JPMorgan Chase & Co. CEO JAMES DIMON bought 500000 shares on 01-16-2009 at $22.93
JPMorgan Chase & Co. (â€śJPMorgan Chaseâ€ť or the â€śFirmâ€ť) is a financial holding company incorporated under Delaware law in 1968. JPMorgan Chase is one of the largest banking institutions in the United States of America (â€śU.S.â€ť), with $1.6 trillion in assets, $123 billion in stockholdersâ€™ equity and operations worldwide.
JPMorgan Chaseâ€™s principal bank subsidiaries are JPMorgan Chase Bank, National Association (â€śJPMorgan Chase Bank, N.A.â€ť), a national banking association with U.S. branches in 17 states, and Chase Bank USA, National Association (â€śChase Bank USA, N.A.â€ť), a national banking association that is the Firmâ€™s credit cardâ€“issuing bank. JPMorgan Chaseâ€™s principal nonbank subsidiary is J.P. Morgan Securities Inc. (â€śJPMorgan Securitiesâ€ť), its U.S. investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks.
The Firmâ€™s website is www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the â€śSECâ€ť). The Firm has adopted, and posted on its website, a Code of Ethics for its Chairman and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and other senior financial officers.
JPMorgan Chaseâ€™s activities are organized, for management reporting purposes, into six business segments (Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services, Asset Management) and Corporate (which includes its Private Equity, Treasury and Corporate). A description of the Firmâ€™s business segments and the products and services they provide to their respective client bases is provided in the â€śBusiness segment resultsâ€ť section of Managementâ€™s discussion and analysis (â€śMD&Aâ€ť), beginning on page 38, and in Note 34 on page 175.
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment. Competitors include other banks, brokerage firms, investment banking companies, merchant banks, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, hedge funds, trust companies, securities processing companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. JPMorgan Chaseâ€™s businesses generally compete on the basis of the quality and range of their products and services, transaction execution, innovation and price. Competition also varies based on the types of clients, customers, industries and geographies served. With respect to some of its geographies and products, JPMorgan Chase competes globally; with respect to others, the Firm competes on a regional basis. The Firmâ€™s ability to compete also depends upon its ability to attract and retain its professional and other personnel, and on its reputation.
The financial services industry has experienced consolidation and convergence in recent years, as financial institutions involved in a broad range of financial products and services have merged. This convergence trend is expected to continue. Consolidation could result in competitors of JPMorgan Chase gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. It is likely that competition will become even more intense as the Firmâ€™s businesses continue to compete with other financial institutions that are or may become larger or better capitalized, or that may have a stronger local presence in certain geographies.
Supervision and regulation
Permissible business activities: The Firm is subject to regulation under state and federal law, including the Bank Holding Company Act of 1956, as amended. JPMorgan Chase elected to become a financial holding company as of March 13, 2000, pursuant to the provisions of the Gramm-Leach-Bliley Act (â€śGLBAâ€ť).
Under regulations implemented by the Board of Governors of the Federal Reserve System (the â€śFederal Reserve Boardâ€ť), if any depository institution controlled by a financial holding company ceases to meet certain capital or management standards, the Federal Reserve Board may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition, the Federal Reserve Board may require divestiture of the holding companyâ€™s depository institutions if the deficiencies persist. The regulations also provide that if any depository institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act (â€śCRAâ€ť), the Federal Reserve Board must prohibit the financial holding company and its subsidiaries from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. At December 31, 2007, the depository-institution subsidiaries of JPMorgan Chase met the capital, management and CRA requirements necessary to permit the Firm to conduct the broader activities permitted under GLBA. However, there can be no assurance that this will continue to be the case in the future.
Regulation by Federal Reserve Board under GLBA: Under GLBAâ€™s system of â€śfunctional regulation,â€ť the Federal Reserve Board acts as an â€śumbrella regulator,â€ť and certain of JPMorgan Chaseâ€™s subsidiaries are regulated directly by additional authorities based upon the particular activities of those subsidiaries. JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are regulated by the Office of the Comptroller of the Currency (â€śOCCâ€ť). See â€śOther supervision and regulationâ€ť below for a further description of the regulatory supervision to which the Firmâ€™s subsidiaries are subject.
Dividend restrictions: Federal law imposes limitations on the payment of dividends by the subsidiaries of JPMorgan Chase that are national banks. Nonbank subsidiaries of the Firm are not subject to those limitations. The amount of dividends that may be paid by national banks, such as JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., is limited to the lesser of the amounts calculated under a â€śrecent earningsâ€ť test and an â€śundivided profitsâ€ť test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current yearâ€™s net income combined with the retained net income of the two preceding years, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bankâ€™s â€śundivided profits.â€ť See Note 27 on pages 165â€“166 for the amount of dividends that the Firmâ€™s principal bank subsidiaries could pay, at January 1, 2008 and 2007, to their respective bank holding companies without the approval of their banking regulators.
In addition to the dividend restrictions described above, the OCC, the Federal Reserve Board and the Federal Deposit Insurance Corporation (the â€śFDICâ€ť) have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its bank and bank holding company subsidiaries, if, in the banking regulatorâ€™s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.
