Full text of Financial Crisis Inquiry Commission : Documents Relating to the Financial Crisis of 2007-2009 : Followup Information From Jamie Dimon, Chairman of the Board, President, Chief Executive Officer, JPMorgan Chase & Company

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February 2, 2010

Via FedEx

Phil Angclides
Chairmflll

Mr. Jamie Dimon
Chairman of the Board, President, Chief Executive Officer
JPMorgan Chase & Company
270 Park A venue
New York, NY 10017

Hon. Bill Thomas

Re:

Vice C/mirman

Financial Crisis Inquiry Commission Hearing on
January 13,2010

Dear Mr. Dimon:
Brooksley Born

CommissiOllcr
Byron S. Georgiou
Commissioner
Senator Bob Graham

Commissioner
Keith Hennessey

Commissioner
Douglas Holtz-Eakin
Commissioner
Heather H. Murren, CFA

On January 20, 2010, Chairman Angelides and Vice Chairman Thomas sent you a
letter thanking you for testifying at the January 13,2010 hearing and informing
you that the staff of the FCIe would be contacting you to follow up on certain
areas of your testimony and to submit written questions and requests for
information related to your testimony, which are listed below. Please provide
your answers and any additional information by February 26, 2010.!
1. Did JPMorgan 2 prepare any kind of internal investigation, audit, or similar
review regarding its b usiness practices, including mistakes made, that
contributed to the financial problems experienced by the bank in 2008? If
so, please provide the internal review. Ifno review was performed, please
explain why .
2. Please explain JPMorgan Chase's due diligence practices regarding
mortgage loans originated, acquired, securitized or sold, including any
changes to those practices, following the September 2004 warning from
the FBI about mortgage fraud .

Commissioner

3. Please answer the questions in the January 12, 2010 New York Times
lohn W. Thompson

COlllnlissio/ler

article by Andrew Ross Sorkin, entitled "What the Financial Crisis
Commission Should Ask."

Peter 1. Wallison

Commissio/ler

Thomas Greene

Executive Director

1 lbe answers you provide to the questions below are a continuation of your testimony and under
the same oath you took before testifYing on January 13,2010. Further, please be advised that
according to section 1001 of Title I 8 of the United States Code, "Whoever, in any matter within
the jurisdiction of any department or agency oftne United States knowingly and willfully falsifies,
conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious
or fraudulent statements or representations, or makes or uses any false writing or document
knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined
under this title or imprisoned not more than five years, or both."
2 As used hcrein, lPMorgan refers to JPMorgan Chase & Co. and all of its affiliates and managed
accounts or funds .

1717 Pennsylvania Avenue, NW, Suite 800 • Washington, DC 20006-4614

-- .,

202.292.2799 • 202.632.1604 Fax

Mr. Jamie Dimon
February 2, 2010
Page 2

4. Please answer each questions posed in the January 13, 2010 New York Times article
entitled "Questions for the Big Bankers."
5. Please state whether JPMorgan Chase has applied the claw-back proVISIons of its
compensation program to any employee from January I, 2005 through the present.
Please include the reasons for the claw-back, the dollar amount of the claw-back and the
percentage of the individual's compensation the claw-back represented.
6. Were there any internal discussions at JPMorgan Chase in 2008 about the possibility of
the government rescuing the bank, providing assistance to the bank or preventing the
bank from failing? Please provide the details of those discussions and any documents
related to those discussions.
7. Please describe how JPMorgan Chase's board of directors, committees of the board of
directors, internal auditors, outside auditors and regulators review, test and audit the
company's risk management practices, including the value of JPMorgan Chase's assets
and its leverage. At any point during or after 2007, did any of those entities, or any other
entities, express any concern or raise any issues about the value of JPMorgan Chase's
assets or its leverage? If yes, what were the concerns or issues, when were they raised,
and how did JPMorgan Chase respond? Please provide any written documentation
regarding that concern, including any reports, presentations, meeting minutes,
correspondence, or memoranda.
8. You testified that one of the biggest mistakes JPMorgan made was missing that home
prices do not go up forever and that it is not sufficient to have stated income in home
prices. In addition, you testified that JPMorgan's stress tests did not test for falling
housing prices but that currently, they do test for falling housing prices. Please explain
the types of stress tests JPMorgan performed? Please explain any changes to the stress
tests, when the changes were made, and why.
9. Please describe any JPMorgan Chase transaction between January 1,2007 and December
31,2009 where JPMorgan Chase would have profited if housing prices had declined.
10. Please provide the following information about your institution' s business as an over-thecounter derivatives dealer during each of the last four years, 2006-2009:
a. Revenues relating to the business by quarter.
b. Profits or losses relating to the business by quarter.
c. Percentage of the business that consisted of standardized contracts as opposed to
customized contracts by quarter. Please describe how you are defining
"standardized" and "customized".
d. Positions held in all OTe derivatives contracts in notional amount at the end of
each of the last four years, and positions held in each of the following categories
at that time: interest rate, currency, energy. credit, and other.

