JPMorgan Chase & Co. Chairman & CEO JAMES DIMON bought 500,000 shares on 7-20-2012 at $ 34.22
JPMorgan Chase & Co. (â€ś JPMorgan Chase â€ť or the â€śFirmâ€ť), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (â€śU.S.â€ť), with operations worldwide; the Firm has $2.3 trillion in assets and $183.6 billion in stockholdersâ€™ equity as of December 31, 2011 . The Firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the worldâ€™s most prominent corporate, institutional and government clients.
JPMorgan Chase â€™s principal bank subsidiaries are JPMorgan Chase Bank, National Association (â€ś JPMorgan Chase Bank, N.A. â€ť), a national bank with U.S. branches in 23 states, and Chase Bank USA, National Association (â€śChase Bank USA, N.A.â€ť), a national bank that is the Firmâ€™s credit cardâ€“issuing bank. JPMorgan Chase â€™s principal nonbank subsidiary is J.P. Morgan Securities LLC (â€śJPMorgan Securitiesâ€ť), the Firmâ€™s 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. One of the Firmâ€™s principal operating subsidiaries in the United Kingdom (â€śU.K.â€ť) is J.P. Morgan Securities Ltd., a subsidiary of JPMorgan Chase Bank, N.A.
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, 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 U.S. 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 Chase â€™s activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firmâ€™s wholesale businesses comprise the Investment Bank (â€śIBâ€ť), Commercial Banking (â€śCBâ€ť), Treasury & Securities Services (â€śTSSâ€ť) and Asset Management (â€śAMâ€ť) segments. The Firmâ€™s consumer businesses comprise the Retail Financial Services (â€śRFSâ€ť) and Card Services & Auto (â€śCardâ€ť) segments.
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 of financial condition and results of operations (â€śMD&Aâ€ť), beginning on page 63 and in Note 33 on pages 300â€“303.
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment. Competitors include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, commodity trading companies, private equity firms, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, 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 Chase â€™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 on 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 and, in some cases, failed. 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 capitaliz ed, that may have a stronger local presence in certain geographies or that operate under different rules and regulatory regimes than the Firm.
Supervision and regulation
The Firm is subject to regulation under state and federal laws in the United States, as well as the applicable laws of each of the various jurisdictions outside the United States in which the Firm does business.
Regulatory reform : On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the â€śDodd-Frank Actâ€ť), which is intended to make significant structural reforms to the financial services industry. As a result of the Dodd-Frank Act and other regulatory reforms, the Firm is currently experiencing a period of unprecedented change in regulation and such changes could have a significant impact on how the Firm conducts business. The Firm continues to work diligently in assessing and understanding the implications of the regulatory changes it is facing, and is devoting substantial resources to implementing all the new rules and regulations while meeting the needs and expectations of its clients. Given the current status of the regulatory developments, the Firm cannot currently quantify the possible effects on its business and operations of all of the significant changes that are currently underway. For more information, see â€śRisk Factorsâ€ť on pages 7â€“17. Certain of these changes include the following:
Resolution plan . In September 2011, the Federal Deposit Insurance Corporation (â€śFDICâ€ť) and the Board of Governors of the Federal Reserve System (the â€śFederal Reserveâ€ť) issued, pursuant to the Dodd-Frank Act, a final rule that will require bank holding companies with assets of $50 billion or more and companies designated as systemically important by the Financial Stability Oversight Council (the â€śFSOCâ€ť) to submit periodically to the Federal Reserve, the FDIC and the FSOC a plan for resolution under the Bankruptcy Code in the event of material distress or failure (a â€śresolution planâ€ť). In January 2012, the FDIC also issued a final rule that will require insured depository institutions with assets of $50 billion or more to submit periodically to the FDIC a plan for resolution under the Federal Deposit Insurance Act in the event of failure. The timing of initial, annual and interim resolution plan submissions under both rules is the same. The Firmâ€™s initial resolution plan submissions are due on July 1, 2012, with annual updates thereafter, and the Firm is in the process of developing its resolution plans.
Debit interchange . On October 1, 2011, the Federal Reserve adopted final rules implementing the â€śDurbin Amendmentâ€ť provisions of the Dodd-Frank Act, which limit the amount the Firm can charge for each debit card transaction it processes.
Derivatives . Under the Dodd-Frank Act, the Firm will be subject to comprehensive regulation of its derivatives business, including capital and margin requirements, central clearing of standardized over-the-counter derivatives and the requirement that they be traded on regulated trading platforms, and heightened supervision. Further, the proposed margin rules for uncleared swaps may apply extraterritorially to U.S. firms doing business with clients outside of the United States. The Dodd-Frank Act also requires banking entities, such as JPMorgan Chase, to significantly restructure their derivatives businesses, including changing the legal entities through which certain transactions are conducted.
Volcker Rule . The Firm will also be affected by the requirements of Section 619 of the Dodd-Frank Act, and specifically the provisions prohibiting proprietary trading and restricting the activities involving private equity and hedge funds (the â€śVolcker Ruleâ€ť). On October 11, 2011, regulators proposed the remaining rules to implement the Volcker Rule, which are expected to be finalized sometime in 2012. Under the proposed rules, â€śproprietary tradingâ€ť is defined as the trading of securities, derivatives, or futures (or options on any of the foregoing) that is predominantly for the purpose of short-term resale, benefiting from short-term movements
in prices or for realizing arbitrage profits for the Firmâ€™s own account. The proposed ruleâ€™s definition of proprietary trading does not include client market-making, or certain risk management activities. The Firm ceased some proprietary trading activities during 2010, and is planning to cease its remaining proprietary trading activities within the timeframe mandated by the Volcker Rule.
Capital . The treatment of trust preferred securities as Tier 1 capital for regulatory capital purposes will be phased out over a three year period, beginning in 2013. In addition, in June 2011, the Basel Committee and the Financial Stability Board (â€śFSBâ€ť) announced that certain global systemically important banks (â€śGSIBsâ€ť) would be required to maintain additional capital, above the Basel III Tier 1 common equity minimum, in amounts ranging from 1% to 2.5%, depending upon the bankâ€™s systemic importance. In December 2011, the Federal Reserve, the Office of the Comptroller of the Currency (â€śOCCâ€ť) and FDIC issued a notice of proposed rulemaking for implementing ratings alternatives for the computation of risk-based capital for market risk exposures, which, if implemented, would result in significantly higher capital requirements for many securitization exposures. For more information, see â€śCapital requirementsâ€ť on pages 4â€“5.
FDIC Deposit Insurance Fund Assessments . In February 2011, the FDIC issued a final rule changing the assessment base and the method for calculating the deposit insurance assessment rate. These changes became effective on April 1, 2011, and resulted in an aggregate annualized increase of approximately $600 million in the assessments that the Firmâ€™s bank subsidiaries pay to the FDIC. For more information, see â€śDeposit insuranceâ€ť on page 5.
Bureau of Consumer Financial Protection . The Dodd-Frank Act established a new regulatory agency, the Bureau of Consumer Financial Protection (â€śCFPBâ€ť). The CFPB has authority to regulate providers of credit, payment and other consumer financial products and services. The CFPB has examination authority over large banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., with respect to the banksâ€™ consumer financial products and services.
Heightened prudential standards for systemically important financial institutions . The Dodd-Frank Act creates a structure to regulate systemically important financial companies, and subjects them to heightened prudential standards. For more information, see â€śSystemically important financial institutionsâ€ť below.
Concentration limits . The Dodd-Frank Act restricts acquisitions by financial companies if, as a result of the acquisition, the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies. The Federal Reserve is expected to issue rules related to this restriction in 2012.
The Dodd-Frank Act instructs U.S. federal banking and other regulatory agencies to conduct approximately 285 rulemakings and 130 studies and reports. These regulatory agencies include the Commodity Futures Trading Commission (the â€śCFTCâ€ť); the SEC; the Federal Reserve; the OCC; the FDIC; the CFPB; and the FSOC.
Other proposals have been made internationally, including additional capital and liquidity requirements that will apply to non-U.S. subsidiaries of JPMorgan Chase, such as J.P. Morgan Securities Ltd.
Systemically important financial institutions: The Dodd-Frank Act creates a structure to regulate systemically important financial institutions, and subjects them to heightened prudential standards, including heightened capital, leverage, liquidity, risk management, resolution plan, concentration limit, credit exposure reporting, and early remediation requirements. Systemically important financial institutions will be supervised by the Federal Reserve . Bank holding companies with over $50 billion in assets, including JPMorgan Chase, and certain nonbank financial companies that are designated by the FSOC will be considered systemically important financial institutions subject to the heightened standards and supervision.