Capital requirements: Federal banking regulators have adopted risk-based capital and leverage guidelines that require the Firmâ€™s capital-to-assets ratios to meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and specified offâ€“balance sheet financial instruments into four weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, capital is divided into two tiers: Tier 1 capital and Tier 2 capital. The amount of Tier 2 capital may not exceed the amount of Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital. Under the guidelines, banking organizations are required to maintain a Total capital ratio (total capital to risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%.
The federal banking regulators also have established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 capital divided by adjusted average total assets (which reflects adjustments for disallowed goodwill and certain intangible assets). The minimum leverage ratio is 3% for bank holding companies that are considered â€śstrongâ€ť under Federal Reserve Board guidelines or which have implemented the Federal Reserve Boardâ€™s risk-based capital measure for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. Bank holding companies may be expected to maintain ratios well above the minimum levels, depending upon their particular condition, risk profile and growth plans. Effective January 1, 2008, the SEC authorized JPMorgan Securities to use the alternative method of computing net capital for broker/dealers that are part of Consolidated Supervised Entities as defined by SEC rules. Accordingly, JPMorgan Securities may calculate deductions for market risk using its internal market risk models. For additional information regarding the Firmâ€™s regulatory capital, see Regulatory Capital on page 64 and Note 28 on pages 166â€“167.
The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. The Basel Committee has proposed a revision to the Accord (â€śBasel IIâ€ť). U.S. banking regulators are in the process of incorporating the Basel II Framework into the existing risk-based capital requirements. The Basel II rules will also apply to the Firmâ€™s operations in non-U.S. jurisdic tions. In the U.S., JPMorgan Chase will be required to implement advanced measurement techniques by employing internal estimates of certain key risk drivers to derive capital requirements. Prior to its implementation of the new Basel II Framework, JPMorgan Chase will be required to demonstrate to its U.S. bank supervisors that its internal criteria meet the relevant supervisory standards. JPMorgan Chase expects to be in compliance with all relevant Basel II rules within the established timelines.
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991 (â€śFDICIAâ€ť) provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators; among other things, it requires the relevant federal banking regulator to take â€śprompt corrective actionâ€ť with respect to a depository institution if that institution does not meet certain capital adequacy standards.
Supervisory actions by the appropriate federal banking regulator under the â€śprompt corrective actionâ€ť rules generally depend upon an institutionâ€™s classification within five capital categories. The regulations apply only to banks and not to bank holding companies such as JPMorgan Chase; however, subject to limitations that may be imposed pursuant to GLBA, the Federal Reserve Board is authorized to take appropriate action at the holding company level, based upon the undercapitalized status of the holding companyâ€™s subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the bank holding company would be required to guarantee the performance of the undercapitalized subsidiaryâ€™s capital restoration plan and might be liable for civil money damages for failure to fulfill its commitments on that guarantee.
FDIC Insurance Assessments: In November 2006, the FDIC issued final regulations, as required by the Federal Deposit Insurance Reform Act of 2005, by which the FDIC established a new base rate schedule for the assessment of deposit insurance premiums and set new assessment rates which became effective in January 2007. Under these regulations, each depository institution is assigned to a risk category based upon capital and supervisory measures. Depending upon the risk category to which it is assigned, the depository institution is then assessed insurance premiums based upon its deposits. Some depository institutions are entitled to apply against these premiums a credit that is designed to give effect to premium payments, if any, that the depository institution may have made in certain prior years. The new assessment schedule will not have a material adverse effect on the Firmâ€™s earnings or financial condition.
Powers of the FDIC upon insolvency of an insured depository institution: An FDIC-insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with such institution being â€śin defaultâ€ť or â€śin danger of defaultâ€ť (commonly referred to as â€ścross-guaranteeâ€ť liability). An FDIC cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution.
If the FDIC is appointed the conservator or receiver of an insured depository institution upon its insolvency or in certain other events, the FDIC has the power: (1) to transfer any of the depository institutionâ€™s assets and liabilities to a new obligor without the approval of the depository institutionâ€™s creditors; (2) to enforce the terms of the depository institutionâ€™s contracts pursuant to their terms; or (3) to
repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmation or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. The above provisions would be applicable to obligations and liabilities of JPMorgan Chaseâ€™s subsidiaries that are insured depository institutions, such as JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., including, without limitation, obligations under senior or subordinated debt issued by those banks to investors (referred to below as â€śpublic noteholdersâ€ť) in the public markets.
Under federal law, the claims of a receiver of an insured depository institution for administrative expense and the claims of holders of U.S. deposit liabilities (including the FDIC, as subrogee of the depositors) have priority over the claims of other unsecured creditors of the institution, including public noteholders and depositors in non-U.S. offices, in the event of the liquidation or other resolution of the institution. As a result, whether or not the FDIC would ever seek to repudiate any obligations held by public noteholders or depositors in non-U.S. offices of any subsidiary of the Firm that is an insured depository institution, such as JPMorgan Chase Bank, N.A., or Chase Bank USA, N.A., such persons would be treated differently from, and could receive, if anything, substantially less than the depositors in U.S. offices of the depository institution.