Mr. Jamie Dimon
February 2, 2010

Page 3
11. Please provide the foHowing information about your institution's proprietary trading
during each of the last four years, 2006-2009:
a. Describe the nature and kinds of proprietary trading your institution engaged in.
b. The amount of proprietary trading that was speculative and the amount of such
trading that was hedging your business risk.
c. Revenues relating to the proprietary trading.
d. Profits or losses relating to the proprietary trading.
e. Assets held relating to proprietary trading at the end of each of the last four years.
12. If you had to identify one cause for the financial crisis, what would it be?
13. In your answers to questions at the hearing, you said that JPMorgan Chase (the holding
company) was not too big to fail, and that you agreed that there should be some method
for resolving a faili ng financial finn like lP Morgan Chase outside bankruptcy. How are
these statements consistent? Please clarify l PMorgan Chase's position on the appropriate
resolution for large financial institutions including JPMorgan Chase.
14. There has been a great deal of criticism of th e ori ginate-to-distribute fonn of securitized
fi nancing for mortgages. In your view, does this system reduce mortgage rates and, if so,
by how much?
15 . To what extent did fair value or mark-to-market accounting have a role in JPMorgan
Chase's problems or the financial crisis in general?
16. Did JPMorgan Chase acquire subprime mortgages, create pools of these mortgages and
sell securities backed by these pools? If so, (i) please provide data on the value of
securities sold, (ii) whether JPMorgan Chase retained any interest in these pools, and (iii)
the nature of these interests and their respective dollar amounts.
17. According to the annual report of the Community Reinvestment Coalition for 2007,
JPMorgan Chase or its affiliated institutions made commitments for CRA loans of more
than $1.3 trillion in 2003 and 2004. The NCRC says these commitments were made in
connection with merger approvals. Can you confirm this?
a. How many of these commitments resulted in CRA qualifying loans?
b. What are the delinquency and default rates on these loans? What are the
delinquency and default rates on non-CRA qualifying loans made by JP Morgan
Chase or its affiliated institutions in 2003 and 2004?
18.In 2006 you estimated that JPMorgan Chase's losses on subprime loans would not exceed
$150 million, but in your 2008 annual report you estimated that the losses would be $1.4
billion. Why were your estimates of losses on subprime loans so much greater than first
estimated? Please provide the data and any other relevant written documentation

Mr. Jrunie Dimon
February 2, 2010
Pagc 4
supporting both estimates, including any reports, presentations, memoranda, meeting
minutes, correspondence, or analyses relevant to the estimates.
19. Overall, has your acquisition of Bear Steams resulted in profit or loss for JPMorgan
Chase?
20. What arc JP Morgan Chase's earnings by quarter from Credit Default Swaps (CDS) for
the period January 1,2005 through January I, 2010?
21. Did JPMorgan Chase purchase any CDS protection on AIG or provide any CDS
protection on AIG to any third party? If so, please identify the risks on which lPMorgan
Chase purchased or provided protection. In addition, please provide the written
documentation for all CDS protection on AIG, including any contracts, agreements,
correspondence, memoranda or reports reflecting the CDS protection.
22. It is said that CDS obligations are not visible on the balance sheets or financial statements
of participants in the CDS market. Is this true? If these obligations are visible to
investors and creditors in your fin ancial statements, please identify whcre they appear
and how they arc calculated. If they are not visible, please explain JPMorgan ' s method of
accounting for CDS obligations, and its justification for that treatment.
23. Did JPMorgan Chase provide any CDS protection on Lehman or purchase any CDS
protection on Lehman? If so, what were JPMorgan Chase's gains or losses, if any, when
Lehman failed? Please provide written documentation of any CDS protection JPMorgan
Chase provided or obtained on Lehman, including any contracts, agreements,
correspondence, memoranda or reports reflecting the CDS protection.
24. What other gains or losses to JPMorgan Chase resulted from Lehman's bankruptcy, and
what is the amount of such gains or losses?
25. Please provide infonnation on every strcss test lPMorgan Chase ran from January 2005
through January 1, 2010, including the reasons for the stress tests, the parameters and
findings of the stress tests, and all of the individuals involved. Please provide copies of
the written materials generated in the process of the stress tests as well , including any
memoranda, correspondence, and reports generated in the process or as a result of the
stress tests.
26. Please provide complete copies of JP Morgan Chase's daily risk reports from January 1,
2006 through December 31 , 2009.

Mr. Jamie Dimon
February 2, 2010
Page 5
The FCIC appreciates your cooperation in providing the information requested. Please do nOl
hesitate to contact Chris Secfer at (202) 292- 1345 or csecfcrla:lfc ic.gov if you have any questions
or concerns.
Sincerely,

Thomas Greene
Executive Director, Financial Crisis Inquiry Commission

cc:

Phil Angelides, Chainnan, Financial Crisis Inquiry Commission
Bill Thomas, Vice Chainnan, Financial Crisis Inquiry Commission

4841-9947-2133, v. 1

JPMORGAN CHASE&CO.
Stephen M. Cutler
General Counsel

March 1,2010

By Email and Federal Express
Mr. Thomas Greene
Executive Director
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW
Suite 800
Washington. DC 20006·4614

Financial Crisis Inquiry Commission {"Commission"} January 13. 2010 Hearing
Dear Mr. Greene:
On behalf of JPMorgan Chase & Co. ("JPMorgan" or the "Firm"), I write
in response to the Commission's February 2. 2010 letter following up on the testimony of
JPMorgan Chairman and CEO Jamie Dimon at the Commission's January 13, 2010
hearing (" Hearing"). Consistent with Mr. Dimon's direction to assist the Commission in
any way that we can, we provide below responses to several of the Commission's
questions. We are working very hard to provide you with additiona l responses promptly .

•

1.
Request 3: Mr. Dimon, during the final week before Lelunan
Brothers collapsed, your firm asked Lehman to post billions of dollars in collateral and
threatened to stop clearing Lehman' s trades if it didn ' t do so. That demand had the effect
of depleting Lehman 's capital base, just when it desperatel y needed that capital to return
funds to investors who were asking for their money back. JPMorgan clearly was trying
to protect itself. But could you explain what impact you believe that "collateral call" had
on Lehman's failure and the ensuing market crisis? (N.Y. Times, January 12, 2010 Andrew Ross Sorkin question 2.)
Response: During the week prior to the commencement by Lehman
Brothers Holdings Inc. ("LBHI" ) of its chapter 11 case, LBHI posted approximately $8.6
bill ion of collateral at JPMorgan ' s request, much of which was requested as a result of

270 Part A\'eorn: - 48 '" Hoor, New York, NY 10017

Telephone: 212-270-3220 Facsimile212-270-326 1 stephen m,cutler (I jpmorgancom
JI'Morgan Chase & Co.