In addition, if the regulators determine that the size or scope of activities of the company pose a threat to the safety and soundness of the company or the financial stability of the United States, the regulators have the power to require such companies to sell or transfer assets and terminate activities.
On December 20, 2011, the Federal Reserve issued proposed rules to implement these heightened prudential standards. For more information, see â€śCapital requirementsâ€ť and â€śPrompt corrective action and early remediationâ€ť on page 5.
Permissible business activities : JPMorgan Chase elected to become a financial holding company as of March 13, 2000, pursuant to the provisions of the Gramm-Leach-Bliley Act. If a financial holding company or any depository institution controlled by a financial holding company ceases to meet certain capital or management standards, the Federal Reserve 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 may require divestiture of the holding companyâ€™s depository institutions if the deficiencies persist. Federal 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, the Federal Reserve 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. So long as the depository-institution subsidiaries of JPMorgan Chase meet the capital, management and Community Reinvestment Act requirements, the Firm is permitted to conduct the broader
activities permitted under the Gramm-Leach-Bliley Act.
The Federal Reserve has proposed rules under which the Federal Reserve could impose restrictions on systemically important financial institutions that are experiencing financial weakness, which restrictions could include limits on acquisitions, among other things. For more information on the restrictions, see â€śPrompt corrective action and early remediationâ€ť on page 5.
Financial holding companies and bank holding companies are required to obtain the approval of the Federal Reserve before they may acquire more than five percent of the voting shares of an unaffiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the â€śRiegle-Neal Actâ€ť), the Federal Reserve may approve an application for such an acquisition without regard to whether the transaction is prohibited under the law of any state, provided that the acquiring bank holding company, before or after the acquisition, does not control more than 10% of the total amount of deposits of insured depository institutions in the U.S. or more than 30% (or such greater or lesser amounts as permitted under state law) of the total deposits of insured depository institutions in the state in which the acquired bank has its home office or a branch. In addition, the Dodd-Frank Act restricts acquisitions by financial companies if, as a result of the acquisition, the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies. For non-U.S. financial companies, liabilities are calculated using only the risk-weighted assets of their U.S. operations. U.S. financial companies must include all of their risk-weighted assets (including assets held overseas). This could have the effect of allowing a non-U.S. financial company to grow to hold significantly more than 10% of the U.S. market without exceeding the concentration limit. Under the Dodd-Frank Act, the Firm must provide written notice to the Federal Reserve prior to acquiring direct or indirect ownership or control of any voting shares of any company with over $10 billion in assets that is engaged in â€śfinancial in natureâ€ť activities.
Regulation by Federal Reserve : The Federal Reserve acts as an â€śumbrella regulatorâ€ť and certain of JPMorgan Chaseâ€™s subsidiaries are regulated directly by additional authorities based on the particular activities of those subsidiaries. For example, JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are regulated by the OCC. See â€śOther supervision and regulationâ€ť on pages 6â€“7 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 national banks. Dividends payable by JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., as national bank subsidiaries of JPMorgan Chase, are 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 page 281 for the amount of dividends that the Firmâ€™s principal bank subsidiaries could pay, at January 1, 2012, 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 and the FDIC have authority to prohibit or 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.
Moreover, the Federal Reserve has issued rules requiring bank holding companies, such as JPMorgan Chase, to submit to the Federal Reserve a capital plan on an annual basis and receive a notice of non-objection from the Federal Reserve before taking capital actions, such as paying dividends, implementing common equity repurchase programs or redeeming or repurchasing capital instruments. The rules establish a supervisory capital assessment program that outlines Federal Reserve expectations concerning the processes that such bank holding companies should have in place to ensure they hold adequate capital and maintain ready access to funding under adverse conditions. The capital plan must demonstrate, among other things, how the bank holding company will maintain a pro forma Basel I Tier 1 common ratio above 5% under a supervisory stress scenario.
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 off-balance sheet financial instruments into risk-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%. For a further description of these guidelines, see Note 28 on pages 281â€“283.
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. The minimum leverage ratio is 3% for bank holding companies that are considered â€śstrongâ€ť under Federal Reserve guidelines or which have implemented the Federal Reserveâ€™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. The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision (â€śBasel Iâ€ť). In 2004, the Basel Committee published a revision to the Accord (â€śBasel IIâ€ť). The goal of the Basel II Framework is to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking operations. In December 2010, the Basel Committee finalized further revisions to the Accord (â€śBasel IIIâ€ť) which narrowed the definition of capital, increased capital requirements for specific exposures, introduced short-term liquidity coverage and term funding standards, and established an international leverage ratio. In June 2011, the U.S. federal banking agencies issued rules to establish a permanent Basel I floor under Basel II/Basel III calculations. For further description of these capital requirements, see pages 119â€“122.
In connection with the U.S. Governmentâ€™s Supervisory Capital Assessment Program in 2009, U.S. banking regulators developed a new measure of capital, Tier 1 common, which is defined as Tier 1 capital less elements of Tier 1 capital not in the form of common equity - such as perpetual preferred stock, noncontrolling interests in subsidiaries and trust preferred capital debt securities. Tier 1 common, a non-GAAP financial measure, is used by banking regulators, investors and analysts to assess and compare the quality and composition of the Firmâ€™s capital with the capital of other financial services companies. The Firm uses Tier 1 common along with the other capital measures to assess and monitor its capital position. For more information, see Regulatory capital on pages 119â€“122.
In June 2011, the Basel Committee and the FSB announced that GSIBs would be required to maintain additional capital, above the Basel III Tier 1 common equity minimum, in amounts ranging from 1% to 2.5%, depending upon the bankâ€™s systemic importance. Furthermore, in order to provide a disincentive for banks facing the highest required level of Tier 1 common equity to â€śincrease materially their global systemic importance in the future,â€ť an additional 1% charge could be applied.
The Basel III revisions governing the capital requirements are subject to prolonged observation and transition periods. The transition period for banks to meet the revised Tier 1 common equity requirement will begin in 2013, with implementation on January 1, 2019. The additional capital requirements for GSIBs will be phased-in starting January 1, 2016, with full implementation on January 1, 2019. The Firm will continue to monitor the ongoing rule-making process to assess both the timing and the impact of Basel III on its businesses and financial condition.
James A. Bell, 63
Retired Executive Vice President of The Boeing Company, aerospace
Director since November 2011
Mr. Bell was an Executive Vice President of The Boeing Company, the worldâ€™s largest aerospace company, from 2003 until his retirement effective April 1, 2012. He had been Corporate President from June 2008 until February 2012 and was Chief Financial Officer from November 2003 until February 2012. While Chief Financial Officer, he oversaw two key Boeing businesses, Boeing Capital Corporation, the companyâ€™s customer-financing subsidiary, and Boeing Shared Services, an 8,000-person, multi-billion dollar business unit that provides common internal services across Boeingâ€™s global enterprise. He is a director of Dow Chemical Company (since 2005).
Prior to being named Chief Financial Officer in 2003, Mr. Bell held the position of Senior Vice President of Finance and Corporate Controller from 2000 and was Vice President of contracts and pricing for Boeing Space and Communications from 1996 to 2000. Before becoming Vice President at the operating group level in 1996, Mr. Bell served as director of business management of the Space Station Electric Power System at the Boeing Rocketdyne unit. Mr. Bell began his career with Rockwell in 1972.
Mr. Bell graduated California State University at Los Angeles with a degree in accounting. He is a member of the board of directors of the Chicago Urban League, World Business Chicago and the Chicago Economic Club.
Mr. Bell has had global business and leadership experience overseeing business performance and strategic growth initiatives at Boeing. His finance and accounting expertise included experience with and direct involvement and supervision in the preparation of financial statements and risk management. As CFO, he was responsible for overall financial management of the company, its financial reporting and transparency, and for multiple corporate functions including Controller, Treasury, long-range planning and corporate and strategic development. In his position as Senior Vice President of Finance and Corporate Controller he served as the companyâ€™s principal interface with the boardâ€™s audit committee.
Crandall C. Bowles, 64
Chairman of Springs Industries, Inc., window fashions
Director since 2006
Ms. Bowles has been Chairman of Springs Industries, Inc., a manufacturer of window products for the home, since 1998 and a member of its board since 1978. From 1998 until 2006, she was also Chief Executive Officer of Springs Industries, Inc. Subsequent to a spinoff and merger in 2006, she was Co-Chairman and Co-CEO of Springs Global Participacoes S.A., a textile home furnishings company based in Brazil, until July 2007. Ms. Bowles is a director of Deere & Company (since 1999 and previously from 1990 to 1994) and of Sara Lee Corporation (since 2008). She previously served as a director of Wachovia Corporation (1991â€“1996).
