserve to pay interest to depository institutions on
reserve balances); net additions to the wholesale loan portfolio, from
organic growth in CB; additions to the consumer prime mortgage
portfolio as a result of the decision to retain, rather than sell, new
originations of nonconforming prime mortgage loans; an increase in
securities purchased under resale agreements reflecting growth in
demand from clients for liquidity; and net purchases of asset-backed
commercial paper from money market mutual funds in connection
with a temporary Federal Reserve Bank of Boston lending facility.
Partially offsetting these uses of cash were proceeds from sales and
maturities of AFS securities; loan sales and credit card securitization
activities, which were at a lower level than for the same periods in
2007 as a result of the adverse market conditions that have contin-
ued since the last half of 2007; and net cash received from acquisi-
tions and the sale of an investment. Additionally, in June 2008, in
connection with the merger with Bear Stearns, the Firm sold assets
acquired from Bear Stearns to the FRBNY and received cash pro-
ceeds of $28.85 billion (for additional information see Note 2 on
pages 135–140 of this Annual Report).
For the year ended December 31, 2007, net cash of $73.1 billion
was used in investing activities, primarily to fund purchases in the
AFS securities portfolio to manage the Firm’s exposure to interest
rate movements; net additions to the wholesale retained loan portfo-
lios in IB, CB and AM, mainly as a result of business growth; a net
increase in the consumer retained loan portfolio, primarily reflecting
growth in RFS in home equity loans and net additions to RFS’ sub-
prime mortgage loans portfolio (which was affected by manage-
ment’s decision in the third quarter to retain (rather than sell) new
subprime mortgages), and growth in prime mortgage loans originat-
ed by RFS and AM that cannot be sold to U.S. government agencies
or U.S. government-sponsored enterprises; and increases in securities
purchased under resale agreements as a result of a higher level of
cash that was available for short-term investment opportunities in
connection with the Firm’s efforts to build liquidity. These net uses of
cash were partially offset by cash proceeds received from sales and
maturities of AFS securities; and credit card, residential mortgage,
student and wholesale loan sales and securitization activities, which
grew in 2007 despite the difficult conditions in the credit markets.
For the year ended December 31, 2006, net cash of $99.6 billion
was used in investing activities. Net cash was invested to fund net
additions to the retained wholesale loan portfolio, mainly resulting
from capital markets activity in IB leveraged financings; increases in
CS loans reflecting strong organic growth; net additions in retail
home equity loans; the acquisition of private-label credit card portfo-
lios from Kohl’s, BP and Pier 1 Imports, Inc.; the acquisition of
Collegiate Funding Services; and purchases of AFS securities in con-
nection with repositioning the portfolio in response to changes in
interest rates. These uses of cash were partially offset by cash pro-
ceeds provided from credit card, residential mortgage, auto and