Mr. Thomas Greene
Page 2

concerns about the value of collateral previously posted. After that collateral was posted
- including the period afler LBHI went into bankruptcy - JPMorgan advanced hundreds
of billions of dollars to Lehman Brothers Inc., Lehman 's US broker-dealer ("LBI"),
returned substantial amounts of securities collateral to LBHI and LBI, and continued to
support Lelunan's business generally. Other than JPMorgan and, for specific periods, the
NY Fed and Barc1ays Capital. no other party provided substantial financial support to
LS I during that period. Without JPMorgan' s advances and support, LSI could never have
sold its business to Barc1ays Capital, which preserved thousands of jobs and facilitated
the smooth transfer of more than 100,000 customer accounts.
Therefore, there is no truth to the notion that JPMorgan damaged
Lehman's liquidity and that such damage caused Lehman's failure. To the contrary,
lPMorgan remained Lehman's principal source of liquidity even as most others fled, tried
to help Lehman survive its crisis, and reduced the impact of Lehman's fai lure on the
system by facilitating tbe sale to Barc1ays Capital and the transfer of customer accounts.
2.
Request 4: One result of the Pecora commission, the Depression
equivalent of this investigation, was the Glass-Steagall Act, which kept investment
banking separate from commercial banking until the act was repealed in 1999. Many
experts now believe that divide should be reinstated. Yet commercial banks like
Washington Mutual lost a lot of money during the crisis without having any investment
banking activities, and pure investment banks like Bear Stearns and Lehman Brothers
collapsed without being deposit-taking institutions. This suggests that the problem does
not lie with mingling commercial and investment banking. Are you in favo r of the return
of Glass-Steagall, and why? (N. Y. Times, January 12, 2010 - Liaquat Ahamed question
I.)
Response: No . The repeal of Glass-Steagall had nothing to do with the
financial crisis. Some of the largest and most consequential institutions that failed during
the crisis were stand-alone investment banks, mortgage companies, thrifts, and insurance
companies - not the diversified financial firms that would be most impacted by the return
of Glass-SteagalL
Indeed, the partial repeal of Glass-Steagall allowed the creation of
financial holding companies, such as JPMorgan. which had the scale, stability, and
diversity to acquire Bear Steams and Washington Mutual at the government's request,
which ultimately reduced costs to taxpayers and consumers and helped to support
economic recovery. The global economy need s firms of all sizes to drive economic
growth and job creation. These finns need banking partners that operate globally, offer a
full range of products and services, and provide financing in the billions of dollars. The
correct policy response to the financial crisis is not a call for the reinstatement of GlassSteagall; rather, the call should be for enhanced supervision to minimize the chances of
financial instability, coupled with resolution authority to end the u too big to fail" concept.

Mr. Thomas Greene

Page 3
3.

Request 4: Over the last 20 years, the world of finance has been

irrevocably transformed: individuals have moved their money from savings accounts
into money market funds, and institutional investors now keep their cash in the repo
market, where Treasury securities are borrowed and lent, rather than as deposits in
commercial banks. As a result, before the crisis, half of the credit provided in the United
States was being channeled outside the commercial banking system. What regulatory
changes do we need to ensure that our current financial system is as stable as the
traditional banking system that served us so well from 1936 to 19967 (N.Y. Times,
January 12,2010 - Liaquat Ahamed question 3.)
Response: JPMorgan believes that refonn and modernization of the
regulatory structure for financial firms are needed to enhance system-wide stability. We
support reform establishing a systemic regulator, eliminating the concept of "too big to
fail," and holding all systemically important financial firms to the same rigorous
regulatory standards.
First, we need a systemic regulator responsible for monitoring risk across
our financial system. Responsibility for a company' s actions rests solely with the
company's management; however, had a systemic regulator been in place and closely
watching the mortgage industry, it might have identified the umegulated pieces of the
mortgage industry as a critical point of failure. It might also have been in a position to
recognize the one-sided credit derivative exposures of AIG and the monoline insurers.
While it may be unrealistic to believe that a systemic regulator could prevent future
problems entirely, such a regulator may be able to mitigate the consequences of some
failures and prevent them from collectively becoming catastrophic.
Second, as we at JPMorgan have stated repeatedly, no firm - including our
own - should be "too big to fail. " The goal is to regulate financial finns so they don't
fail; but when they run into trouble, all firms should be allowed to fail, regardless of their
size or interconnectedness to other firms. To ensure that this can happen - especially in
times of crisis - regulators need enhanced resolution authority to wind down failing firms
in a controlled way that does not put taxpayers or the broader economy at risk. Such
authority can be an effective mechanism that makes it absolutely clear that there is no
financial safety net for management or shareholders. Under such a system, a failed
bank's shareholders should lose their investments; unsecured creditors should be at risk
and, if necessary, wiped out. A regulator should be able to terminate management and
boards and liquidate assets. Those who benefited from mismanaging risks or taking on
inappropriate risk should feel the pain.
Last, it is clear that threats to our financial system can and do originate in
non-depository institutions. Thus, any new regulatory framework should reach all
systemically important entities - including investment banks - whether or not they have
insured deposit-based business; all systemically important institutions should be
regulated to the same rigorous standard. Regulation needs to be administered by product
and economic substance, not by legal entity. If we leave outside the scope of rigorous

