Management’s Discussion and Analysis Institutional Client Services Our Institutional Client Services segment is comprised of: Fixed Income, Currency and Commodities Client Execution.
Includes client execution activities related to making markets in interest rate products, credit products, mortgages, currencies and commodities.
‰ Interest Rate Products.
Government bonds, money market instruments such as commercial paper, treasury bills, repurchase agreements and other highly liquid securities and instruments, as well as interest rate swaps, options and other derivatives.
‰ Credit Products.
Investment-grade corporate securities, high-yield securities, credit derivatives, bank and bridge loans, municipal securities, emerging market and distressed debt, and trade claims.
‰ Mortgages.
Commercial mortgage-related securities, loans and derivatives, residential mortgage-related securities, loans and derivatives (including U. S.  government agency-issued collateralized mortgage obligations, other prime, subprime and Alt-A securities and loans), and other asset-backed securities, loans and derivatives.
‰ Currencies.
Most currencies, including growth-market currencies.
‰ Commodities.
Crude oil and petroleum products, natural gas, base, precious and other metals, electricity, coal, agricultural and other commodity products.
Equities.
Includes client execution activities related to making markets in equity products and commissions and fees from executing and clearing institutional client transactions on major stock, options and futures exchanges worldwide, as well as OTC transactions.
Equities also includes our securities services business, which provides financing, securities lending and other prime brokerage services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and generates revenues primarily in the form of interest rate spreads or fees.
The table below presents the operating results of our Institutional Client Services segment.
## Table 0 ##
Notes to consolidated financial statements JPMorgan Chase & Co.  102 JPMorgan Chase & Co.  / 2004 Annual Report The following table reflects information about the Firm’s loans held for sale, principally mortgage-related:
## Table 1 ##
(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
All other periods reflect the results of heritage JPMorgan Chase only.
Impaired loans JPMorgan Chase accounts for and discloses nonaccrual loans as impaired loans and recognizes their interest income as discussed previously for nonaccrual loans.
The Firm excludes from impaired loans its small-balance, homogeneous consumer loans; loans carried at fair value or the lower of cost or fair value; debt securities; and leases.
The table below sets forth information about JPMorgan Chase’s impaired loans.
The Firm primarily uses the discounted cash flow method for valuing impaired loans:
## Table 2 ##
(a) Heritage JPMorgan Chase only.
(b) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under SFAS 114.
(c) The allowance for impaired loans under SFAS 114 is included in JPMorgan Chase’s Allowance for loan losses.
Note 12 – Allowance for credit losses JPMorgan Chase’s Allowance for loan losses covers the wholesale (primarily risk-rated) and consumer (primarily scored) loan portfolios and represents management’s estimate of probable credit losses inherent in the Firm’s loan portfolio.
Management also computes an Allowance for wholesale lending-related commitments using a methodology similar to that used for the wholesale loans.
As a result of the Merger, management modified its methodology for determining the Provision for credit losses for the combined Firm.
The effect of conforming methodologies in 2004 was a decrease in the consumer allowance of $254 million and a decrease in the wholesale allowance (including both funded loans and lending-related commitments) of $330 million.
In addition, the Bank One seller’s interest in credit card securitizations was decertificated; this resulted in an increase to the provision for loan losses of approximately $1.4 billion (pre-tax) in 2004.
The Allowance for loan losses consists of two components: asset-specific loss and formula-based loss.
Within the formula-based loss is a statistical calculation and an adjustment to the statistical calculation.
The asset-specific loss component relates to provisions for losses on loans considered impaired and measured pursuant to SFAS 114.
An allowance is established when the discounted cash flows (or collateral value or observable market price) of the loan are lower than the carrying value of that loan.
To compute the asset-specific loss component of the allowance larger impaired loans are evaluated individually, and smaller impaired loans are evaluated as a pool using historical loss experience for the respective class of assets.
The formula-based loss component covers performing wholesale and consumer loans and is the product of a statistical calculation, as well as adjustments to such calculation.
These adjustments take into consideration model imprecision, external factors and economic events that have occurred but are not yet reflected in the factors used to derive the statistical calculation.
The statistical calculation is the product of probability of default and loss given default.
For risk-rated loans (generally loans originated by the wholesale lines of business), these factors are differentiated by risk rating and maturity.
For scored loans (generally loans originated by the consumer lines of business), loss is primarily determined by applying statistical loss factors and other risk indicators to pools of loans by asset type.
Adjustments to the statistical calculation for the risk-rated portfolios are determined by creating estimated ranges using historical experience of both loss given default and probability of default.
Factors related to concentrated and deteriorating industries are also incorporated into the calculation where relevant.
Adjustments to the statistical calculation for the scored loan portfolios are accomplished in part by analyzing the historical loss experience for each major product segment.
The estimated ranges and the determination of the appropriate point within the range are based upon management’s view of uncertainties that relate to current macroeconomic and political conditions, quality of underwriting standards, and other relevant internal and external factors affecting the credit quality of the portfolio.
The Allowance for lending-related commitments represents management’s estimate of probable credit losses inherent in the Firm’s process of extending credit.
Management establishes an asset-specific allowance for lending-related commitments that are considered impaired and computes a formula-based allowance for performing wholesale lending-related commitments.
These are computed using a methodology similar to that used for the wholesale loan portfolio, modified for expected maturities and probabilities of drawdown.
At least quarterly, the allowance for credit losses is reviewed by the Chief Risk Officer and the Deputy Chief Risk Officer of the Firm and is discussed with a risk subgroup of the Operating Committee, relative to the risk profile of the Firm’s credit portfolio and current economic conditions.
