JP Morgan Chase 2010 Annual Report Download - page 276

Notes to consolidated financial statements
JPMorgan Chase & Co./2010 Annual Report
276
(c) Includes credit enhancements and bond and commercial paper liquidity commitments to U.S. states and municipalities, hospitals and other not-for-profit entities of
$43.4 billion and $44.1 billion, at December 31, 2010 and 2009, respectively.
(d) At December 31, 2010 and 2009, includes unissued standby letters of credit commitments of $41.6 billion and $38.4 billion, respectively.
(e) At December 31, 2010 and 2009, JPMorgan Chase held collateral relating to $37.8 billion and $31.5 billion, respectively, of standby letters of credit; and $2.1 billion and
$1.3 billion, respectively, of other letters of credit.
(f) At December 31, 2010 and 2009, collateral held by the Firm in support of securities lending indemnification agreements was $185.0 billion and $173.2 billion, respectively.
Securities lending collateral comprises primarily cash, and securities issued by governments that are members of the Organisation for Economic Co-operation and Development
(“OECD”) and U.S. government agencies.
(g) Represents notional amounts of derivatives qualifying as guarantees. The carrying value at December 31, 2010 and 2009, reflects derivative payables of $390 million and
$974 million, respectively, less derivative receivables of $96 million and $78 million, respectively.
(h) At December 31, 2010 and 2009, includes unfunded commitments of $1.0 billion and $1.5 billion, respectively, to third-party private equity funds that are generally fair
valued at net asset value as discussed in Note 3 on pages 170–187 of this Annual Report; and $1.4 billion and $897 million, respectively, to other equity investments.
(i) Amounts include letters of credit hedged by derivative transactions and managed on a market risk basis.
(j) Represents estimated repurchase liability related to indemnifications for breaches of representations and warranties in loan sale and securitization agreements. For
additional information, see Loan sale and securitization-related indemnifications on pages 278–279 of this Note.
(k) The prior period has been revised to conform to current presentation.
(l) For lending-related products the carrying value represents the allowance for lending-related commitments and the fair value of the guarantee liability, for derivative-related
products the carrying value represents the fair value. For all other products the carrying value represents the valuation reserve.
Other unfunded commitments to extend credit
Other unfunded commitments to extend credit are generally com-
prised of commitments for working capital and general corporate
purposes as well as extensions of credit to support commercial
paper facilities and bond financings in the event that those obliga-
tions cannot be remarketed to new investors.
Also included in other unfunded commitments to extend credit are
commitments to noninvestment-grade counterparties in connection
with leveraged and acquisition finance activities which were $5.9
billion and $7.0 billion at December 31, 2010 and 2009, respec-
tively. For further information, see Note 3 and Note 4 on pages
170–187 and 187–189 respectively, of this Annual Report.
Guarantees
U.S. GAAP requires that a guarantor recognize, at the inception of
a guarantee, a liability in an amount equal to the fair value of the
obligation undertaken in issuing the guarantee. U.S. GAAP defines
a guarantee as a contract that contingently requires the guarantor
to pay a guaranteed party based upon: (a) changes in an underlying
asset, liability or equity security of the guaranteed party; or (b) a
third party’s failure to perform under a specified agreement. The
Firm considers the following off–balance sheet lending-related
arrangements to be guarantees under U.S. GAAP: certain asset
purchase agreements, standby letters of credit and financial guar-
antees, securities lending indemnifications, certain indemnification
agreements included within third-party contractual arrangements
and certain derivative contracts.
As required by U.S. GAAP, the Firm initially records guarantees at
the inception date fair value of the obligation assumed (e.g., the
amount of consideration received, the net present value of the
premium receivable). For certain types of guarantees, the Firm
records this fair value amount in other liabilities with an offsetting
entry recorded in cash (for premiums received), or other assets (for
premiums receivable). Any premium receivable recorded in other
assets is reduced as cash is received under the contract, and the fair
value of the liability recorded at inception is amortized into income
as lending- and deposit-related fees over the life of the guarantee
contract. For indemnifications provided in sales agreements, a
portion of the sale proceeds is allocated to the guarantee, which
adjusts the gain or loss that would otherwise result from the trans-
action. For these indemnifications, the initial liability is amortized to
income as the Firm’s risk is reduced (i.e., over time or when the
indemnification expires). Any contingent liability that exists as a
result of issuing the guarantee or indemnification is recognized
when it become probable and reasonably estimable. The contingent
portion of the liability is not recognized if the estimated amount is
less than the carrying amount of the liability recognized at inception
(adjusted for any amortization). The recorded amounts of the
liabilities related to guarantees and indemnifications at December
31, 2010 and 2009, excluding the allowance for credit losses on
lending-related commitments, are discussed in footnote (b) to the
table above and below in this Note on pages 276–280.
Standby letters of credit
Standby letters of credit (“SBLC”) and other financial guarantees
are conditional lending commitments issued by the Firm to guaran-
tee the performance of a customer to a third party under certain
arrangements, such as commercial paper facilities, bond financings,
acquisition financings, trade and similar transactions. The carrying
values of standby and other letters of credit were $707 million and
$920 million at December 31, 2010 and 2009, respectively, which
were classified in accounts payable and other liabilities on the
Consolidated Balance Sheets; these carrying values include $347
million and $553 million, respectively, for the allowance for lend-
ing-related commitments, and $360 million and $367 million,
respectively, for the guarantee liability and corresponding asset.