JP Morgan Chase 2010 Annual Report Download - page 250

Notes to consolidated financial statements
250 JPMorgan Chase & Co./2010 Annual Report
December 31, 2010 (in billions) Loans Other assets
Total assets held by Firm-
administered multi-seller conduits
Commercial paper
issued to third parties
Consolidated(a) $ 21.1 $ 0.6 $ 21.7 $ 21.6
(a) The Firm provided certain deal-specific liquidity facilities (primarily asset purchase agreements); program-wide liquidity facilities; and program-wide credit enhancements
that were eliminated in consolidation.
Accounting Treatment Prior to January 1, 2010
Prior to January 1, 2010, the Firm had consolidated one of its
multi-seller conduits; all other Firm-administered multi-seller con-
duits were not consolidated in accordance with prior accounting
rules. Under prior accounting rules, the party that absorbed the
majority of the entity’s expected losses, received a majority of the
entity’s residual returns, or both, would consolidate. Each noncon-
solidated multi-seller conduit administered by the Firm at December
31, 2009 had issued Expected Loss Notes (“ELNs”), the holders of
which were committed to absorbing the majority of the expected
loss of each respective conduit. The total amounts of ELNs out-
standing for nonconsolidated conduits at December 31, 2009 was
$96 million.
At December 31, 2009, total assets funded and commercial paper
issued by Firm-sponsored multi-seller conduits were as follows.
December 31, 2009 (in billions)
Total
assets funded
Commercial
paper issued
Consolidated
$
5.1
$
5.1
Non-consolidated
(a)
17.8 17.8
(a) The Firm provided certain deal-specific liquidity facilities (primarily asset
purchase agreements) of $24.2 billion. Additionally, the Firm provided
program-wide liquidity facilities of $13.0 billion and program-wide credit
enhancements of $2.0 billion.
The Firm’s maximum exposure to loss on nonconsolidated Firm-
administered multi-seller conduits was $24.8 billion at December 31,
2009. The maximum exposure to loss, calculated separately for each
multi-seller conduit, included the Firm’s exposure to both deal-specific
liquidity facilities and program wide credit enhancements. For pur-
poses of calculating maximum exposure to loss, Firm-provided pro-
gram-wide credit enhancement was limited to deal-specific liquidity
facilities provided to third parties.
VIEs associated with investor intermediation activities
As a financial intermediary, the Firm creates certain types of VIEs
and also structures transactions, typically using derivatives, with
these VIEs to meet investor needs. The Firm may also provide
liquidity and other support. The risks inherent in the derivative
instruments or liquidity commitments are managed similarly to
other credit, market or liquidity risks to which the Firm is ex-
posed. The principal types of VIEs for which the Firm is engaged
in on behalf of clients are municipal bond vehicles, credit-related
note vehicles and asset swap vehicles.
Municipal bond vehicles
The Firm has created a series of trusts that provide short-term
investors with qualifying tax-exempt investments, and that allow
investors in tax-exempt securities to finance their investments at
short-term tax-exempt rates. In a typical transaction, the vehicle
purchases fixed-rate longer-term highly rated municipal bonds and
funds the purchase by issuing two types of securities: (1) putable
floating-rate certificates and (2) inverse floating-rate residual inter-
ests (“residual interests”). The maturity of each of the putable
floating-rate certificates and the residual interests is equal to the
life of the vehicle, while the maturity of the underlying municipal
bonds is longer. Holders of the putable floating-rate certificates
may “put,” or tender, the certificates if the remarketing agent
cannot successfully remarket the floating-rate certificates to an-
other investor. A liquidity facility conditionally obligates the liquidity
provider to fund the purchase of the tendered floating-rate certifi-
cates. If funded, the liquidity facility would be repaid by the pro-
ceeds from the sale of the underlying municipal bonds upon
termination of the vehicle. In certain transactions, if the proceeds
from the sale of the underlying municipal bonds are not sufficient
to repay the liquidity facility, the liquidity provider has recourse to
the residual interest holders for reimbursement.
The holders of the residual interests in these vehicles could experi-
ence losses if the face amount of the putable floating-rate certifi-
cates exceeds the market value of the municipal bonds upon
termination of the vehicle. Certain vehicles require a smaller initial
investment by the residual interest holders and thus do not result in
excess collateralization. For these vehicles there exists a reim-
bursement obligation which requires the residual interest holders to
post, during the life of the vehicle, additional collateral to the Firm,
as liquidity provider, on a daily basis should the market value of the
municipal bonds decline.
JPMorgan Chase Bank, N.A. often serves as the sole liquidity pro-
vider, and J.P. Morgan Securities LLC as remarketing agent, of the
putable floating-rate certificates. The liquidity provider’s obligation to
perform is conditional and is limited by certain termination events,
which include bankruptcy or failure to pay by the municipal bond
issuer or credit enhancement provider, an event of taxability on the
municipal bonds or the immediate downgrade of the municipal bond
to below investment grade. A downgrade of JPMorgan Chase Bank,
N.A.’s short-term rating does not affect the Firm’s obligation under
the liquidity facility. However, in the event of a downgrade in the
Firm’s credit ratings, holders of the putable floating-rate certificates
supported by those liquidity facility commitments might choose to sell
their instruments, which could increase the likelihood that the liquid-
ity commitments could be drawn. In vehicles in which third-party
investors own the residual interests, in addition to the termination
events, the Firm’s exposure as liquidity provider is further limited by