Mr. Thomas Greene
Page 4

regulation those institutions that are intercormected and integral to the provision of credit,
capital, and liquidity in our system, we will be right back where we were before this crisis
began.
4.
Request 4: How did you use the bailout money, and to what extent
did it result in more lending or higher bonuses for your employees than you would have
otherwise provided? (N.v. Times, January 12, 2010 - David M. Walker question 1.)
Response: JPMorgan did not ask for, nor did we need, a capital infusion
from the federal government. The Finn's capital ratios remained well in excess of
recommended regulatory levels throughout the crisis, even excluding federal assistance.
On October 13, 2008, the Firm was asked by the Secretary of the Treasury, the Chainnan
of the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC and the
New York Federal Reserve Bank to agree to accept a capital infusion as a sign of support
for the Troubled Asset Relief Program. The govermnent's view was that if any of the
banks in attendance did not accept TARP funds, then many of the additional banks might
not want to be tainted by their acceptance of the T ARP money because it might be
viewed as a sign of weakness. The Finn viewed its participation as the right thing to do
for the economy and the financial system.
After acceptance ofthe government's $25 billion preferred stock
investment, we continued our lending activities to consumers, businesses and
govenunents. In the fourth quarter of2008 alone, the Firm extended over $150 billion in
new credit to consumers, businesses, municipalities and non-profit organizations. That
figure includes: over $50 billion in new consumer originations (mortgages, home equity
loans, credit cards, student loans, auto loans, etc.); over $20 billion in new credit
extended to 8,000 small and mid-sized businesses; and approximately $90 billion in new
and renewed commitments to our corporate and other clients. We also dramatically
increased our presence in the interbank market, lending an average of$50 billion a day to
other banks. The Finn did so while maintaining prudent risk management and
underwriting standards, mindful of market and credit risks. (Beginning January 30, 2009,
JPMorgan submitted detailed infonnation regarding lending activities to the Department
of the Treasury in connection with the Monthly Bank Lending Survey.)
The receipt ofTARP funds did not result in higher incentive compensation
for JPMorgan employees. As compared to performance-year 2007, aggregate incentive
compensation (paid in late January 2008), the average aggregate cash incentive per
employee for 2008 was down approximately 43% and the average aggregate equity
incentive was down approximately 23%.
5.
Request 6: Were there any internal discussions at JPMorgan Chase
in 2008 about the possibility of the government rescuing the bank, providing assistance to
the bank or preventing the bank from failing? Please provide the details of those
discussions and any documents related to those discussions.

Mr. Thomas Greene
Page 5

Response: No, we never discussed the possibility of JPMorgan's failure
and, therefore, we did not discuss the need for government rescue. As noted in our
response in paragraph 4 above, we did discuss the government's request to accept T ARP
funds, and did accept those funds because we believed it was the right thing to do for the
economy and the financial system.
6.
what would it be?

Request 12: If you had to identify one cause of the financial crisis,

Response: We do not believe there is a sole cause of the financial crisis.
As Mr. Dimon stated in his written testimony before the Commission on January 13,
20 I 0, we believe there are a number of key underlying causes of the financial crisis.
These causes include: the creation and ultimately the bursting of the housing bubble;
excessive leverage that pervaded the system; the dramatic growth of structural risks and
the unanticipated damage they caused; regulatory lapses and mistakes; the pro-cyclical
nature of certain policies, actions and events; and the impact of huge trade and financing
imbalances on interest rates, consumption and speculation.
7.
Request 13: In your answers to questions at the hearing, you said
that JPMorgan Chase (the holding company) was not too big to fail, and that you agreed
that there should be some method for resolving a failing financial firm like IPMorgan
Chase outside of bankruptcy. How are these statements consistent? Please clarify
IPMorgan Chase ' s position on the appropriate resolution for large financial institutions
including JPMorgan Chase.
Response: Some have suggested that size alone, or the combination of
investment banking and commercial banking, contributed to the crisis. We disagree. If
you consider the institutions that have failed during the crisis, many have been small;
some of the largest and most consequential failures were firms that were principally
engaged in one business. JPMorgan has grown in a manner that strengthened each of our
businesses, and without the diversification and synergies permitted by our business
model, it is far from certain that we could have acquired Bear Stearns or Washington
Mutual.
No institution, including JPMorgan, is "too big to fail. " Size is not the
issue; rather, it is when institutions are too interconnected that an uncontrolled failure has
the potential to bring down the entire financial system. This is why we need a regulatory
system that provides for even the largest financial firms to be allowed to fail in a way that
does not put taxpayers or the broader economy at risk.
Creating the structures to allow for the orderly failure of a large financial
institution starts with giving regulators the authority to facilitate failures when they occur.
Under such a system, a failed bank's shareholders should lose their val ue; unsecured
creditors should be at risk and, if necessary, wiped out. A regulator should be able to
terminate management and boards and liquidate assets. Those who benefited from

Mr. Thomas Greene
Page 6

mismanaging risks or taking on inappropriate risk should feel the pain. We can learn here
from how the FDIC closes banks. As with the FDIC process, as long as shareholders and
creditors are losing their value, the industry should pay its fair share.
Establishing this resolution authority will require thoughtful legislation
that promotes predictability in the resolution process in accordance with recognized
priorities, requires sound risk-management practices, and maintains a level playing field
among finns with similar business models. It also requires effective international
cooperation, as the implications ofa major financial institution's failure are global. This
is challenging, but worth doing. The alternatives, neither of which is acceptable, are to
perpetuate the politically and economically bankrupt "too big to fail" idea, or to try to
impose artificial limits on the size of U.S. financial institutions.
8.
Request 24: What other gains or losses to JPMorgan Chase
resulted from Lelunan's bankruptcy, and what is the amount of such gains or losses?
Response: JPMorgan has more than $29 billion of claims against LBHI ,
LBI, and other Lelunan entities, most of which arise from IPMorgan's roles as LBI ' s
principal clearing bank and one of Lehman's largest trading counterparties. JPMorgan
believes that it has adequate collateral to cover all of that exposure.
Nonetheless, JPMorgan may be subject to litigation or other challenges with respect to
certain claims and collateral. No litigation of that type is currently pending.
Consequently, it is premature to state the amount of IPMorgan's recoveries or losses .