Ms. Bowles graduated from Wellesley College in 1969 and earned an MBA from Columbia University in 1973. She is a trustee of the Brookings Institution and is on the governing boards of the Packard Center at Johns Hopkins, The University of North Carolina Press, The Wilderness Society, and the Global Research institute of UNC-Chapel Hill.
Ms. Bowles has extensive experience managing large complex business organizations at Springs Industries, Inc. and Springs Global Participacoes S.A. At those companies, and through her current and prior service on other public company boards, she has dealt with a wide range of issues including audit and financial reporting, risk management, executive compensation, international business, and sales and marketing of consumer products and services. Her philanthropic activities give her valuable perspective on important societal and economic issues relevant to the Firmâ€™s business.
Stephen B. Burke, 53
Chief Executive Officer of NBCUniversal, LLC and Executive Vice President of Comcast
Corporation, television and entertainment
Director since 2004 and Director of Bank One Corporation from 2003 to 2004
Mr. Burke has been Chief Executive Officer of NBCUniversal, LLC and Executive Vice President of Comcast Corporation since January 2011. He had been Chief Operating Officer of Comcast Corporation, one of the nationâ€™s leading providers of entertainment, information and communication products and services, from 2004 until 2011, and was President of Comcast Cable Communications, Inc. from 1998 until January 2010. Before joining Comcast, he served with The Walt Disney Company as President of ABC Broadcasting. Mr. Burke joined The Walt Disney Company in January 1986, where he helped to develop and found The Disney Store and helped to lead a comprehensive restructuring effort of Euro Disney S.A. Mr. Burke is a director of Berkshire Hathaway Inc. (since 2009).
Mr. Burke graduated from Colgate University in 1980 and received an MBA from Harvard Business School in 1982. He is Chairman of The Childrenâ€™s Hospital of Philadelphia.
Mr. Burkeâ€™s roles at Comcast, ABC Broadcasting, and Euro Disney, have given him broad exposure to the challenges associated with managing a large and diverse business. In those roles he has dealt with a variety of issues including audit and financial reporting, risk management, executive compensation, sales and marketing, and technology and operations. In addition, Comcast and ABC Broadcasting have provided him with experience working in regulated industries and Euro Disney has given him international business experience.
David M. Cote, 59
Chairman and Chief Executive Officer of Honeywell International Inc., diversified
technology and manufacturing
Director since 2007
Mr. Cote is Chairman and Chief Executive Officer of Honeywell International Inc., a diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; turbochargers; and specialty materials. He was elected President and Chief Executive Officer in February 2002, and was named Chairman of the Board in July 2002. Prior to joining Honeywell, he served as Chairman, President and Chief Executive Officer of TRW Inc., which he joined in 1999 after a 25 year career with General Electric. Mr. Cote is a director of Honeywell International Inc. (since 2002) and was a director of TRW Inc. (1999â€“2001).
Mr. Cote graduated from the University of New Hampshire in 1976. In 2010, he was named by President Obama to serve on the bipartisan National Commission on Fiscal Responsibility and Reform. Mr. Cote was named co-chair of the U.S.-India CEO Forum by President Obama in 2009, and has served on the Forum since July 2005. Mr. Cote serves on an advisory panel to Kohlberg Kravis Roberts & Co.
At Honeywell and TRW, Mr. Cote gained experience dealing with a variety of issues relevant to the Firmâ€™s business, including audit and financial reporting, risk management, executive compensation, sales and marketing of industrial and consumer goods and services, and technology matters. He also has extensive experience in international business issues and public policy matters. His record of public service further enhances his value to the Board.
James S. Crown, 58
President of Henry Crown and Company, diversified investments
Director since 2004 and Director of Bank One Corporation from 1991 to 2004
Mr. Crown joined Henry Crown and Company, a privately owned investment company which invests in public and private securities, real estate and operating companies, in 1985 as Vice President and became President in 2003. Mr. Crown is a director of General Dynamics Corporation (since 1987) and of Sara Lee Corporation (since 1998). He is also a director of JPMorgan Chase Bank, N.A., a wholly-owned subsidiary of the Firm (since 2010).
Mr. Crown graduated from Hampshire College in 1976 and received his law degree from Stanford University Law School in 1980. Following law school, Mr. Crown joined Salomon Brothers Inc. and became a vice president of the Capital Markets Service Group in 1983. In 1985 he joined his familyâ€™s investment firm. He is a Trustee of the University of Chicago Medical Center, the Museum of Science and Industry, The Aspen Institute, the University of Chicago, and the Chicago Symphony Orchestra. He is a member of the American Academy of Arts and Sciences.
Mr. Crownâ€™s position with Henry Crown and Company and his service on other public company boards have given him exposure to many issues encountered by the Firmâ€™s Board, including audit and financial reporting, investment management, risk management, and executive compensation. His legal training gives him enhanced perspective on legal and regulatory issues. He is experienced in investment banking and capital markets matters through his prior work experience and subsequent responsibilities. The broad range of his philanthropic activities, in the Chicago area in particular, gives him important insight into the community concerns of one of the Firmâ€™s largest markets.
James Dimon, 56
Chairman and Chief Executive Officer of JPMorgan Chase
Director since 2004 and Chairman of the Board of Bank One Corporation from 2000 to 2004
Mr. Dimon became Chairman of the Board on December 31, 2006, and has been Chief Executive Officer and President since December 31, 2005. He had been President and Chief Operating Officer since JPMorgan Chaseâ€™s merger with Bank One Corporation in July 2004. At Bank One he had been Chairman and Chief Executive Officer since March 2000. Prior to joining Bank One, Mr. Dimon had extensive experience at Citigroup Inc., the Travelers Group, Commercial Credit Company and American Express Company.
Mr. Dimon graduated from Tufts University in 1978 and received an MBA from Harvard Business School in 1982. He is a director of The College Fund/UNCF and serves on the Board of Directors of The Federal Reserve Bank of New York, The National Center on Addiction and Substance Abuse, Harvard Business School and Catalyst. He is also on the Board of Trustees of New York University School of Medicine. Mr. Dimon does not serve on the board of any publicly traded company other than JPMorgan Chase.
Mr. Dimon has many years of experience in the financial services business, both wholesale and retail, as well as international and domestic experience. As CEO, he is intimately familiar with all aspects of the Firmâ€™s business activities. In addition to the JPMorgan Chase merger with Bank One, he led the Firmâ€™s successful acquisition and integration of The Bear Stearns Companies Inc. and the banking operations of Washington Mutual Bank. His business experience and his service on the board of the Federal Reserve Bank of New York have given him experience dealing with government officials and agencies and insight into the regulatory process.
Timothy P. Flynn, 55
Retired Chairman of KPMG International, professional services
Mr. Flynn was Chairman of KPMG International from 2007 until his retirement in October 2011. KPMG International is a professional services organization which provides audit, tax and advisory services in 152 countries. KPMG International member firms have 145,000 professionals, including more than 8,000 partners in 152 countries, with combined revenues of $22.7 billion for fiscal year 2011. He was also Chairman (2005â€“2010) and Chief Executive Officer (2005â€“2008) of KPMG LLP, the U.S. and largest individual member firm of KPMG International.
Mr. Flynn held a number of key leadership positions throughout his 32 years at KMPG, providing him with perspective on the issues facing major companies and the evolving business environment. Mr. Flynn joined a predecessor of KPMG in 1979 and became a Partner in 1988. After having served as an audit partner on accounts for technology and manufacturing companies, he became Vice Chairman, Human Resources (1996â€“2001). He has served as Client Service Partner for some of KPMGâ€™s largest clients, including clients in the financial services industry. As Chairman of KPMG International, Mr. Flynn led a team of senior partners responsible for the management and operations of the global network and led a board of senior partners responsible for strategy, oversight, risk management and governance of the global network. During his Chairmanship of KPMG LLP, he led the redesign of governance, compensation and incentive programs focusing on integrity, professionalism and personal accountability. This cultural transformation culminated in KPMG LLP being named to Fortune's Top 100 Great Places to Work in 2007 and later years.
Mr. Flynn holds a bachelors degree in accounting from The University of St. Thomas, St. Paul, Minnesota and is a member of their Board of Trustees. He has previously served as a trustee of the Financial Accounting Standards Board, a member of the World Economic Forumâ€™s International Business Counsel, and a founding member of The Prince of Whalesâ€™ International Integrated Reporting Committee.