The Bank Secrecy Act: The Bank Secrecy Act, which was amended by the USA Patriot Act of 2001, requires all â€śfinancial institutions,â€ť to establish certain anti-money laundering compliance and due diligence programs. The Act also requires financial institutions that maintain correspondent accounts for non-U.S. institutions, or persons that are involved in private banking for â€śnon-United States personsâ€ť or their representatives, to establish â€śappropriate, specific and, where necessary, enhanced due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering through those accounts.â€ť The Firm has developed and maintains policies and procedures which are designed to comply with these requirements.
Other supervision and regulation: Under current Federal Reserve Board policy, JPMorgan Chase is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support its bank subsidiaries in circumstances where it might not do so absent such policy. However, because GLBA provides for functional regulation of financial holding company activities by various regulators, GLBA prohibits the Federal Reserve Board from requiring payment by a holding company or subsidiary to a depository institution if the functional regulator of the payor objects to such payment. In such a case, the Federal Reserve Board could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.
The bank subsidiaries of JPMorgan Chase are subject to certain restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Firm and certain other affiliates, and on investments in stock or securities of JPMorgan Chase and those affiliates. These restrictions prevent JPMorgan Chase and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts. See Note 27 on pages 165â€“166.
The Firmâ€™s banks and certain of its nonbank subsidiaries are subject to direct supervision and regulation by various other federal and state authorities (some of which are considered â€śfunctional regulatorsâ€ť
under GLBA). JPMorgan Chaseâ€™s national bank subsidiaries, such as JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are subject to supervision and regulation by the OCC and, in certain matters, by the Federal Reserve Board and the FDIC. Supervision and regulation by the responsible regulatory agency generally includes comprehensive annual reviews of all major aspects of the relevant bankâ€™s business and condition, as well as the imposition of periodic reporting requirements and limitations on investments and other powers. The Firm also conducts securities underwriting, dealing and brokerage activities through JPMorgan Securities and other broker-dealer subsidiaries, all of which are subject to the regulations of the SEC and the Financial Industry Regulatory Authority, and other self-regulatory organizations. JPMorgan Securities is a member of the New York Stock Exchange. The operations of JPMorgan Chase mutual funds also are subject to regulation by the SEC. The Firm has subsidiaries that are members of futures exchanges in the U.S. and abroad. One subsidiary is registered as a futures commission merchant, and other subsidiaries are registered as commodity pool operators and commodity trading advisors, all with the Commodity Futures Trading Commission (â€śCFTCâ€ť). These CFTC-registered subsidiaries are also members of the National Futures Association. The Firmâ€™s energy business is subject to regulation by the Federal Energy Regulatory Commission. The types of activities in which the non-U.S. branches of JPMorgan Chase Bank, N.A., and the international subsidiaries of JPMorgan Chase may engage are subject to various restrictions imposed by the Federal Reserve Board. Those non-U.S. branches and international subsidiaries also are subject to the laws and regulatory authorities of the countries in which they operate.
The activities of JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., as consumer lenders also are subject to regulation under various U.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practice and Electronic Funds Transfer acts, as well as various state laws. These statutes impose requirements on the making, enforcement and collection of consumer loans and on the types of disclosures that need to be made in connection with such loans.
Under the requirements imposed by GLBA, JPMorgan Chase and its subsidiaries are required periodically to disclose to their retail customers the Firmâ€™s policies and practices with respect to (1) the sharing of nonpublic customer information with JPMorgan Chase affiliates and others; and (2) the confidentiality and security of that information. Under GLBA, retail customers also must be given the opportunity to â€śopt outâ€ť of information-sharing arrangements with nonaffiliates, subject to certain exceptions set forth in GLBA.
For a discussion of certain risks relating to the Firmâ€™s regulatory environment, see Risk factors below.
For geographic distributions of total revenue, total expense, income before income tax expense and net income, see Note 33 on pages 174â€“175. For information regarding non-U.S. loans, see Note 14 on page 137 and the sections entitled â€śEmerging markets country exposureâ€ť in the MD&A on page 83, Loan portfolio on page 190 and â€śCross-border outstandingsâ€ť on page 192.
MANAGEMENT DISCUSSION FROM LATEST 10K
Managementâ€™s discussion and analysis of the financial condition and results of operations, entitled â€śManagementâ€™s discussion and analysis,â€ť appears on pages 27 through 100. Such information should be read in conjunction with the Consolidated financial statements and Notes thereto, which appear on pages 104 through 178.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
For a discussion of the Firmâ€™s current stock repurchase program, see Stock repurchases, on page 43, and Item 5: Market for Registrantâ€™s common equity, related stockholder matters and issuer purchases of equity securities on pages 13â€“14 of JPMorgan Chaseâ€™s 2007 Annual Report on Form 10-K.
During the first quarter of 2008, shares of common stock of JPMorgan Chase & Co. were issued in transactions exempt from registration under the Securities Act of 1933, pursuant to Section 4(2) thereof, as follows: (i) on January 2, 2008, 9,694 shares were issued to retired directors who had deferred receipt of such common stock pursuant to the Deferred Compensation Plan for Non-Employee Directors; and (ii) on January 22, 2008, 678 shares and on January 30, 2008, 57,449 shares were issued to retired employees who had deferred receipt of such common shares pursuant to the Corporate Performance Incentive Plan.