•

J respectfully request that this letter, which contains confidential
infonnation, be maintained in strict confidence by the Commission. If the Commission is
requested to disclose, or if the Commission intends to disclose, the contents of this letter
to anyone who is not a member or employee of the Commission, I ask that you promptly
notify me of the contemplated disclosure.

We hope that these responses will assist the Commission in furthering its
goals, and we intend to provide responses to the Commission's remaining requests
promptly. Please do not hesitate to contact me if you have any questions.
Sincerely,

Stephen M. Cutler
Executive Vice President & General Counsel
JPMorgan Chase & Co.

Mr. Thomas Greene
Page 7

cc: Phil Angelides, Commission Chairman
Bill Thomas, Commission Vice Chairman
Brad S. Karp, Esq.

JPMORGAN CHASE &CO.
Stephen M. Cutler
General Counsel

DECEIVEn

MAR 16 2010

By: _ _ _ __
March 15,2010

By Email and Federal Express
Mr. Thomas Greene
Executive Director
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW
Suite 800
Washington, DC 20006-4614

Financial Crisis Inquiry Commission ("Commission") January 13,2010 Hearing
Dear Mr. Greene:
On behalf of JPMorgan Chase & Co. ("JPMorgan" or the "Firm"), I write
in further response to the Commission's February 2,2010 letter following up on the
testimony of JPMorgan Chairman and CEO Jamie Dimon at the Commission's January
13,2010 hearing ("Hearing"). Consistent with Mr. Dimon's direction to assist the
Commission in any way that we can, we provide below responses to several of the
Commission's questions. We are working diligently to provide you with additional
responses promptly.

1.
Request 1: Did JPMorgan prepare any kind of internal
investigation, audit, or similar review regarding its business practices, including mistakes
made, that contributed to the fmancial problems experienced by the bank in 2008? If so,
please provide the internal review. If no review was performed, please explain Why.
Response: While JPMorgan was disappointed with its 2008 financial
results, the Firm fared better than most of its competitors, earning a profit in every
quarter of 2008 and completing successful transactions with Bear Steams and
Washington Mutual. JPMorgan's 2008 fmancial results were negatively affected by two
principal factors: (i) increasing credit costs, mostly for consumer and mortgage loans,
270 Park Avenue - 48 111 floor, New York, NY 10017
Telephone: 212·270·3220 Facsimile 212·270·3261 stephen m.cutler@ipmorgan.com
JPMorgan Chase & Co.

Mr. Thomas Greene
Page 2

and (ii) Investment Bank write-downs of more than $10 billion, primarily from leveraged
lending and mortgage exposures. JPMorgan did not conduct an internal investigation or
audit specific to these issues. That said, the Firm has long had risk management
procedures in place that enable it continuously to review and improve its business
practices.
2.
Request 3: A question for all the executives about bonuses: We
keep hearing that you plan to payout billions in bonuses this year. Given that they come
out of profits that, to a large degree, seem to be the result of government programs to
prop up and stimulate the banking sector, do you think they are deserved, even if they are
in stock? And, while we're on the topic, given the market crisis of 2008, were you all
overpaid in 2007? (N.Y. Times, January 12,2010 - Andrew Ross Sorkin question 4.)
Response: Compensation paid to JPMorgan employees was not the result
of the government's bank stimulus programs. As explained in paragraph 4 of my March
1st letter, JPMorgan's willingness to accept TARP funds in 2008 did not result in higher
incentive compensation for JPMorgan employees for that year. In 2009, JPMorgan
repaid the TARP funds as soon as it was permitted to do so, and the Firm currently is not
participating in any of the government's bank stimulus programs.
The incentive compensation paid to JPMorgan employees for 2009 was
appropriate. JPMorgan's annual incentive compensation pool, drawn from Firm
revenues, reflected the Firm's performance as a whole, viewed through the lens oflongterm sustainability and with risk taken into account. Similarly, the Firm's assessment of
individual performance - a key component in determining an employee's compensationis not based on any single fmancial measure or single year, but rather on a broad-based
evaluation of individuals and their contributions to the overall, long-term health and
success of the Firm. The last few years have proved to be the most turbulent fmancial era
that most Americans have ever experienced. Many of the Firm's peers were unable to
survive, yet JPMorgan has remained healthy and capable of serving its clients and
communities. JPMorgan's employees made extraordinary efforts during this period and
deserve fair and appropriate pay, including annual incentive compensation. If JPMorgan
wants to attract and retain the talent necessary for its continued success, it is vital that the
Firm continue to offer competitive compensation.
The Firm does not believe that Mr. Dimon was overpaid in 2007. Mr.
Dimon's compensation is determined by the Compensation Committee, which is
comprised of independent directors on JPMorgan's Board of Directors. Mr. Dimon
received incentive compensation for 2007, when JPMorgan attained strong results despite
a challenging market environment, and achieved a second consecutive year of record
earnings and revenue, while building credit reserves, maintaining strong capital, and
continuing to invest in the Firm's businesses. The Compensation Committee also noted
Mr. Dimon's close attention to risk management. For 2008, due to JPMorgan's overall
disappointing financial results, Mr. Dimon was awarded no incentive compensation of
any kind, although the Compensation Committee and Board of Directors strongly
commended Mr. Dimon for his highly effective leadership of the Firm through a very

