JP Morgan Chase 2010 Annual Report Download - page 170

Notes to consolidated financial statements
170 JPMorgan Chase & Co./2010 Annual Report
Termination of Chase Paymentech Solutions joint
venture
The dissolution of the Chase Paymentech Solutions joint venture,
a global payments and merchant acquiring joint venture between
JPMorgan Chase and First Data Corporation, was completed on
November 1, 2008. JPMorgan Chase retained approximately 51%
of the business, which it operates under the name Chase Pay-
mentech Solutions. The dissolution of the Chase Paymentech
Solutions joint venture was accounted for as a step acquisition in
accordance with U.S. GAAP for business combinations, and the
Firm recognized an after-tax gain of $627 million in the fourth
quarter of 2008 as a result of the dissolution. The gain represents
the amount by which the fair value of the net assets acquired
(predominantly intangible assets and goodwill) exceeded JPMor-
gan Chase’s carrying value in the net assets transferred to First
Data Corporation. Upon dissolution, the Firm consolidated the
retained Chase Paymentech Solutions business.
Proceeds from Visa Inc. shares
On March 19, 2008, Visa Inc. (“Visa”) completed its initial public
offering (“IPO”). Prior to the IPO, JPMorgan Chase held approxi-
mately a 13% equity interest in Visa. On March 28, 2008, Visa
used a portion of the proceeds from the offering to redeem a
portion of the Firm’s equity interest, which resulted in the recog-
nition of a pretax gain of $1.5 billion (recorded in other income).
In conjunction with the IPO, Visa placed $3.0 billion in escrow to
cover liabilities related to certain litigation matters. The escrow
was increased by $1.1 billion in 2008, $700 million in 2009 and
by $1.3 billion in 2010. Increases in Visa’s escrow account results
in a dilution of the value of the Firm’s ownership of Visa Inc.
JPMorgan Chase’s interest in the escrow was recorded as a
reduction of other expense and reported net to the extent of
established litigation reserves.
Purchase of remaining interest in Highbridge Capital
Management
In January 2008, JPMorgan Chase purchased an additional equity
interest in Highbridge Capital Management, LLC (“Highbridge”),
which resulted in the Firm owning 77.5% of Highbridge. In July
2009, JPMorgan Chase completed its purchase of the remaining
interest in Highbridge, which resulted in a $228 million adjustment
to capital surplus.
Note 3 – Fair value measurement
JPMorgan Chase carries a portion of its assets and liabilities at
fair value. The majority of such assets and liabilities are carried at
fair value on a recurring basis. Certain assets and liabilities are
carried at fair value on a nonrecurring basis, including held-for-
sale loans, which are accounted for at the lower of cost or fair
value and that are only subject to fair value adjustments under
certain circumstances.
The Firm has an established and well-documented process for
determining fair values. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. Fair value is based on quoted market prices,
where available. If listed prices or quotes are not available, fair
value is based on internally developed models that primarily
use, as inputs, market-based or independently sourced market
parameters, including but not limited to yield curves, interest
rates, volatilities, equity or debt prices, foreign exchange rates
and credit curves. In addition to market information, models
also incorporate transaction details, such as maturity of the
instrument. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjust-
ments include amounts to reflect counterparty credit quality,
the Firm’s creditworthiness, constraints on liquidity and unob-
servable parameters. Valuation adjustments are applied consis-
tently over time.
• Credit valuation adjustments (“CVA”) are necessary when the
market price (or parameter) is not indicative of the credit qual-
ity of the counterparty. As few classes of derivative contracts
are listed on an exchange, the majority of derivative positions
are valued using internally developed models that use as their
basis observable market parameters. An adjustment is neces-
sary to reflect the credit quality of each derivative counterparty
to arrive at fair value. The adjustment also takes into account
contractual factors designed to reduce the Firm’s credit expo-
sure to each counterparty, such as collateral and legal rights
of offset.
• Debit valuation adjustments (“DVA”) are necessary to reflect
the credit quality of the Firm in the valuation of liabilities
measured at fair value. The methodology to determine the ad-
justment is consistent with CVA and incorporates JPMorgan
Chase’s credit spread as observed through the credit default
swap market.