Mr. Flynn has extensive experience in financial services and risk management. Prior to serving as Chairman and Chief Executive Officer, Mr. Flynn served, among other positions, as Vice Chairman, Audit and Risk Advisory Services, with operating responsibility for the audit practice, as well as the Risk Advisory and Financial Advisory Services practices.
Mr. Flynn combines leadership and business experience in a global setting with experience in accounting, auditing, financial services, risk management and regulatory affairs.
Ellen V. Futter, 62
President and Trustee of the American Museum of Natural History
Director since 2001 and Director of J.P. Morgan & Co. Incorporated from 1997 to 2000
Ms. Futter became President of the American Museum of Natural History in 1993, prior to which she had been President of Barnard College since 1981. The Museum is one of the worldâ€™s preeminent scientific and cultural institutions. Her career began at Milbank, Tweed, Hadley & McCloy where she practiced corporate law. Ms. Futter is a director of Consolidated Edison, Inc. (since 1997) and was previously a director of American International Group Inc. (1999â€“2008), Bristol-Myers Squibb Company (1999â€“2005), and Viacom (2006â€“2007).
Ms. Futter graduated from Barnard College in 1971 and earned a law degree from Columbia Law School in 1974. She is a member of the Board of Overseers and Managers of Memorial Sloan-Kettering Cancer Center, a Fellow of the American Academy of Arts and Sciences and a member of the Council on Foreign Relations. Ms. Futter is also a director of The American Ditchley Foundation and NYC & Company. She was a director of the Federal Reserve Bank of New York (1988â€“1993) and served as its Chairman (1992â€“1993).
Ms. Futter has managed large education and not-for-profit organizations, Barnard College and the American Museum of Natural History, and in that capacity, she has dealt with many complex organizational issues. Such work and her service on public company boards and the board of the Federal Reserve Bank of New York have given her experience with regulated industries, in particular the financial services industry, and with risk management, executive compensation, and audit and financial reporting. In her role at the Federal Reserve Bank of New York she also acquired valuable experience dealing with government officials and agencies. Her years of practicing corporate law give her enhanced perspective on legal and regulatory issues. Her extensive experience with philanthropic organizations provides her with insights that are relevant to the Firmâ€™s corporate responsibility initiatives.
Laban P. Jackson, Jr., 69
Chairman and Chief Executive Officer of Clear Creek Properties, Inc., real estate
Director since 2004 and Director of Bank One Corporation from 1993 to 2004
Mr. Jackson has been Chairman of Clear Creek Properties, Inc., a real estate development company, since 1989. Mr. Jackson was a director of The Home Depot (2004â€“2008), SIRVA (2006â€“2007) and IPIX Corporation (1999â€“2006). He is also a director of J.P. Morgan Securities Ltd. and of JPMorgan Chase Bank, N.A., wholly-owned subsidiaries of the Firm (since 2010).
Mr. Jackson graduated from the United States Military Academy in 1965. He was a director of the Federal Reserve Bank of Cleveland (1987â€“1992). Mr. Jackson is also a director of Markey Cancer Foundation and Transylvania University.
Mr. Jackson has founded and managed businesses and is an experienced entrepreneur and manager. In that capacity, and through his current and prior service on other public company boards, he has dealt with a wide range of issues that are important to the Firmâ€™s business, including audit and financial reporting, risk management, executive compensation, marketing and product development. His service on the board of the Federal Reserve Bank of Cleveland has given him experience dealing with government officials and agencies and further experience in financial services.
Mr. Jackson is a member of the Audit Committee Leadership Network (â€śACLNâ€ť), a group of audit committee chairs from some of North Americaâ€™s leading companies, committed to improving the performance of audit committees and helping to enhance trust in the financial markets.
Lee R. Raymond, 73
Retired Chairman and Chief Executive Officer of Exxon Mobil Corporation, oil and gas
Director since 2001 and Director of J.P. Morgan & Co. Incorporated from 1987 to 2000
Mr. Raymond was Chairman of the Board and Chief Executive Officer of ExxonMobil from 1999 until he retired in December 2005. ExxonMobilâ€™s principal business is energy, involving exploration for and production of crude oil and natural gas, manufacture of petroleum and petrochemical products, and transportation and sale of crude oil, natural gas, petroleum and petrochemical products. He had been Chairman of the Board and Chief Executive Officer of Exxon Corporation from 1993 until its merger with Mobil Oil Corporation in 1999, having begun his career in 1963 with Exxon. He was a director of Exxon Mobil Corporation (1984â€“2005).
Mr. Raymond graduated from the University of Wisconsin in 1960 and received a Ph.D. from the University of Minnesota in Chemical Engineering in 1963. He is a director of the Business Council for International Understanding, a Trustee of the Wisconsin Alumni Research Foundation, a Trustee of the Mayo Clinic, a member of the Innovations in Medicine Leadership Council of UT Southwestern Medical Center, a member of the National Academy of Engineering and a member and past Chairman of the National Petroleum Council. Mr. Raymond serves on an advisory panel to Kohlberg Kravis Roberts & Co.
During his long tenure at Exxon Mobil and its predecessors, Mr. Raymond gained important experience in all aspects of business management, including audit and financial reporting, risk management, executive compensation, marketing, and operating in a regulated industry. He has extensive international business experience.
William C. Weldon, 63
Chairman and Chief Executive Officer of Johnson & Johnson, health care products
Director since 2005
Mr. Weldon has been Chairman and Chief Executive Officer of Johnson & Johnson since 2002. Effective April 26, 2012, Mr. Weldon is resigning as Chief Executive Officer; he will continue as Chairman. He served as Vice Chairman from 2001 and Worldwide Chairman, Pharmaceuticals Group from 1998 until 2001. Johnson & Johnson is engaged worldwide in the research and development, manufacture and sale of a broad range of products in the health care field. The company conducts business in virtually all countries of the world with the primary focus on products related to human health and well-being.
Mr. Weldon served in a number of other senior executive positions since joining Johnson & Johnson in 1971. In 1982 he was named manager, ICOM Regional Development Center in Southeast Asia. Mr. Weldon was appointed executive vice president and managing director of Korea McNeil, Ltd., in 1984 and managing director of Ortho-Cilag Pharmaceutical, Ltd., in the U.K. in 1986. In 1989, he was named vice president of sales and marketing at Janssen Pharmaceutica in the U.S., and in 1992 he was appointed president of Ethicon Endo-Surgery. Mr. Weldon is a director of Johnson & Johnson (since 2002).
Mr. Weldon graduated from Quinnipiac University in 1971. Mr. Weldon is a member of the CEO Roundtable on Cancer, a director of the US-China Business Council, a member of The Business Council, a member of the Healthcare Leadership Council, a member of the Business Roundtable, and a member of the Sullivan Commission on Diversity in the Health Professions Workforce. Mr. Weldon also serves on the Liberty Science Center Chairmanâ€™s Advisory Council and as a member of the Board of Trustees for Quinnipiac University. He previously served as Chairman of the Pharmaceutical Research and Manufacturers of America.
Mr. Weldon has experience managing a large complex organization at Johnson & Johnson, where he has dealt with such issues as audit and financial reporting, risk management, and executive compensation. Through his role at various Johnson & Johnson entities, he has had extensive exposure to international business management and to operating in a regulated industry, and he has gained expertise in sales and marketing to consumers. His extensive record of charitable involvement and public service also brings an important perspective to his role on the Board.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
JPMorgan Chase reported first-quarter 2012 net income of $5.4 billion, or $1.31 per share, on net revenue of $26.7 billion. Net income declined by $172 million, or 3%, compared with net income of $5.6 billion, or $1.28 per share, in the first quarter of 2011. ROE for the quarter was 12%, compared with 13% for the prior-year quarter. Results in the first quarter of 2012 included the following significant items: $1.8 billion pretax benefit ($0.28 per share after-tax increase in earnings) from the reduction in the allowance for loan losses, related to mortgage and credit card loans; $1.1 billion pretax benefit ($0.17 per share after-tax increase in earnings) from the Washington Mutual bankruptcy settlement, in Corporate; $2.5 billion pretax expense ($0.39 per share after-tax reduction in earnings) for additional litigation reserves, predominantly for mortgage-related matters, in Corporate; and $0.9 billion pretax loss ($0.14 per share after-tax reduction in earnings) from debit valuation adjustments (â€śDVAâ€ť) in the Investment Bank, resulting from tightening of the Firmâ€™s credit spreads.