On April 17, 2007, the Board of Directors authorized the repurchase of up to $10.0 billion of the Firmâ€™s common shares. The new authorization commenced April 19, 2007, and replaced the Firmâ€™s previous $8.0 billion repurchase program.
During the first quarter of 2008, under the current $10.0 billion stock repurchase program, the Firm did not repurchase any shares. During the first quarter of 2007, under the $8.0 billion stock repurchase program, the Firm repurchased 81 million shares for $4.0 billion at an average price per share of $49.45. As of March 31, 2008, $6.2 billion of authorized repurchase capacity remained under the current stock repurchase program.
The Firm has determined that it may, from time to time, enter into written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of common stock in accordance with the repurchase program. A Rule 10b5-1 repurchase plan allows the Firm to repurchase shares during periods when it would not otherwise be repurchasing common stock, for example during internal trading â€śblack-out periods.â€ť All purchases under a Rule 10b5-1 plan must be made according to a predefined plan that is established when the Firm is not aware of material nonpublic information.
Participants in the Firmâ€™s stock-based incentive plans may have shares withheld to cover income taxes. Shares withheld to pay income taxes are repurchased pursuant to the terms of the applicable plan and not under the Firmâ€™s share repurchase program. Shares repurchased pursuant to these plans during the first quarter of 2008 were as follows
Good morning everybody thanks for joining us early this morning. We simply wanted to get our results out as soon as they were ready so appreciate your patience in us moving the time on this. As usual weâ€™re going to do the presentation but Iâ€™m going to cover it pretty quickly since thereâ€™s a lot of material in here but slow down on certain slides to really make sure Iâ€™m very clear about whatâ€™s in them and then weâ€™ll take some Q&A at the end.
So if you start on the presentation just quickly on the first slide, you see that our full year profits for 2008 were $5.6 billion or $1.37 a share driven down substantially from the prior year by higher credit costs of $22 billion but really the point here is absorbing that substantial increase was the very high and strong pre-provision profits that you can see, the $73 billion of revenues less the $43 billion of expenses to give you $30 billion pre-tax pre-provision profitability which is obviously a big part of the story as well across all the businesses.
If you go to the next slide, slide two, Iâ€™ll only point out here that for the quarter $702 million of net income or $0.07 of EPS. Rather then spend time here as usual itâ€™s best to go through this business by business which Iâ€™ll do but first letâ€™s just hit slide three and let me spend a minute just to flag for you what are the big items that are imbedded in that $0.07 of results.
And so here on slide three fourth quarter significant items, you see a variety of negatives and positives which are baked in there so letâ€™s just walk down them from the top. So first one, $4 billion pre-tax increase to our loan loss reserves for $2.5 billion after-tax. That brings our total loan loss reserves to $24 billion from $10 billion a year ago.
Next item is $2.9 billion pre-tax of net markdowns on leveraged loans and mortgage exposures. The exposures weâ€™ve been talking to you about for the last several quarters now and thatâ€™s in the investment bank. The next item, merger-related items that really reflects a gain related to the net positive impact of a variety of refinements to the purchase accounting estimates for WaMu which as we said last quarter would get refined in the first quarter given that we did the deal five days before the end of last quarter so itâ€™s negative goodwill, that flows through the income statement as a gain of $1.1 billion after-tax.
Next MSR risk management results of $1.4 billion pre-tax, $900 million after-tax. We just point this out because the bigger then usual number and this is the money we made taking some risk in the way we manage and hedge the change in value of the MSR asset in the mortgage banking part of retail.
Next is $1.1 billion pre-tax of private equity write-downs shown in corporate and lastly as you saw in our 10-Q because this happened very early in the quarter the $600 million after-tax Paymentech gain on sale.
So with all those items just flagged for you and the businesses over to the right in which they appear, I wonâ€™t harp on those again, so now letâ€™s just start with the investment bank on slide four. So let me start you up on the upper right side of the page in the box, so you see net loss for the quarter of $2.4 billion in the investment bank and this table is its own sort of significant items table for the investment bank.
So the leverage lending markdowns and the mortgage-related markdowns flagged for you on the prior page and Iâ€™ll show you where we stand on those positions in a second. Credit costs, this is additions to reserves shown on the prior page, total $4 billion pre-tax for the firm, $700 million pre-tax in the investment bank in the quarter and then the last item is the impact of spread tightening on structured liabilities, an item weâ€™ve been talking about over the past several quarters for $700 million pre-tax. Those items come down to, if you tax effect them but not comp effect just to be clear what I did here, thatâ€™s $2.7 billion after-tax impact in the quarter where there wasnâ€™t a comp accrual is the way I did that.
I just make one additional point that typically we see when our spread tightens and we have a reduction in value of our structured liabilities on the liability side, our counterparty payables on the asset side of the balance sheet tend to increase in value and have an offset. In this quarter the spreads didnâ€™t behave in the same relationship so actually whatâ€™s known as CVA, the value of our counterparty receivables adjustment actually was a meaningful negative number as well.
So now if you just walk down the bullets and the P&L, aside from those items that are in the box above you see investment banking fees of $1.4 billion revenue, thatâ€™s down 17% from a year ago but you see on the next slide, Iâ€™ll show you the continued leading market position that we have in corporate finance across all categories is very substantial.