Mr. Thomas Greene
Page 3

challenging environment, as well as his thoughtful efforts to contribute to the stability of
our financial system.
3.
Request 4: Some of your fIrms received payouts on credit-default
swap contracts with American International Group. Most of those guarantees resulted
from hedging supposedly safe investments (they had AAA ratings, after all) with A.I.G.
or other insurers. This hedging allowed traders to book "profIts" that had not yet been
earned - profIts that would be counted in calculating their bonuses. However, this
insurance was likely to fail, as your risk managers surely knew. It involved so-called
wrong-way risk: the guarantor (A.I.G.) was certain to be damaged by the same event (the
housing market collapse) that would lead you to seek payment on the insurance. The
insurance was effective only because the government stepped in, theoretically on the
taxpayers' behalf, and made payments for A.I.G., an otherwise bankrupt fIrm. Since
employees' bonuses, and ultimately yours, were based on these fraudulent profIts, my
questions are these: (1) How much profIt did your fInn record for bonus purposes on
these trades that ultimately delivered huge losses? How much of those bogus profIts
were paid out in bonuses? (2) Have you made any effort to recover the bonuses? If not,
why not? (N.Y. Times, January 13,2010 - Yves Smith questions 1 and 2.)
Response: JPMorgan was not a counterparty to AIG on the credit default
swaps ("CDS") that were terminated (and effectively paid out at par value) in connection
with the assistance provided by the government through the Federal Reserve Bank of
New York's dedicated lending facility, as discussed in the November 17,2009 report of
the Office of the Special Inspector General for the Troubled Asset Relief Program
entitled "Factors Affecting Efforts to Limit Payments to AIG Counterparties" (the
"Report"). Table 2, on page 20 of the Report, identifIes the sixteen counterparties to the
relevant CDS with AIG and indicates the par value of those CDS. JPMorgan is not one
of those counterparties.
4.
Request 4: Why were Wall Street traders and other moneymen
permitted to make bets - through the use of so-called credit-default swaps - on the longterm value of securities they didn't even own? (This is akin to everyone in your
neighborhood being allowed to buy fIre insurance on your house. Since the only way that
bet can pay off is if your house burns down, it shouldn't be any surprise when that is
exactly what happens.) (N.Y. Times, January 13,2010 - William D. Cohan question 2.)
Response: CDS may be traded for a number of reasons, such as to hedge
an existing position, to take a view on the creditworthiness of an entity, or to make
markets for other investors who wish to buy or sell CDS. Traders that buy and sell CDS
when they do not have a position in the security, including market makers like JPMorgan,
help to increase the depth and liquidity of the credit markets, and often provide customers
with the ability to hedge risks associated with securities that they own.
Below are examples of CDS trades made for various reasons:

Mr. Thomas Greene
Page 4

Example # 1: An investor who holds a particular security may use CDS to
manage the credit risk that arises from holding that security. For example, a holder of a
corporate bond may hedge its exposure to the possible default of the bond by entering
into a CDS contract as the buyer of protection on the debt of the entity that issued the
bond (which is known as the "reference entity"). If the bond goes into default, then the
proceeds from the CDS contract will limit the investor's losses on that bond.
Example #2: Investors may use CDS as an investment, buying or selling
CDS as a means of taking a position on the creditworthiness of a reference entity when
they do not own securities issued by that reference entity. This activity - commonly
referred to as going "long" or "short" credit risk - serves the valuable function of
increasing the depth and liquidity of the credit markets. Trading by such investors also
provides valuable price information to all market participants.
Example #3: Market makers, like JPMorgan, routinely buy CDS
protection from, and sell CDS protection to, their clients. It is common for market
makers to buy CDS protection (or go "short" risk) with respect to a reference entity when
they do not own the debt of that entity. Under these circumstances, a market maker likely
would hedge market risk by entering into offsetting CDS transactions in which it sells
CDS protection on the same reference entity. These trades deepen liquidity in the credit
markets and provide holders of the reference security with an enhanced ability to hedge
their positions.
5.
Request 4: Why aren't bankers and traders required to have more
skin in the game - that is, more of their own salary at risk - and not just a marginal part
of one year's bonus? (In the old days, when investment banks were private partnerships,
a partner's entire net worth was on the line, every day.) (N.Y. Times, January 13,2010William D. Cohan question 3.)
Response: JPMorgan investment bankers and traders have considerably
more than "a marginal part of one year's bonus" tied to the performance of the Firm. A
large percentage of compensation for such employees is comprised of incentive
compensation, which is granted at the discretion of the Firm based on the performance of
the Firm, the performance of the employee's business unit, and the employee's individual
performance, including the employee's contribution to the Firm on a sustained basis. A
substantial portion of this incentive compensation is paid in stock that vests over multiple
years, and this percentage increases as an employee's incentive compensation, decisionmaking authority, and the impact of his or her role increase. The Firm also requires
members of the Operating Committee to retain approximately 75% of all compensationrelated stock they receive for as long as they remain on such committee, and other
members of the Firm's Executive Committee generally are required to hold at least 50%
of all compensation-related stock they receive for as long as they remain on such
committee.
Such executives have "skin in the game" in multiple respects, and far
more than if just their salary were at risk. In years where performance suffers, the