The decrease in net income from the first quarter of 2011 was driven by higher noninterest expense, largely offset by higher net revenue. The increase in net revenue was driven by higher mortgage fees and related income and a $1.1 billion benefit from the Washington Mutual bankruptcy settlement, partially offset by lower principal transactions revenue, driven by a $907 million loss from DVA. The increase in noninterest expense was predominantly driven by higher compensation and noncompensation expense, including $2.5 billion of additional litigation reserves, predominantly for mortgage-related matters.
Results in the first quarter of 2012 reflected positive credit trends for the consumer real estate and credit card portfolios. Estimated losses declined for these portfolios, and the Firm reduced the related allowance for loan losses by a total of $1.8 billion in the first quarter. However, costs and losses associated with mortgage-related issues continued to negatively affect the mortgage business. Trends in the Firmâ€™s credit metrics across the wholesale portfolios were stable and continued to be strong. Firmwide, net charge-offs were $2.4 billion for the quarter, down $1.3 billion from the first quarter of 2011, and nonperforming assets were $12.0 billion , down 21%. Based upon regulatory guidance issued in the first quarter of 2012, the Firm began reporting performing junior liens that are subordinate to senior liens that are 90 days or more past due as nonaccrual loans, a component of nonperforming assets. For more information on the new regulatory guidance, see Consumer Credit Portfolio on pages 60â€“69 of this Form 10-Q. Total firmwide credit reserves at March 31, 2012, were $26.6 billion, resulting in a loan loss coverage ratio of 3.11% of total loans, excluding the PCI portfolio.
While several significant items affected the Firmâ€™s results, overall, the Firmâ€™s performance in the first quarter was solid. The Investment Bank, in particular, reported strong results driven by continued leadership and improved market conditions. Consumer & Business Banking within Retail Financial Services increased average deposits by 8% compared with the first quarter last year; Business Banking loan originations were up 8% as well. Mortgage Banking (also within Retail Financial Services) application volume increased 33% from the prior-year quarter, and Retail channel originations were a record, up 11% from the prior-year quarter. In the Card business, credit card sales volume (excluding Commercial Card) was up 12% compared with the first quarter of 2011. Commercial Banking reported its seventh consecutive quarter of loan growth, including record middle-market loans. Treasury & Securities Services reported record assets under custody of $17.9 trillion, and Asset Management reported record assets under supervision of $2.0 trillion. The first quarter was also the twelfth consecutive quarter of positive long-term flows into assets under management.
During the first quarter of 2012, the Firm provided credit and raised capital of over $445 billion for its commercial and consumer clients. This included more than $4 billion of credit to U.S. small businesses, up 35% compared with the prior year. The Firm originated more than 200,000 mortgages in the first quarter and remains committed to helping struggling homeowners; JPMorgan Chase has offered more than 1.3 million mortgage modifications since 2009, and has completed more than 490,000.
JPMorgan Chase continued to strengthen its balance sheet, ending the first quarter with Basel I Tier 1 common capital of $128 billion, or 10.4% , up from $123 billion, or 10.1% at year-end 2011. The Firm estimated that its Basel III Tier 1 common ratio was approxim ately 8.2% at Marc h 31, 2012. (The Basel I and III Tier 1 common ratios are non-GAAP financial measures, which the Firm uses along with the other capital measures, to assess and monitor its capital position.) For further discussion of the Tier 1 common
capital ratios, see Regulatory capital on pages 42â€“45 of this Form 10-Q. During the first quarter of 2012, the Board of Directors of JPMorgan Chase increased the Firmâ€™s quarterly common stock dividend to $0.30 per share, an increase of $0.05 per share. The Board of Directors also authorized a new $15 billion common equity repurchase program, of which up to $12 billion of repurchases is approved for 2012 and up to $3 billion is approved for the first quarter of 2013.
The discussion that follows highlights the performance of each business segment compared with the prior year and presents results on a managed basis. Managed basis starts with the reported results under the accounting principles generally accepted in the United States of America (â€śU.S. GAAPâ€ť) and, for each line of business and the Firm as a whole, includes certain reclassifications to present total net revenue on a fully taxable-equivalent (â€śFTEâ€ť) basis. For more information about managed basis, as well as other non-GAAP financial measures used by management to evaluate the performance of each line of business, see pages 12â€“13 of this Form 10-Q.
Investment Bank net income decreased from the prior year as lower net revenue and a lower benefit from the provision for credit losses were partially offset by lower noninterest expense. Net revenue included the $907 million loss from DVA. Excluding the DVA impact, net revenue was approximately flat to the level in the prior year. Fixed Income and Equity Markets revenue decreased slightly, excluding DVA, compared with the prior year and reflected continued solid client revenue. Investment banking fees also decreased. Lower compensation expense drove the decline in noninterest expense from the prior-year level.
Retail Financial Services reported net income in the current quarter compared with a net loss in the prior year, driven by higher net revenue and a lower provision for credit losses. Growth in net revenue was driven by higher mortgage fees and related income, partially offset by lower net interest income, resulting from lower loan balances due to portfolio runoff, and lower debit card revenue. The provision for credit losses was a benefit in the first quarter of 2012, compared with an expense in the prior year, and reflected lower net charge-offs and a $1.0 billion reduction of the allowance for loan losses, due to lower estimated losses as mortgage delinquency trends improved.
Card Services & Auto net income decreased compared with the prior year reflecting a higher provision for credit losses. The current-quarter provision reflected lower net charge-offs and a reduction of $750 million to the allowance for loan losses due to lower estimated losses. The prior-year provision included a reduction of $2.0 billion to the allowance for loan losses.
The decline in net revenue was driven by lower net interest income, reflecting lower average loan balances and narrower loan spreads, partially offset by lower revenue reversals associated with lower charge-offs. Credit card sales volume, excluding the Commercial Card portfolio, was up 12% from the first quarter of 2011. The increase in noninterest expense was primarily due to an expense related to a non-core product that is being exited.
Commercial Banking net income increased, driven by an increase in net revenue, partially offset by higher noninterest expense and an increase in the provision for credit losses. The increase in revenue reflected higher net interest income driven by growth in liability and loan balances, largely offset by spread compression on liability and loan products. The increase in noninterest expense primarily reflected higher headcount-related expense.
Treasury & Securities Services net income increased as higher net revenue was largely offset by higher noninterest expense. Treasury Services drove the increase in net revenue, with higher deposit balances and higher trade finance loan volumes contributing to revenue growth in the business. Worldwide Securities Services net revenue increased modestly compared with the prior year. Assets under custody were a record $17.9 trillion, up 8% from the prior year. Higher noninterest expense was primarily driven by continued expansion into new markets.
Asset Management net income decreased, reflecting higher noninterest expense and lower net revenue. The modest decline in net revenue was primarily due to lower credit-related fees, lower performance fees, lower brokerage commissions and narrower deposit spreads. The decline was predominantly offset by higher deposit and loan balances, net inflows to products with higher margins, and higher valuations of seed capital investments. Assets under supervision at the end of the first quarter of 2012 were a record $2.0 trillion, an increase of $105 billion from the prior year. Assets under management of $1.4 trillion were also a record. Both increases were due to net inflows to long-term products and the impact of higher market levels. In addition, deposit and custody inflows contributed to the increase in assets under supervision. The increase in noninterest expense was due to higher headcount-related expense.
Corporate/Private Equity reported a net loss in the first quarter of 2012 compared with net income in the first quarter of 2011. Net income and revenue in Private Equity declined, driven by lower private equity gains due to the absence of prior-year valuation gains on private investments. Corporate reported a net loss, driven by higher litigation reserves, predominantly for mortgage-related matters, partially offset by a $1.1 billion benefit from the Washington Mutual bankruptcy settlement.
2012 Business outlook
The following forward-looking statements are based on the current beliefs and expectations of JPMorgan Chaseâ€™s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firmâ€™s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking Statements on page 84 and Risk Factors on page 175 of this Form 10-Q.
JPMorgan Chaseâ€™s outlook for the remainder of 2012 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment, client activity levels, and regulatory and legislative developments in the U.S. and other countries where the Firm does business. Each of these linked factors will affect the performance of the Firm and its lines of business.
In the Consumer & Business Banking business within RFS, the Firm estimates that, given the current low interest rate environment, spread compression will likely negatively affect 2012 net income by approximately $400 million for the full year. In addition, the effect of the Durbin Amendment will likely reduce annualized net income by approximately $600 million.