Next line the $1.7 billion fixed income markets negative revenue for the quarter. If you net out the DVA leverage loan marks and mortgage marks from above, that brings you back to $1.6 billion positive revenue and really the story there is weak trading in the credit related products offset again by continued very strong and record performance in rates and currencies and continued strength in commodities and emerging markets which has been a story for the last several quarters.
Moving down to equity markets, negative revenues of $94 million in total. You net out the impact of spread tightening and thatâ€™s $260 million positive so thatâ€™s again weak trading particularly, weak trading results offset in part by strong client revenues particularly in the prime service businesses.
Next is credit costs driving the P&L, $765 million, a little bit of charge-offs in the quarter but again the bulk of that is the nearly $700 million addition to loan loss reserves that brings, you can see in the table to the left, the allowance to total loans in the investment bank of 4.71%, up substantially from last quarter and last year as you can see for yourself, 1.93% a year ago to 4.71% now. So while credit is degrading we think weâ€™re doing what we should be doing to bolster the loan loss reserves through the P&L.
Lastly expenses down 9%, lower compensation expense 63% comp to revenue ratio for the year trued up in the fourth quarter and all that brings you down to the $2.4 billion bottom line loss that you see here in the investment bank.
Next slide, slide five, you see the standing of the investment bank and the client franchise and you can look for yourself at this and see how strong the franchise position is and understand why despite the challenging environment that weâ€™re in weâ€™re very confident about the ability to deliver in the investment banking business, strong results looking ahead.
Slide six, donâ€™t need to spend much time on. Youâ€™ve seen this before but when you take the $1.8 billion of markdowns, now Iâ€™m on leveraged lending, itâ€™s the $1.8 billion of markdowns takes us down to $12.6 billion of [notional] commitments remaining that have a total markdown cumulative of $5.7 billion or 45% so the carrying value of $6.9 billion of market exposure is where we currently have our remaining legacy leverage loans at $0.55 on the $1 on average but obviously that goes loan by loan, name by name, piece by piece.
Slide seven is then the last page on the investment bank and itâ€™s just a recap of again what weâ€™ve shown you last quarter. If you start in the box in the upper left, itâ€™s the aggregate exposures we have in these various residential and commercial mortgage exposures. So last quarter we ended the quarter with $18.6 billion worth of exposure. You see in the middle column $3.9 billion reduction in the quarter to end at $14.7 billion.
Obviously the marks came down, that was $1.1 billion of markdowns embedded in the $3.9 billion of exposure reduction. The bulk of that against the commercial exposure there where you see $9.3 billion of exposure at the end of last quarter, total reduction of $1.6 billion and then ending just under $8 billion.
So moving past the investment bank, slide eight I just wanted to show you how we are now for the first quarter including the operating results of Washington Mutual in the particularly the remaining businesses here and so what Iâ€™ve shown you and youâ€™ll see this in our supplement as well, is the top half is the way JPMorgan Chase was reporting its businesses that were effected previously, and so at the bottom is how weâ€™ve revamped some of our disclosures and Iâ€™ll walk across that across the bottom.
So the first two buckets are going to be the two new segments of disclosure within retail financial services, so retail financial services will still be one of our six business units but weâ€™ll break those results down in to retail banking which is going to be really the branch banking business as well as business banking and the related loans in business banking and WaMu branches will go into that business.
Moving over its consumer lending and then for all the remaining lending activities aside from business banking, all the origination and balance activities, so thatâ€™s home lending, education, auto etc., will be shown and reported in this business as well as mortgage production and servicing and again related WaMu activities reported beginning this quarter in there.
And then over on the right side of the page you see card services and commercial bank, disclosure exactly the same as before but as we get to those businesses you can look at the supplement and see weâ€™re just enhancing some of the disclosure items that are embedded in these businesses to help you understand what we picked up from WaMu, where itâ€™s relevant.
Slide nine, I wonâ€™t spend a lot of time on, but we just break down now the key statistics that drive the P&L for both retail banking on the top half of the page and consumer lending at the bottom the way we always do. So just at the top half Iâ€™d just point out the healthy underlying trends. We feel good about them, average deposits of $340 billion, up a bit year-over-year ex WaMu and then in the case of WaMu deposits have been stabilizing and have stabilized and thatâ€™s reflective of the fact that weâ€™ve been adjusting pricing and have not seen a run off in deposits there which we think is a very good sign and very good for the business.
And branch production stats very strong as well. Obviously at the bottom you see origination activities down and thatâ€™s driven by generally speaking the tighter underwriting standards that weâ€™ve been talking about across the various portfolios.
Slide 10 now the retail overall P&L, so retail top few lines is just the consolidated retail financial services business earned $624 million for the quarter. But going to the pieces the second bullet and middle of the page on the left, itâ€™s retail banking, $1,040 million of profit in the quarter, up 85%. Obviously that includes WaMu with total revenue of $4.5 billion for the quarter. That billion dollar number just stare at that for a second, that is a powerful source of ongoing earnings that we are going to continue to invest in and grow so we feel very good about the profit line in this business.