Mr. Thomas Greene
Page 5

absolute level of their award is subject to reduction; at the same time, the value of the
equity they hold from past awards will decline with any decline in the Firm's share price.
The equity they hold as well as the equity they receive as part of their current incentive
compensation also is at risk based on the future performance of the Firm and the price of
its shares.
6.
Request 4: What, if any, changes do you contemplate making to
your pay programs for executives and other high-level employees in light of recent events
and related public concerns? (N.Y. Times, January 13, 2010 - David M. Walker question
2.)
Response: JPMorgan has long adhered to compensation practices that are
designed to reward long-term performance, not just short-term revenues, and to align
employee and shareholder interests. In furtherance of these goals, the Firm's senior
executives receive at least half (and, in some cases, significantly more) of their incentive
compensation in equity awards that vest over multiple years, and they are expected to
maintain a significant percentage of the shares received from equity awards for the
duration of their service as senior executives. It also has been the Firm's long-standing
policy to consider the Firm's overall fmancial performance in determining the
compensation of its employees. Thus, for example, when the Firm's 2008 financial
results were disappointing, Mr. Dimon, JPMorgan's Chairman and CEO, did not receive
incentive compensation of any kind, and JPMorgan's executive officers' aggregate
annual incentive compensation (in cash and restricted stock units) declined 72% from the
pnoryear.
JPMorgan is continually reassessing its compensation practices and has
made a number of adjustments in the last few years. As described in response to Request
5 (paragraph 7, below), the Firm adopted a Bonus Recoupment Policy in 2006 that
applies to all JPMorgan employees, and has added additional recoupment provisions to
equity awards since that time.
For 2009, JPMorgan also increased the percentage of incentive
compensation paid in restricted stock units (as opposed to cash), particularly for senior
executives. While JPMorgan's senior management always has received a significant
percentage of its incentive compensation in deferred stock, for 2009, members of
JPMorgan's Operating Committee, which includes JPMorgan's Named Executive
Officers, received on average at least two-thirds of their incentive compensation in stock.
Beginning in 2008, JPMorgan's Chief Risk Officer reviewed with the
Compensation Committee the relationship of risk management practices and incentive
compensation arrangements for senior executives, and will continue to do so going
forward. Beginning in December 2009, the Compensation Committee also meets at least
annually with one or more members of the Risk Policy Committee of the Board of
Directors.

Mr. Thomas Greene
Page 6

While JPMorgan believes that its compensation decisions have been
consistently at the forefront of sensible compensation practices, the Firm is cognizant of
the economic environment in making its compensation decisions and structuring its
compensation arrangements. To that end, although not required to do so, the Firm will
submit an advisory resolution to shareholders at the 2010 annual meeting to approve the
Firm's overall executive compensation philosophy, principles and practices, and their
implementation for 2009 for the Firm's Named Executive Officers.
7.
Request 5: Please state whether JPMorgan has applied the clawback provisions of its compensation program to any employee from January 1, 2005
through the present. Please include the reasons for the claw-back, the dollar amount of
the claw-back and the percentage of the individual's compensation the claw-back
represented.
Response: JPMorgan has in place policies that permit recovery or
recoupment of incentive compensation under certain circumstances.
JPMorgan's Bonus Recoupment Policy, adopted in 2006, provides that in
the event of a material restatement of JPMorgan's fmancial results, the Firm may seek
repayment of incentive compensation for the period covered by the restatement. This
policy applies to all JPMorgan employees. Since 2005, JPMorgan's policy also has
permitted the Firm to cancel outstanding equity incentives and require repayment of the
value of stock distributed under various circumstances including, for example, where the
Firm determines that the employee violated firm polices, laws or regulations, or acted in a
manner that might reasonably be expected to be injurious to the interests of the Firm.

In addition, all equity incentive compensation awarded in 2009 (for the
2008 performance year) or later is subject to recovery or claw back if:
•
•

•

the employee is terminated for cause or the Firm determines after
termination that the employee could have been terminated for cause,
the Firm determines that the award was based on materially inaccurate
performance metrics, whether or not the employee was responsible for
the inaccuracy, or
the award was based on a material misrepresentation by the employee.

Further, for all equity compensation awarded in 2010 (for the 2009 performance year),
the Firm may cancel or recover such compensation if the employee engages in conduct
that is detrimental to the Firm insofar as it causes material financial or reputational harm
to the Firm or its business activities. And equity incentive compensation awarded in
2010 (for the 2009 performance year) to members of the Operating Committee - the
Firm's 16 most senior executives - and certain other senior employees is subject to
recovery or claw back for failure properly to identify, raise, or assess, in a timely manner
and as reasonably expected, risks and/or concerns with respect to risks material to the
Firm or its business activities.

Mr. Thomas Greene
Page 7

For members of the Operating Committee, equity awards granted in
January 2009 and January 2010 allow for reduction, forfeiture or deferral in scheduled
vesting or exercisability in the event of a determination by the CEO that an executive has
not achieved satisfactory progress toward the priorities that have been established for the
executive or that the Firm has not achieved satisfactory progress toward the Firm's
priorities for which the executive shares responsibility as a member of the Operating
Committee. Such determination is subject to ratification by the Compensation
Committee. In the case of an equity award to the CEO, such determination would be
made by the Compensation Committee, subject to ratification by the Board of Directors.
To date, JPMorgan has not used these recoupment policies to recover
compensation that has already been paid. The Firm does, however, in the normal course
assess the continuing performance of its employees and may act to lower incentive
compensation versus prior years' levels, or to terminate employees, based on
performance. If the Firm terminates an individual's employment based on performance,
unvested or unexercised awards by their terms are cancelled.
8.
Request 10Cd): Please provide the following information about
your institution's business as an over-the-counter derivatives dealer during each of the
last four years, 2006-2009: (d) Positions held in all OTC derivatives contracts in notional
amount at the end of each of the last four years, and positions held in each of the
following categories at that time: interest rate, currency, energy, credit, and other.
Response: JPMorgan trades over-the-counter ("OTC") derivatives as both
a dealer and an end-user. The table below provides JPMorgan's total notional amount
outstanding of currency, interest rate, credit, commodity, and other derivatives as of yearend 2006, 2007, 2008, and 2009 (in $ thousands). This table was created for the purpose
of responding to Request 1O(d) based on information contained in systems used for the
Firm's regulatory reporting, and is not generated or maintained by the Firm in the
ordinary course of business. Because these systems do not break out energy derivatives
from other commodity derivatives, such information is not readily available, and we have
provided information concerning all commodity derivatives below.