In the Mortgage Production and Servicing business within RFS, revenue in 2012 could be negatively affected by continued elevated levels of repurchases of mortgages previously sold, predominantly to U.S. government-sponsored entities (â€śGSEsâ€ť). Management estimates that realized mortgage repurchase losses could be approximately $350 million per quarter in 2012. Also for Mortgage Production and Servicing, management expects the business to continue to incur elevated default and foreclosure-related costs including additional costs associated with the Firmâ€™s mortgage servicing processes, particularly its loan modification and foreclosure procedures. (See Mortgage servicing-related matters on pages 67â€“69 and Note 16 on pages 144â€“146 of this Form 10-Q.) In addition, management believes that the high margins experienced in the first quarter of 2012 will not be sustainable over time.
For Real Estate Portfolios within RFS, management believes that quarterly net charge-offs could be less than $900 million. Given managementâ€™s current estimate of portfolio runoff levels, the existing residential real estate portfolio is expected to decline by approximately 10% to 15% in 2012 from year-end 2011 levels. This reduction in the residential real estate portfolio is expected to reduce net interest income by approximately $500 million in 2012. However, over time, the reduction in net interest income is expected to be more than offset by an improvement in credit costs and lower expenses. In addition, as the portfolio continues to run off, management anticipates that approximately $1 billion of capital may become available for redeployment each year, subject to the capital requirements associated with the remaining portfolio.
In Card, the net charge-off rate for the credit card portfolio could decrease in the second quarter of 2012 to approximately 4.25%.
The currently anticipated results of RFS and Card described above could be adversely affected by further declines in U.S. housing prices or increases in the unemployment rate. Given ongoing weak economic conditions, combined with a high level of uncertainty concerning the residential real estate markets, management continues to closely monitor the portfolios in these businesses.
In IB, TSS, CB and AM, revenue will be affected by market levels, volumes and volatility, which will influence client flows and assets under management, supervision and custody. For the IB, the second quarter of 2012 has started weaker than the seasonally strong first quarter. CB and TSS will continue to experience low net interest margins as long as market interest rates remain low. In addition, the wholesale credit environment will influence levels of charge-offs, repayments and the provision for credit losses for IB, CB, TSS and AM.
In Private Equity, within the Corporate/Private Equity segment, earnings will likely continue to be volatile and be influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific issues.
In Corporate, within the Corporate/Private Equity segment, net income (excluding Private Equity results and litigation expense) for the second quarter is currently estimated to be a loss of approximately $800 million. (Prior guidance for Corporate quarterly net income (excluding Private Equity results, litigation expense and nonrecurring significant items) was approximately $200 million.) Actual second quarter results could be substantially different from the current estimate and will depend on market levels and portfolio actions related to investments held by the Chief Investment Office (CIO), as well as other activities in Corporate during the remainder of the quarter.
Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO's synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO's AFS securities portfolio. As of March 31, 2012, the value of CIO's total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.
The Firm is currently repositioning CIO's synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm's overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.
Accordingly, net income in Corporate likely will be more volatile in future periods than it has been in the past.
The Firm faces a variety of exposures resulting from repurchase demands and litigation arising out of its various roles as issuer and/or underwriter of mortgage-backed securities (â€śMBSâ€ť) offerings in private-label securitizations. It is possible that these matters will take a number of years to resolve and their ultimate resolution is currently uncertain. Reserves for such matters may need to be increased in the future; however, with the additional litigation reserves taken in the first quarter of 2012, absent any materially adverse developments that could change managementâ€™s current views, JPMorgan Chase does not currently anticipate further material additions to its litigation reserves for mortgage-backed securities-related matters over the remainder of the year.
JPMorgan Chase is subject to regulation under state and federal laws in the U.S., as well as the applicable laws of each of the various other jurisdictions outside the U.S. in which the Firm does business. The Firm is currently experiencing a period of unprecedented change in regulation and supervision, and such changes could have a significant impact on how the Firm conducts business. The Firm continues to work diligently in assessing and understanding the implications of the regulatory changes it is facing, and is devoting substantial resources to implementing all the new rules and regulations while meeting the needs and expectations of its clients. The Firm expects heightened scrutiny by its regulators of its compliance with new and existing regulations, and expects that regulators will more frequently bring formal enforcement actions for violations of law rather than resolving those violations through informal supervisory processes. While the Firm has made a preliminary assessment of the likely impact of these anticipated changes, the Firm cannot, given the current status of the regulatory and supervisory developments, quantify the possible effects on its business and operations of all of the significant changes that are currently underway. For further discussion of regulatory developments, see Supervision and regulation on pages 1â€“7 and Risk factors on pages 7â€“17 of JPMorgan Chaseâ€™s 2011 Form 10-K.
Michael J. Cavanagh
Thanks, Doug. So I hope everybodyâ€™s coffees kicked in and mine as well. Weâ€™re going to spend a little while here going through the Task Force Update. So, for those on the phone or on the web, if you go to the next section as what itâ€™s called. So in the room here, Iâ€™ll dive right in on slide number one, which describes the management review thatâ€™s been underway for the past two months. So my job has been to lead this firm wide response and conduct a rigorous review of the events leading up to the losses, assess what went wrong, and mobilize the company to make necessary fixes happen, and while some work remains. I am glad to say that the scope and intensity of what weâ€™ve already done or ask me to give you today, what I think is a very clear picture of what happened and what weâ€™ve done about it.
I have to say that itâ€™s been an incredible effort by many people and I just to thank everyone who has been involved in getting this work done, to get it here. So now what I am going to is go through this presentation in three sections. First, weâ€™re going to spend a bunch of time just walk you through some facts. Then we will go through observation and implications of those facts. And then finally, Iâ€™ll bring it to close with the remediation actions that weâ€™ve taken in response to all of this.
So if you start, letâ€™s begin on slide two and that is just a summary of the key findings of the review. So there are five key observations, the first is the actual cause of the losses, and the other observations are things that had weâ€™ve done them better, may have reduced the size of the losses allowing us to detect issues earlier.
So the first one, which is the cause is that, CIO judgment, execution and escalation were poor in the first quarter. Second, the level of scrutiny of CIO did not evolve, commensurate with itâ€™s increased complexity. Third, a dedicated risk management team supporting CIO was ineffective in dealing with the challenges of this portfolio. Fourth, risk limits in CIO were not granular enough. And fifth, thatâ€™s the model, the approval and implementation of a synthetic credit VaR model that we talked about, it happened in the quarter was poorly done. So with that overview of these observations, now letâ€™s slowly go through the pertinent fact that these support.
So on slide 3, some of the historical contexts on synthetic credit portfolio itself. So the portfolioâ€™s primary purpose had been to provide a partial offset for losses we would suffer elsewhere in CIO and the company in a stress credit environment. The portfolio got started about five years ago, it was generally short credit, but also included some long positions in order to reduce the cost of carrying credit protections, and consistent with itâ€™s objective, the portfolio produced gains in a stress period of 2008 to 2010, and was break-even or positive each year from 2007 to 2011. And all in, it generated about $2 billion in gains during that period.
So next, on slide 4. Now we get in to a summary of the first quarter 2012 transformation of the portfolio that led to the losses. In late 2011, CIO was directed to reduce the synthetic credit portfolios risk and risk-weighted assets, that direction came as part of the annual budgeting process in which we developed the firmâ€™s capital plan, including our glide path to Basel III.
Now the second bullet, I will attempt to explain what it appears the synthetic credit team and CIO hopes to do. And that was to move their portfolios risk position from a net sure position to a neutral one, while reducing risk-weighted assets in the process. They also hoped to retain some protections against corporate credit defaults, which was the synthetic credit portfolios historical mission.
So again there are a lot of things going on that they were trying to accomplish and found it difficult to find a balance that they liked. To simplify what they did, it amounted to them going long investment grade indices, while increasing short positions in junior tranches and high yield indices. And the size of the portfolio grew dramatically, as they continue to add positions later in the quarter when they were struggling to balance the portfolio as the market began to move against them.
So the question why they didnâ€™t just pursue an outright reduction of the portfolio, and it appears and thatâ€™s all as an appearance that they thought about it a bit, but they believe that it will be more expensive than the approach they chose, which obviously proved to be wrong. and then weâ€™re focused on thinking about high execution cost to reduce the portfolio in size and to lock carryover reduced portfolio. and so they went ahead with the approach they had.
Thatâ€™s my best shot at describing what it seems they were trying to do, and now you move to the third bullet, where you see what we now know, which is what they did do with increased size and complexity of the portfolio dramatically in the first quarter and along with the sensitivity to a variety of risks, which you can see listed there all of which contributed in some parts of the losses and Jamie touched on some of these earlier on.
On the slide five, I just gave a graphic representation of basically the same thing, which is the growth of the portfolio in the first quarter. on the left, you see the total notional size of the portfolio with the red dots being the net of long and short notionals, which as you can see tripled in the first quarter.