Next you go down to consumer lending, which I described what that is and you see the net income loss of $416 million and that obviously includes to the negative the additional higher credit costs, $3.3 billion which is higher losses as well as the addition of loan loss reserves which related to the residential real estate portfolio is $1.6 billion of the $4 billion of additions to reserves running through that $3.3 billion of credit costs and then on the revenue line, noninterest revenues of $2.1 billion includes that positive MSR risk management result I talked about earlier.
Next slide, slide 11 I just wanted before going through the stats on the key portfolios, just to show you a page that shows you how WaMu balances coming into our credit reporting is going to have an effect on our credit stats as you try to think about them versus the past and compare them to others. So Iâ€™ll just quickly run down the page, so first row of numbers is Chase so thatâ€™s legacy Chase consumer lending $205 billion of balances, $1.5 billion of charge-offs, 2.98% charge-off rate for the quarter and allowance against that of $7.4 billion or 3.62% coverage.
When you add in the portion of the WaMu balances that we didnâ€™t impair obviously thatâ€™s a selection of loans that are performing really well, so thatâ€™s $58 billion with zero charge-offs in the quarter. That will obviously grow over time and obviously has the conforming loan loss allowance will be put against but thatâ€™s at a lower level then Chase so when you blend those two together the charge-off rate comes down to 2.32% and coverage to 3.16%.
But that is the row, the blue line, the blue shading you will see that row hence forward in our supplemental disclosures and we really think that that is the relevant line looking at the credit stats related to our non-credit impaired consumer-lending portfolio. Weâ€™ll also show you the total including the impaired portfolio which you see on the next line which is $89 billion but obviously we marked that so that doesnâ€™t reflect charge-offs in it so it further dilutes down charge-off rates and allowance coverage ratios.
Iâ€™ll quickly hit the next few slides, youâ€™ve seen these before, the main point if you look at the delinquency trends on the upper left is that delinquencies continue to go higher. If you move over to the upper right box you see that dollar charge-offs in our home equity portfolio which were $770 million in the quarter, charge-off rate of 2.67% and thatâ€™s all in. When you look at just the portion of $95 billion or so thatâ€™s heritage JPMorgan you see that same $770 million drives a charge-off rate against the legacy portfolio of 3.24% so obviously the loss trend up more dramatically then when you look at it on a blended basis.
And the key points at the bottom, last bullet, that we do see continued deterioration. We expect that that $770 million of quarterly charge-offs could progress towards a billion dollars plus or minus per quarter over the next several quarters hence the addition to loan loss reserves in the quarter.
Next slide, same thing on prime, $195 million charge-offs in the quarter, 1.20% charge-off rate, 1.97% charge-off rate for heritage JPMorgan only and that our quarterly loss outlook, bottom bullet again could be as high as $400 million per quarter looking out over the next several quarters.
And then on slide 14, subprime portfolio, $319 million of net charge-offs in the quarter, 8.08% charge-off rate all in, 9.76% for heritage JPMorgan and the quarterly losses here could be as high as $375 million to $425 million a quarter over the course of 2009. Similar guidance here to what we had before, nonetheless some addition to reserve there.
Now slide 15 is important updates so let me take a second on this. We talked to you when we acquired the WaMu portfolio about some scenarios of expected lifetime losses, so if you go to the table here, let me just refresh you. The first two columns you see per prior presentation, we had said in our last presentation to you that our base estimate reflected US peak to trough HPI of down 25% that that reflected working down the page $36 billion of remaining life losses from the beginning of 2008 which then had imbedded in it $30.7 billion remaining after the close.
We also told you in the next column over that if we got to a deeper recession which we approximated could reflect a 28% peak to trough HPI that the losses could go up by $6 billion and $42 billion and $36.7 billion, weâ€™re going to stop talking about from the beginning of the year, so if you just look at that bottom line, $31 billion up to $36.7 billion.
Now moving over to the right, current outlook and this is market outlook because we havenâ€™t really recranked every number in here but the current markets forecast [case shield] or whatever you want to look at, economy.com, which suggests that the peak to trough may go to something more like 31%. Weâ€™ve refined or triangulated what our implied losses could be having had another quarterâ€™s worth of work to do, that against that kind of market outlook the implied range of where losses could be, could be as high as $32 billion to $36 billion to give you a freshened up view on that.
Going down the bullets, the next important point is the second bullet, as weâ€™ve also refined our accounting on the balance sheet our current marks reflect $32.5 billion of remainder of life losses so that puts us marked and accounted for at the bottom end but inside that range of where current market expectation is.
Next important point is that losses that weâ€™ve actually taken thus far, its been very early, are actually inline with losses and delinquencies inline with what was imbedded in our valuation so far. And then the last point is how to think about this is that when you would have future additions to loan loss reserves, that would happen if and when the actual delinquencies and losses start to exceed what was imbedded in our initial expectations.
So Iâ€™ll leave it at that. You will hear more in Investor Day but itâ€™s very early but we know this is an important topic so we want to just give you a freshened up view on that.