Mr. Thomas Greene
Page 8

Derivatives
Type

1213112006

12/3112007

12/3112008

1213112009

Currencyl

4,497,876

6,614,894

7,338,945

7,154,259

Interest Rate

51,424,959

66,279,634

69,277,033

62,287,928

Credit

4,618,565

7,966,864

8,387,879

5,993,888

Commodity

565,715

697,045

560,040

468,074

Other2

892,438

728,987

827,930

653,980

Grand Total

61,999,553

82,287,424

86,391,827

76,558,129

9.
Request 21: Did JPMorgan Chase purchase any CDS protection
on AIG or provide any CDS protection on AlG to any third party? If so, please identify
the risks on which JPMorgan Chase purchased or provided protection. In addition, please
provide the written documentation for all CDS protection on AlG, including any
contracts, agreements, correspondence, memoranda or reports reflecting the CDS
protection.
Response: Over the past several years, JPMorgan has been a market
maker in CDS with AlG as the reference entity, primarily through its North American
Credit Trading business (''NA Credit Flow"). The risk on which such CDS protection
was bought and sold was AlG's senior unsecured debt. We are producing with this letter
a spreadsheet Bates numbered JPM-FCIC 00000061-00000110 reflecting trades and
unwinds of CDS with AIG as the reference entity for JPMorgan NA Credit Flow between
2005 and 2009. As indicated on this spreadsheet, there were 2,163 such transactions
during this time period. We have prepared this spreadsheet in order to provide the
Commission with the information identified in the request in reasonably usable form, in
lieu of producing the voluminous underlying documentation. This spreadsheet is thus not
a document generated or maintained by JPMorgan in the ordinary course of business.
We summarize below the information reflected in the spreadsheet:
•

Column A, entitled "Issuer Name," indicates the reference entity on
which the CDS protection was purchased or sold by JPMorgan NA
Credit Flow.

•

Column B, entitled "Counterparty," indicates the name of the
counterparty facing JPMorgan NA Credit Flow, which may be another
business at JPMorgan or may be a third party.

J Includes currency derivatives and currency-related derivatives - e.g., FX FWD's, CCY Swaps, FX
Bought and Sold Options, and FX Spots.
2 Includes equity derivatives - i.e., Equity Swaps, Equity Forwards, and EQ Bought and Sold Options.

Mr. Thomas Greene
Page 9

•

Column C, entitled "Buy Sell Risk," indicates whether JPMorgan NA
Credit Flow was buying or selling risk. Where JPMorgan NA Credit
Flow sells risk, it is the purchaser of credit protection on the reference
entity; where JPMorgan NA Credit Flow buys risk, it is the seller of
protection on the reference entity.

•

Column D, entitled "Trade Date," indicates the trade date for the
transaction.

•

Column E, entitled "Sum Of Amount USD," represents the U.S. dollar
equivalent (in millions) of the transaction's amount. For a new trade,
this number is the notional amount. For an unwind transaction, this
number is the unwound amount.

•

Column F, entitled "Currency," indicates the currency in which the
contract was denominated - i.e., U.S. dollars or euros.

I respectfully request that this letter and its enclosure, which contain
confidential information, be maintained in strict confidence by the Commission. If the
Commission is requested to disclose, or if the Commission intends to disclose, the
contents of this letter or its enclosures to anyone who is not a member or employee of the
Commission, I ask that you promptly notify me of the contemplated disclosure.
We hope that these responses will assist the Commission in furthering its
goals, and we intend to provide responses to the Commission's remaining requests
promptly. Please do not hesitate to contact me if you have any questions.
Respectfully,

Stephen M. Cutler
Executive Vice President and General Counsel
JPMorgan Chase & Co.
Enclosure
cc: Gary J. Cohen, Esq. (w/out enclosure)
Brad S. Karp, Esq. (w/out enclosure)

Response to the Financial Crisis Inquiry Commission's February 2, 2010 Letter

JPMorgan Chase & Co. Response to Request 21:

Issuer Name
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.
American International Group, Inc.

Counterparty Name

Buy Sell
Sum Of
Risk
Amount USD Currency
Trade Date
10
Sell
3/24/2005
USD
Sell
6/15/2005 29.76190476
EUR
Sell
6/15/2005 35.71428571
EUR
17.4
Buy
6/22/2005
USD
2.6
Buy
6/22/2005
USD
5
Buy
2/2/2005
USD
10
Buy
2/2/2005
USD
25
Buy
9/20/2005
USD
5
Buy
11/29/2005
USD
1.19047619
Sell
2/21/2006
EUR
10
Sell
11/29/2005
USD
5
Sell
11/29/2005
USD
7.194
Buy
3/29/2005
USD
150
Buy
1/25/2005
USD
150
Buy
10/24/2005
USD
10
Buy
2/10/2005
USD
40
Buy
2/22/2005
USD
10
Buy
3/29/2005
USD
3
Buy
3/22/2005
USD
3
Buy
11/29/2005
USD
10
Buy
4/1/2005
USD
5
Sell
3/23/2005
USD
5
Sell
11/29/2005
USD
5
Sell
3/23/2005
USD
5
Sell
11/29/2005
USD
5
Buy
3/28/2005
USD
5
Buy
4/27/2005
USD
5
Buy
3/28/2005
USD
5
Buy
11/29/2005
USD
10
Buy
4/5/2005
USD
5
Buy
3/29/2005
USD
5
Buy
11/29/2005
USD
20
Sell
3/29/2005
USD