Now you canâ€™t look at this slide and fully understand the risk of the portfolio. but what it does show is that the significantly increased size and complexity of the portfolio left little margin for error when you expect the pricing relationships across the portfolio began to break down and generate losses. It was a very risky approach they took that should have been discussed, embedded at more senior levels, but it was not.
So now for the next three slides, what Iâ€™m going to do is layout some key events that happened during three sequential time periods. So the first one, slide six, covers the first period and that is from the beginning of 2012, to late March 23, by which point the cake was fully baked on this thing. And since we all have loss making positions, weâ€™re already on the books.
So during this period, what you see on this slide is three key events I want to talk about. So the first one, was that certain CIO level risk limits got exceeded and how those exceptions were handled. So these types of business level limits are common across the company, and when they are exceeded, the independent business unit risk managers are responsible for reviewing the reasons for the excess and either granting relief or ensuring that action is taken to get back inside the limits.
Specifically two CIO level credit spread widening limits were exceeded over the course of the quarter. In January, a measurement of the impact of credit spread widening that ignored correlations across instruments, exceeded its limits, this was reviewed by CIOâ€™s market risk officer who granted relief from the limits, on a basis that the measure was an unsophisticated tool for measuring risk in these circumstances.
And then secondly, the other one, there was on March 23, the second CIO level of credit spread widening limit was exceeded and this was obviously of little use as a control measure, since it occurred after the positions were already put on.
Now, the second event you see on the slide here in the middle bullet was the approval of a new synthetic credit VaR model in late January. This was approved by the independent model review group in corporate risk management.
The week before the new model was implemented John Hogan, the new Chief Risk Officer and Jamie were asked to sign-off an temporary increase of firm wide VaR in an e-mail, which noted that CIO VaR model was soon to be approved which is expected to lower VaR and they assented and went ahead with that approval. But the problem with the second event here, which is why I saw in the slide relates to the model approval itself.
Again, this was done by the model review group, despite reasons are concerned about the weak operational environment supporting the model, which weâ€™ll come back to you later on.
And then the third event on this slide was the February 29, CIO business review with folks from the corporate and there will be CIO attendees at that meeting indicative that the portfolio, the synthetic credit portfolio was well-positioned and RWA reduction was on track and raised no other issues. So thatâ€™s it for the key events up to the period of March 23 and that is the period by which all the positions were substantially on the books that led to the losses and the portfolio transforms.
So now letâ€™s go on to slide seven and move on to the next time period. I just wanted to talk about and this is the period from then, March 23 then to the April 13 earnings call. So first the portfolio experienced losses in late March and early April. Around this time, market visibility of the synthetic credit positions becomes a concern particularly after press reports on April 6. At that point, Doug and Jamie ask for a review of the portfolio and preparations for the earnings release a few days later.
Ina spearheaded the review with engagement by John Hogan, Doug Braunstein and others. The main output of that review was forward scenario analysis that produced the probable P&L range for the second quarter on the portfolio from positive $350 million to negative $250 million with the bias to the positive end. So at that time, the group got comfortable as the portfolios risk was manageable, that in need of heightened attention going forward and assurances to that affect were provided to Jamie and Doug.
Now, let me just make a few additional points about this review. First, that analysis was led by Ina, which made sense. She was very capable of driving review of an activity in her area of responsibility. If there was a question about something like this in TSS for example, Iâ€™d fully expect and to leave the charge on bottoming it out as would other operating committee members for their businesses.
And the second point is that, Ina inturn relied on the managers and traders responsible for the portfolio, and to knew it fast, she produced the supporting analysis that stage over those few days, and hindsight obviously, their views may have been unduly influenced by their conviction of the marketâ€™s awareness of their positions was causing aberrations in pricing that would reverse.
Iâ€™ll also just say here that the VaR model is not a focus during the pre-earnings released review because there were no indication of that fit, that wasnâ€™t working properly, itâ€™s a backward looking indicator and actual losses had already prompted demands for the forward-looking scenario analysis that was being done. And so on April 13, this period ends and we will announce our first quarter results.
Now moving on to slide eight, this is a set of facts for the period between the earnings release and the launch of the management review. So in late April losses pick up and the heightened monitoring thatâ€™s followed the earnings call, itâ€™s taken to another level when the senior team from corporate risk is send to examine the portfolio from the bottom-up.
So they begin providing daily updates and construct an independent analysis of the portfolio that becomes the basis for risk measurement that the new CIO team picks up a few weeks later. Itâ€™s during this period that problems with the new VaR model are discovered. We use the old model for the VaR number in the 10-Q and disclosed that we induced the new model on April 13. This event has caused us to tighten up our procedures around model changes and disclosures going forward by the way.
We filed the first quarter 10-Q on Thursday May 10 and held the investor call that evening with an update on synthetic credit portfolio and finally, on Monday May 14, Matt Zames has announced as the new CIO and our management review is launched.
So thatâ€™s it for the facts on slide nine. We transition from those facts, which you do see summarized on the left to the observations they support on the right, which is what I covered at the beginning. And now letâ€™s spend a little time going through each one of those observations in a bit more detail.
So on slide 10 is the first one, which is the observation that CIO judgment, execution, and escalation were poor. So first the trading approach itself was poorly conceived, reviewed and executed. As we saw in the facts, the portfolio grew to a parallel size with numerous embedded risks that the team did not understand and were not equipped to manage.
The second bullet on the page is about insularity. Even within CIO, the discussion of the portfolios stayed in the chain of managers with direct responsibility to us. A robust review among peer leaders and CIO would have provided for a discussion and challenge on the business side, which is what Iâ€™m accustomed to seeing across the management teams in this company and it didnâ€™t happen here. And this was again compounded by the failure to surface issues related to the synthetic credit portfolio in the February business review with corporate.
And then finally, the CIO led review and analysis of the portfolio in advance of the April 13 earnings call was poorly managed, resulting in the view that potential losses were manageable, that the portfolio was balanced and would recover. So now before I â€“ leaving each of these findings, Iâ€™m just going to comment quickly on the remediation actions that relate to it, that weâ€™ll get to later and prove this one, those fixes are the people changes that have been made and all the relevant CIO roles and a complete revamping of the management processes in CIO.
So the second observation is that the level of scrutiny that CIO faced did not evolve as the complexity of the synthetic credit portfolio increased. So some of the contributing factors here was the belief and experience that the core activities of CIO were managed appropriately, contributing the unit successful track record. Second was the capability of an experience of Ina herself and third, was the modest but positive results of the synthetic credit portfolio historically. So as a result, we collectively ended up with a level of scrutiny that fell short of the high standards. We apply to our client businesses especially as the complexity increased.
Moving on to slide 12, the third observation is that CIO risk management was ineffective in its responsibilities for the synthetic credit portfolio. Now Iâ€™d acknowledge some factors that presented challenges for the CIO risk management team including what in hindsight was the lack of quality resources and a less robust risk committee supporting the risk team.
Nonetheless, the CIO risk team failed to meet reasonable expectations in my mind. First, a primary responsibility of the business level risk team is establishing adequate risk limits. In this case, higher or more appropriate limits would have forced more discussion and debate about this portfolio and if needed would have prompted escalation to more senior levels. And fairness to the CIO risk team had an effort underway to improve the risk limit structure for CIO, but it was too late to matter.
Second, CIO risk team did not perform adequately when it came to the VaR model approval and implementation, and Iâ€™ll cover that in a couple of slides. Third, CIO risk wasnâ€™t forceful enough in challenging the front office and they never developed the sufficient understanding of the risk of the portfolio to escalate concerns the senior risk leaders outside CIO during the first quarter. So now to remediate this, weâ€™ve added new people in key roles. Weâ€™ve also significantly strengthened the risk committee framework that covers CIO and other corporate sector activities.
So on slide 13, observations, number four, that risk limits in CIO were not sufficiently granular. So this is a critical one and we saw it in the facts on slide six that we gave ourselves too few opportunities to engage risk or other senior people as would have been the case if we had a well designed limit structure around this portfolio.
First, there were no risk limits specific to this synthetic credit portfolio. So limits apply to more aggregated portfolios often at the level of CIO, which was clearly inadequate. Obviously though what was needed was granular position level limits for the portfolio itself.
And Iâ€™d just say that in our investment bank credit derivatives business, the limits are already very granular. I believe that had the synthetic credit portfolio been risk managed under equivalent standards, it would not have experienced the unchecked transformation and growth that led to the losses. As for remediation here, we now have granular risk limits for all CIO and verified theyâ€™re in place and where needed across the firm.