Moving on to card services, slide 16, Iâ€™ll pick up the pace a little bit, here you have, Iâ€™ll just make the point if you look at the key stats on the left side of the page, the P&L, it is all in. This is whatâ€™s in our disclosure supplement. This includes the WaMu portfolio imbedded in all the P&L data, revenue, credit costs, expense and profit, but for the key stats in order to give you all a better trend of whatâ€™s going on in the larger Chase business, weâ€™re going to show you stats excluding WaMu as well and for the most part those will be the stats that I try to refer to in terms of how trends are behaving across the business.
So working down some of these bullets here you see the loss for the quarter of $371 million. That was really driven by the $4 billion of pre-tax credit costs up substantially year-over-year and thatâ€™s both due to higher credit costs as well as an addition to loan loss reserves of $1.1 billion in the quarter.
You see the charge-off rate circled at the bottom of the table of 5.29% in the fourth quarter which is basically inline with our last outlook but now looking ahead we do see that loss rate for 2009 beginning the year at something more like 7% and progressing across the year through to something more like 8%. Again that is on an ex WaMu type of basis so consistent with the guidance that weâ€™ve talked about before.
I wonâ€™t run through the rest of the stats on the page but you can see them for yourselves there. Moving on next slide, 17, commercial bank, $480 million of net income is a record quarterly number for this business and that would be the case without the inclusion of WaMu so continued strong results in the business here. Thatâ€™s on record revenue for a quarter of $1.5 billion, up substantially year-on-year and you can just look at the balance sheet stats, second bullet describes them to you, but the liability balances up 17%, loan growth up 11% so thatâ€™s $117 billion of loans, $114 billion of liability balances, a very well funded business.
And of that loan growth you see 11% year-over-year thatâ€™s imbedded in that is 37% growth in the government and not for profit business so James is going to talk a bit about the lending weâ€™ve been doing but you can see it really here in this business.
And then credit costs of $190 million some signs of weakening of credit stats here so a little bit of increased charge-off, 40 basis points as well as some loan loss addition here. Treasury and securities services on slide 18, $533 million worth of record profits, up 26% from a year ago. Thatâ€™s on record revenue again in both treasury services and worldwide security services in the quarter, $2.2 billion total revenue, up 17%.
And again the big drivers of that is growth in the balance sheet here. So you see $336 billion of liability balances, up 34% and weâ€™re seeing tremendous influx of balances in this kind of environment which obviously could abate looking ahead, weâ€™ll see. And also just looking ahead weâ€™re conscious of a lower rate environment which could also put some pressures on spreads in this business as well as in the commercial bank on their liability balances.
Last business, slide 19, asset management quarterly profits of $255 million, down 52% year-over-year, obviously driven by whatâ€™s going on in assets under management so you see assets under management down 5% with $211 billion of market related declines offset in part by continued strong inflows, $61 billion for the quarter, $151 billion of inflows over the past year but most of that obviously in liquidity products, lower margin hence the impact on revenues, so quarterly revenues of $1.7 billion down 31% year-over-year.
Slide 20, corporate/private equity, so just walking down the table Iâ€™ve hit these numbers before for you so $1.1 billion of private equity losses, write-downs on the $6.9 billion of carrying value, that translates into $700 million after-tax loss. Corporate is slightly over $1 billion of profit, big piece of that is the Paymentech gain running through that line and then the last piece of corporate is the merger-related items which includes the extraordinary gain on WaMu offset in part by the Bear Stearns related and WaMu related merger expense.
Iâ€™ll just make a comment here, the merger related items, this number probably plus or minus $600 million after-tax in 2009 blending together WaMu and Bear Stearns which is consistent with what weâ€™ve talked about before.
And lastly before I hand it over to James, capital management slide 21, itâ€™s important to note that we continue to maintain an extremely strong capital position. So you see Tier 1 capital $136 billion, up from $89 billion a year ago and $112 billion last quarter. That translates on a regulatory basis into a Tier 1 capital ratio of 10.8%, up from 8.4% a year ago and 8.9% last quarter.
And looking further down those ratios in the table, Iâ€™d also just point out very strong tangible capital ratios aside from the regulatory capital ratios. Just a few more points here, in the bottom left side, I wanted you to realize weâ€™re talking Tier 1 capital under a Basel I regime, and while weâ€™re not on it yet weâ€™re working towards it and understand that Basel II would be higher for us if we reported on that basis.
Second point is that really maintain this capital strength while managing the other part of balance sheet strength which is the credit reserve side, thatâ€™s up to $24 billion as I said earlier from $10 billion of one year ago. And all that ran through the P&L so to maintain a capital account the way we did goes back to the wide pre-tax margins we have pre-provision.
And then lastly I just wanted to flag for people because thereâ€™s been a lot of concern around the off balance sheet accounting rule changes, so FAS 140 and FIN46R, so while these arenâ€™t yet released weâ€™ve put a little table here in the bottom right so you can look at it yourself to give you an estimate of what it might mean to us.
The point for us is that we look at this all the time and on a forward basis are managing capital with this stuff in mind and you see weâ€™ve [inaudible] to the 10-Q balances that a lot of people see of whatâ€™s off balance sheet, walk that across to what the GAAP asset impact might be, these are our best estimates and then translate that into RWA under Basel I so it could be something like 80 basis points, maybe plus or minus, but obviously that will depend on what the final rules actually look like and when they get implemented.
