JP Morgan Chase 2010 Annual Report Download - page 249

JPMorgan Chase & Co./2010 Annual Report 249
from the securities held in the entity and passes them to the benefi-
cial interest holders. These entities are not actively managed and
are passive in nature. Re-securitization entities are often estab-
lished to the specifications of the investors. In a re-securitization
entity, the most significant power is in the design of the entity (i.e.,
the decision as to the specific security or securities to be repack-
aged and the terms of the beneficial interests issued). The power
over a re-securitization entity is often considered to be shared
between the sponsor and investor(s) that are significantly involved
in the creation and design of the re-securitization entity. At Decem-
ber 31, 2010, the Firm did not consolidate any agency re-
securitizations, as it did not have the unilateral power to direct the
significant activities of the re-securitization entity. At December 31,
2010, the Firm consolidated $477 million of assets and $230
million of liabilities of private-label re-securitizations, as the Firm
had both the unilateral power to direct the significant activities of,
and retained a significant interest in, these re-securitization entities.
As of December 31, 2009, the Firm did not consolidate any re-
securitization entities (agency or private-label) in accordance with
the accounting treatment under prior accounting rules.
During the years ended December 31, 2010, 2009, and 2008, the
Firm transferred $33.9 billion, $19.1 billion and $16.8 billion,
respectively, of securities to agency re-securitization entities and
$1.3 billion, $4.0 billion and $2.7 billion to private-label re-
securitization entities. At December 31, 2010 and 2009, the Firm
held approximately $3.5 billion and $1.6 billion of both senior and
subordinated interests in nonconsolidated agency re-securitization
entities and $46 million and $220 million of both senior and subor-
dinated interests, in nonconsolidated private-label re-securitization
entities. See pages 257–258 of this Note for further information on
interests held in nonconsolidated securitization VIEs.
Multi-seller conduits
The Firm is an active participant in the asset-backed securities
business, and it helps customers meet their financing needs by
providing access to the commercial paper markets through VIEs
known as multi-seller conduits. Multi-seller conduit entities are
separate bankruptcy remote entities that purchase interests in, and
make loans secured by, pools of receivables and other financial
assets pursuant to agreements with customers of the Firm. The
conduits fund their purchases and loans through the issuance of
highly rated commercial paper to third-party investors. The primary
source of repayment of the commercial paper is the cash flows from
the pools of assets. In most instances, the assets are structured
with deal-specific credit enhancements provided by the customers
(i.e., sellers) to the conduits or other third parties. Deal-specific
credit enhancements are generally structured to cover a multiple of
historical losses expected on the pool of assets, and are typically in
the form of overcollateralization provided by the seller, but also
may include any combination of the following: recourse to the seller
or originator, cash collateral accounts, letters of credit, excess
spread, retention of subordinated interests or third-party guaran-
tees. The deal-specific credit enhancements mitigate the Firm’s
potential losses on its agreements with the conduits.
To ensure timely repayment of the commercial paper, each asset
pool financed by the conduits has a minimum 100% deal-specific
liquidity facility associated with it. Deal-specific liquidity facilities
are the primary source of liquidity support for the conduits and are
typically in the form of asset purchase agreements. They are gener-
ally structured so the liquidity that will be provided by the Firm (as
liquidity provider) will be effected by the Firm purchasing, or lend-
ing against, a pool of nondefaulted, performing assets. In limited
circumstances, the Firm may provide unconditional liquidity.
The conduit’s administrative agent can require the liquidity provider
to perform under its asset purchase agreement with the conduit at
any time. These agreements may cause the liquidity provider, which
is generally the Firm, to purchase an asset from the conduit at an
amount above the asset’s then current fair value – in effect, provid-
ing a guarantee of the asset’s initial value.
The Firm also provides the multi-seller conduit vehicles with program-
wide liquidity facilities in the form of uncommitted short-term revolv-
ing facilities established to handle funding increments too small to be
funded by commercial paper and that can be accessed by the con-
duits only in the event of short-term disruptions in the commercial
paper market.
Because the majority of the deal-specific liquidity facilities will only
fund nondefaulted assets, program-wide credit enhancement is
required to absorb losses on defaulted receivables in excess of losses
absorbed by any deal-specific credit enhancement. Program-wide
credit enhancement may be provided by JPMorgan Chase in the form
of standby letters of credit or by third-party surety bond providers. The
amount of program-wide credit enhancement required varies by
conduit and ranges between 5% and 10% of the applicable commer-
cial paper that is outstanding. The Firm provided $2.0 billion and
$2.4 billion of program-wide credit enhancement at December 31,
2010 and 2009, respectively.
JPMorgan Chase receives fees for structuring multi-seller conduit
transactions and compensation from the multi-seller conduits for its
role as administrative agent, liquidity provider, and provider of
program-wide credit enhancement.
Effective January 1, 2010, the Firm consolidated its Firm-
administered multi-seller conduits, as the Firm has both the power
to direct the significant activities of the conduits and a potentially
significant economic interest in the conduits. The Firm directs the
economic performance of the conduits as administrative agent and
in its role in structuring transactions for the conduits. In these roles,
the Firm makes decisions regarding concentration of asset types
and credit quality of transactions, and is responsible for managing
the commercial paper funding needs of the conduits. The Firm’s
interests that could potentially be significant to the VIEs include the
fees received as administrative agent, liquidity provider and pro-
vider of program-wide credit enhancement, as well as the Firm’s
potential exposure as a result of the liquidity and credit enhance-
ment facilities provided to the conduits.