Moving to slide 14, is the final observation, is that the synthetic credit VaR model approval and implementation were inadequate. So thereâ€™s been some speculation here that this model was approved abruptly and by CIO alone, but thatâ€™s not true. The fact is that CIO began working in consultation with the independent model review group in corporate risk in mid-2011 to upgrade the VaR model used for synthetic credits to a more accurate model that captured correlation risk as required for Basel 2.5 compliance, which we did not have with the old model and we obviously wanted to get.
The expectation of all parties involved in the model approval was that the new model with lower measured VaR on the basis of the improvement and the calculation methodology, together with the infrequent band brakes of the old model would suggest that it produced conservative calculation of VaR.
So our fundamental problem with the VaR process was the lack of clarity on the roles and responsibilities for each element of the process across the model review group, the CIO risk group and the CIO front office. And the primary problem in the end though was sloppiness and bad execution in implementing the new model, operational problems, which included incorrect data feeds and certain calculation mistakes resulted in a VaR that was lower than what the approved model would have produced.
A properly implemented model would still have a lower VaR compared to the old model, but not by as much. So it would still have taken its bit of time to catch the overall problems, but as weâ€™ve said, it probably delayed us a little bit. So to remediate here, weâ€™ve strengthened the procedures around significant model approval and implementations.
So slide 15, another transition here. So now we have just finished up reviewing the observations on the left side of the slide, and now Iâ€™ll touch in a little more detail on a couple of major remediation actions that foreshadowed a bit.
So on slide 16, moving to that, first, we have what is effectively a complete revamping of the CIO unit itself. On the people front that includes new CIO management team members including Matt himself, plus the Head of CIO Europe, the Chief Risk Officer and the Chief Financial Officer. All of them are very highly regarded and have substantial experience at our company.
In terms of governance, the new team has instituted a robust committee structure, new review processes and better reporting, which will provide for better discussion and debate to ensure mistakes like this one that occurred here donâ€™t happen again. And in terms of CIOâ€™s mandate, Matt is refocusing on the core mission of managing the AFS investment portfolio. The synthetic credit activity has been shutdown, and the liquidate portfolio transferred to the Investment Bank, where it will be better managed.
On slide 17, you see a summary of the risk management remediation actions, both for CIO and the firm. For CIO, as Iâ€™ve mentioned, we have a new Chief Risk Officer, and have added resources to support his efforts. This new CIO will have responsibility for all the areas, the corporate sector not just CIO. As we learned from this event, all activities outside our client businesses need robust risk management coverage and by broadening the mandate of this new Chief Risk Officer weâ€™ve accomplished that.
Next is risk governance. As Iâ€™ve said, weâ€™ve created a much more robust risk committee for all activities in Corporate that is modeled after the committees in our client businesses; it includes significant representation by senior executives and subject matter experts from outside CIO. The committee has already met numerous times and itâ€™s completed detailed reviews of the activities of CIO ensuring risk parameters are consistent with the newly refocused mandate.
And as for risk limits, weâ€™ve introduced proper limits on all other CIO activities across the rest of the firm, we thoroughly reviewed the market risk limit structures to see if we lacked granularity elsewhere, and found them to be in good shape. And finally, weâ€™ve bolstered the policies for dealing with risk limit accessions by requiring higher levels of escalation and more frequent reviews.
Slide 18 summarizes the remediation of the model approval and implementation and monitoring processes. So here, weâ€™ve clarified the roles and responsibilities between the firm-wide model review group and the line of business risk management functions for the model review group, which sits in corporate in addition to reviewing and approving the VaR calculation framework, which is their core activity.
The group must also assess now the quality of the analytical testing and the soundness of the model operating environment whoever it is thatâ€™s responsible for that. We've also formed up a new team inside model review that will monitor model related responsibilities across the risk management function firm-wide. they've been underway and they've already reviewed all market risk VaR models and confirmed that data integrity in operating environments of sound.
And then for the lines of business, weâ€™ve clarified the responsibilities across all aspects of model governance including post-implementation monitoring and weâ€™ve hidden the expectations for model oversight through the line of business risk committees.
So finally, on remediation, Iâ€™d just say that, I just reviewed the remediations that are the ones that directly address the observations from the management review of CIO. but I should add that weâ€™ve picked up a lot of other learnings along the way during this work, and they were acting on those things as well to make the company better.
So now, just to wrap it up. on slide 19, Iâ€™ll wrap it up by saying that based on everything, the team and I have examined and reviewed in the past two months, I believe that the synthetic credit event is an isolated failure that's both because the circumstances in CIO were unique. but also because of the thorough shakedown of the whole company that we did to be certain that we werenâ€™t making similar mistakes elsewhere.
Iâ€™d say, in closing that our management team has always been and continues to be very highly focused on managing risk and this event has caused us to step up our game everywhere.
So thanks for listening to this. weâ€™re going move to Q&A now, and while Jamie and Doug rejoined for that. Iâ€™m just going to get us started with a couple of topics that is here to get Q&A going. so to just pick up where we â€“ Doug already covered a lot on the restatements, I just want to link it back to the work that Iâ€™ve done.
so this slide, here is some supporting information on the restatement that Doug covered earlier, all of these numbers are the ones that are in there. So the context is, itâ€™s really the management review efforts thatâ€™s created the highly unusual circumstances we are faced with in making the decision to restate the first quarter.
Remember, we started the management review on May 14, which was a couple of days after we â€“ all the works supporting the 10-Q filing on May 10 was completed, but as Iâ€™ve described the management review facts finding has been very exhaustive. Weâ€™ve done, obviously lots of e-mails being reviewed, but also tens of thousands of voice tapes, many of them in foreign languages. and so itâ€™s taking time to work our way through and work continues.
But a broadest of determination in the past few days that as Doug said, we donâ€™t have sufficient comfort that for the first quarter the trade remarks met the requirements of being where the traders thought they could exit their positions. Iâ€™ll just point out though thatâ€™s even though the marks were generally within the bid ask spread, which is what otherwise is accepted for a gap. So given the unusual circumstances, weâ€™ve taken the conservative approach to restate bringing the marks to the VCG estimates of external mid-market benchmarks.
Next, I just want to say a few things on the people side. so first, on clawbacks. So employee related actions for CIO managers here on slide 22. And now, Jamie is going to talk about Ina in a minute. Iâ€™ll talk about several other managers, all the mangers in London with direct responsibility for synthetic credit portfolio are now separated from the firm. None are receiving severance and no 2012 incentive compensation. Weâ€™ve made the decision to clawback compensation from each of these individuals and that amount is the maximum permitted, weâ€™ve invoked that.
It represents approximately two years of total annual compensation for each individual covering stock and options. We took into account or weâ€™re taking into account a broad set of factors. Iâ€™ll just make the point that the balance of factors for any individual in this bounces differently, but all ended up at the same result of a full clawback. The Boardâ€™s reviewed all of these decisions.
Iâ€™ll just say further because there maybe questions on people actions, what current here is the three London managers, with direct responsibility for synthetic credit. But there is several other changes in senior people and CIOs, some of whom have been reassigned to more appropriate roles, and others who will be leaving the firm. We believe weâ€™re taking all the appropriate people actions in a timely manner. But beyond what Iâ€™ve said, I told you here weâ€™re not going to be providing more details on people actions and obviously not going to be talking about individuals.
And then finally on 23, Iâ€™ve got a Board statement to read on compensation determinations and forget the three people I just covered and as I said, Jamie will cover Ina. Advancing the slide here. For all other individuals, and that includes Jamie, that 2012 performance year compensation and clawback, if appropriate will be determined in the ordinary course considering among other things, the factors you see listed, which is company, unit, and individual performance on absolute and relative basis. The achievement of non-financial objectives, which of course of the same things, we would always consider in a total picture on compensation, of course involvement and then responsibility for the CIO matter will be included in that. And just an added point, weâ€™re only going to make public information about what we do on clawbacks if itâ€™s required.
Now let me hand it over to Jamie, who wants to make comment about Ina, and then weâ€™ll go to Q&A.
Thanks Mike. So let me say a word about Ina Drew. I have enormous respect for Ina as a professional and as a person she has made some incredible contribution to this company. But she has decided to retire, I got several letters from former chairman, who talked about her contribution, one even said she saved the company, in his judgment. From my experience she has acted with integrity and tried to do what was right for the company at all times and (inaudible) part of those mistake, and I believe thatâ€™s true here as well. In that spirit, Ina came forward in order to give up a very significant amount of her past compensation, which is equivalent to the maximum clawback amount.
So with that letâ€™s turn it over to Q&A.