JP Morgan Chase 2010 Annual Report Download - page 251

JPMorgan Chase & Co./2010 Annual Report 251
the high credit quality of the underlying municipal bonds, the excess
collateralization in the vehicle or in certain transactions the reim-
bursement agreements with the residual interest holders.
As remarketing agent, the Firm may hold putable floating-rate
certificates of the municipal bond vehicles. At December 31, 2010
and 2009, respectively, the Firm held $248 million and $72 million
of these certificates on its Consolidated Balance Sheets. The largest
amount held by the Firm at any time during 2010 was $796 mil-
lion, or 6%, of the municipal bond vehicles’ aggregate outstanding
putable floating-rate certificates. The Firm did not have and contin-
ues not to have any intent to protect any residual interest holder
from potential losses on any of the municipal bond holdings.
The long-term credit ratings of the putable floating-rate certificates
are directly related to the credit ratings of the underlying municipal
bonds, and to the credit rating of any insurer of the underlying mu-
nicipal bond. A downgrade of a bond insurer would result in a down-
grade of the insured municipal bonds, which would affect the rating
of the putable floating-rate certificates. This could cause demand for
these certificates by investors to decline or disappear, as putable
floating-rate certificate holders typically require an “AA-” bond
rating. At December 31, 2010 and 2009, 96% and 98%, respec-
tively, of the municipal bonds held by vehicles for which the Firm
served as liquidity provider were rated “AA-” or better, based on
either the rating of the underlying municipal bond itself or the bond
rating including any credit enhancement. At December 31, 2010
and 2009, $3.4 billion and $2.3 billion, respectively, of the bonds
were insured by monoline bond insurers.
The Firm consolidates municipal bond vehicles if it owns the residual
interest. The residual interest generally allows the owner to make
decisions that significantly impact the economic performance of the
municipal bond vehicle, primarily by directing the sale of the munici-
pal bonds owned by the vehicle. In addition, the residual interest
owners have the right to receive benefits and bear losses that could
potentially be significant to the municipal bond vehicle. The Firm does
not consolidate municipal bond vehicles if it does not own the resid-
ual interests, since the Firm does not have the power to make deci-
sions that significantly impact the economic performance of the
municipal bond vehicle.
The Firm’s exposure to nonconsolidated municipal bond VIEs at December 31, 2010 and 2009, including the ratings profile of the VIEs’ assets,
was as follows.
December 31, (in billions)
Fair value of assets
held by VIEs Liquidity facilities(b) Excess/(deficit)(c)
Maximum
exposure
Nonconsolidated municipal bond vehicles
(a)
2010 $ 13.7 $ 8.8 $ 4.9 $ 8.8
2009
13.2
8.4
4.8
8.4
Ratings profile of VIE assets
(d)
December 31, Investment-grade
Noninvestment-grade
Fair
value of
Wt. avg.
expected life
(in bi
llions, except where
otherwise noted)
AAA
to AAA-
AA+
to AA-
A+
to A-
BBB
to BBB-
BB+
and below
assets held
by VIEs
of assets
(years)
Nonconsolidated municipal bond vehicles
(a)
2010 $ 1.9 $ 11.2 $ 0.6 $ — $ — $ 13.7 15.5
2009 1.6 11.4 0.2 — — 13.2 10.1
(a) Excluded $4.6 billion and $2.8 billion, as of December 31, 2010 and 2009, respectively, which were consolidated due to the Firm owning the residual interests.
(b) The Firm may serve as credit enhancement provider to municipal bond vehicles in which it serves as liquidity provider. The Firm provided insurance on underlying
municipal bonds, in the form of letters of credit, of $10 million at both December 31, 2010 and 2009.
(c) Represents the excess/(deficit) of the fair values of municipal bond assets available to repay the liquidity facilities, if drawn.
(d) The ratings scale is based on the Firm’s internal risk ratings and is presented on an S&P-equivalent basis.