So with that let me hand it off to James to fill in any outlook comments that I missed.
Thank you very much, and I just have a few comments and then weâ€™ll open it up to questions. On the investment bank, there are two things Iâ€™d like to talk about. One is the results on the client side have really been exceptional, the market share gains, I think thatâ€™s true on investment banking and on trading. We see a lot more client flow and we think weâ€™re going to do very well servicing investor and corporate clients.
We get asked a lot about Bear Stearns and the impact of Bear Stearns. I hesitate to say this a little bit, we still expect to get $1 billion of earnings from Bear Stearns late in 2009 predominantly prime brokerage is doing well and energy and commodities but it also helped and aided our business in equities, fixed income and really across the board we got some terrific bankers in the deal.
However itâ€™s hard to separate out positions that we inherited that we decided to keep or we didnâ€™t hedge right or something like that but when we took on Bear, we did take on a lot more risk assets and we got them down substantially, we probably lost several billion dollars more then we would have in the year had we not done Bear and again, itâ€™s hard to really separate what was our responsibility and what we inherited because we could have sold some of the things we inherited.
The retail business weâ€™re working hard on WaMu. Weâ€™re still very excited about it, we think itâ€™s still approximately what we told you last time what its going to do for this company. Weâ€™re very excited about the ability to build small business, private banking, asset management, and middle market on top of the retail [inaudible] platform there. We hope to consolidate all of WaMu systems by the end of the year. Thatâ€™s the point where we get very comfortable about how we can grow it. We will be changing the brand in California at the end of March because I think itâ€™s important to start using the new name in California.
You might have saw that yesterday we closed a mortgage in the mortgage business which we are obviously a very big player and we still think weâ€™re going to be, get very good at it, and though we donâ€™t know the real ongoing profitability of all the mortgage business, we did close the remaining broker business that we did mostly in the prime side and we just think itâ€™s a smart thing to do because a lot of business that came through that side was just not our kind of quality.
Card, Michael gave you some numbers where losses will be higher. Now we donâ€™t totally see that yet but weâ€™re just kind of assuming that unemployment is going to go up and obviously thatâ€™s going to drive card. We also owe you, weâ€™re not going to do it now, some comments on the new [you dap] so when I think we have Investor Day about what that might mean for the business and how we might adopt a chain into [you dap]. Suffice it to say here, it probably will drive profits lower and reduce the amount of credit that you can make availability and the way you can make it available to consumers, but we think we could adjust to it over time in a fairly reasonable way.
Commercial bank, all I can say is just really great results and, into reserves and MPLs and credit loss havenâ€™t gone up that much. They have to go up. You cannot have an environment like this where you donâ€™t see a lot of stress and strain on middle markets, so we do expect losses to go up there. Treasury and security services kind of gangbusters. I think one of the important things there to keep in mind is we also didnâ€™t have any of the pitfalls so we feel really good how we run that business.
Asset management, results down, obviously because assets under management are down but I think the important thing here also is weâ€™ve grown the business, more bankers, more net inflows and we also stayed away from a lot of pitfalls that have beset some other folks in that business.
Michael mentioned the balance sheet, we think weâ€™re in very good shape. I should add that we did add and you see in the supplement, but our investment portfolio, the parent, have gone from $116 billion to over $160 billion as we try to invest on this excess liquidity we have etc. so it drives those ratios down but itâ€™s completely discretion on our part how we use that and in the short run it drives slightly higher income in corporate as we buy some of those portfolios.
I want to mention two other things, report on one other thing, which is we started this [way forward] campaign about all the things that JPMorgan is doing to help the system, to help our clients, the small business, middle market, investment banking, and thereâ€™s going to be a lot more coming about that and youâ€™ve seen, I think weâ€™ve been at the forefront of mortgage modifications. We have some more information about that coming up in a day or so because we think there are more things we can do to help keep people in their homes and do a better job for the consumer.
And weâ€™re also, in the press release we announced also that in the quarter we extended new credit of over $100 billion because there have been a lot of questions out there about whether banks are making loans. I think weâ€™re speaking for lots of banks here, people are out making loans. This quarter alone I think we did four million new credit cards, so we extended credit card loans, corporate loans, middle market loans, we bought $1.4 billion bond issue when no one else would bid on it from Illinois.
So weâ€™re in business. Some businesses the loan demand is actually dropping rather dramatically. Weâ€™ve also in the interbank market we have had on average $40 billion or $50 billion out and into bank market, that is also a form of lending. So people ask are banks lending to each other, well I think some are and trying to help the system that way.
And all of this is helped by the TARP so we think itâ€™s a valid question people to ask what are doing with the TARP money and we do say itâ€™s hard to separate exactly what is TARP money because remember weâ€™re making loans all the time but we are trying to follow the intent and spirit of TARP which is to help the economy of the United States recover and make sure weâ€™re financing people.
We even have done some major large syndicated leveraged finance loans and Iâ€™ll mention two, [Imbev and Mars] but thereâ€™s several others. So weâ€™re still in business. Obviously the cost of money is higher for clients and people have tightened up some of the underwriting standards, but weâ€™re still in business, weâ€™re still trying to do the best we can both for our shareholders and the country.
So we will stop there and open for questions.