As of December 31, 2004, JPMorgan Chase deemed the allowance for credit losses to be appropriate (i. e. , sufficient to absorb losses that are inherent in the portfolio, including those not yet identifiable).
Market risk–average trading and credit portfolio VAR
## Table 3 ##
(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
All other periods reflect the results of heritage JPMorgan Chase only.
(b) The year-to-date average loans held for sale are $6.4 billion, $3.8 billion and $4.3 billion for 2004, 2003 and 2002, respectively.
These amounts are not included in the allowance coverage ratios and net charge-off rates.
The 2002 net charge-offs and net charge-off rate exclude charge-offs of $212 million taken on lending-related commitments.
(c) Adjusted assets equals total average assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities (VIEs) consolidated under FIN 46R; (3) cash and securities segregated and on deposit for regulatory and other purposes; and (4) goodwill and intangibles.
The amount of adjusted assets is presented to assist the reader in comparing the IB’s asset and capital levels to other investment banks in the securities industry.
Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy.
The IB believes an adjusted asset amount, which excludes certain assets considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry.
See Capital management on pages 50–52 of this Annual Report for a discussion of the Firm’s overall capital adequacy and capital management.
(d) Nonperforming loans include loans held for sale of $2 million, $30 million and $16 million as of December 31, 2004, 2003 and 2002, respectively.
These amounts are not included in the allowance coverage ratios.
(e) Nonperforming loans exclude loans held for sale of $351 million, $22 million and $2 million as of December 31, 2004, 2003, and 2002, respectively, that were purchased as part of the IB’s proprietary investing activities.
(f) Includes all mark-to-market trading activities, plus available-for-sale securities held for IB investing purposes.
(g) Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market loan hedges, which are reported in Trading revenue.
This VAR does not include the accrual loan portfolio, which is not marked to market.
NA-Data for 2002 is not available on a comparable basis.
According to Thomson Financial, in 2004, the Firm improved its ranking in U. S.  announced M&A from #8 to #1, and Global announced M&A from #4 to #2, while increasing its market share significantly.
The Firm’s U. S.  initial public offerings ranking improved from #16 to #4, with the Firm moving to #6 from #4 in the U. S.  Equity & Equity-related category.
The Firm maintained its #1 ranking in U. S.  syndicated loans, with a 32% market share, and its #3 position in Global Debt, Equity and Equity-related.
Market shares and rankings(a)
## Table 4 ##
Management’s discussion and analysis JPMorgan Chase & Co.  78 JPMorgan Chase & Co.  / 2004 Annual Report there is little to no subjectivity in determining fair value.
When observable market prices and parameters do not exist, management judgment is necessary to estimate fair value.
The valuation process takes into consideration factors such as liquidity and concentration concerns and, for the derivatives portfolio, counterparty credit risk (see the discussion of CVA on page 63 of this Annual Report).
For example, there is often limited market data to rely on when estimating the fair value of a large or aged position.
Similarly, judgment must be applied in estimating prices for less readily observable external parameters.
Finally, other factors such as model assumptions, market dislocations and unexpected correlations can affect estimates of fair value.
Imprecision in estimating these factors can impact the amount of revenue or loss recorded for a particular position.
Trading and available-for-sale portfolios Substantially all of the Firm’s securities held for trading and investment purposes (“long” positions) and securities that the Firm has sold to other parties but does not own (“short” positions) are valued based on quoted market prices.
However, certain securities are less actively traded and, therefore, are not always able to be valued based on quoted market prices.
The determination of their fair value requires management judgment, as this determination may require benchmarking to similar instruments or analyzing default and recovery rates.
Examples include certain collateralized mortgage and debt obligations and high-yield debt securities.
As few derivative contracts are listed on an exchange, the majority of the Firm’s derivative positions are valued using internally developed models that use as their basis readily observable market parameters – that is, parameters that are actively quoted and can be validated to external sources, including industry-pricing services.
Certain derivatives, however, are valued based on models with significant unobservable market parameters – that is, parameters that may be estimated and are, therefore, subject to management judgment to substantiate the model valuation.
These instruments are normally either less actively traded or trade activity is one-way.
Examples include long-dated interest rate or currency swaps, where swap rates may be unobservable for longer maturities, and certain credit products, where correlation and recovery rates are unobservable.
Due to the lack of observable market data, the Firm defers the initial trading profit for these financial instruments.
The deferred profit is recognized in Trading revenue on a systematic basis and when observable market data becomes available.
Management judgment includes recording fair value adjustments (i. e. , reductions) to model valuations to account for parameter uncertainty when valuing complex or less actively traded derivative transactions.
The following table summarizes the Firm’s trading and available-for-sale portfolios by valuation methodology at December 31, 2004:

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Year Ended December
$ in millions	2014	2013	2012
Fixed Income, Currency and Commodities Client Execution	$ 8,461	$ 8,651	$ 9,914
Equities client execution1	2,079	2,594	3,171
Commissions and fees	3,153	3,103	3,053
Securities services	1,504	1,373	1,986
Total Equities	6,736	7,070	8,210
Total net revenues	15,197	15,721	18,124
Operating expenses	10,880	11,792	12,490
Pre-tax earnings	$ 4,317	$ 3,929	$ 5,634

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Year ended December 31, (in millions)(a)	2004	2003	2002
Net gains on sales of loans held for sale	$368	$933	$754
Lower of cost or market adjustments	39	26	-36

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December 31, (in millions)	2004	2003	(a)
Impaired loans with an allowance	$1,496	$1,597
Impairedloans without anallowance(b)	284	406
Total impaired loans	$1,780	$2,003
Allowance for impaired loans under SFAS 114(c)	$521	$595
Average balance of impaired loans during the year	1,883	2,969
Interest income recognized on impairedloans during the year	8	4

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(in millions, except headcount and ratios)	2004	2003	2002
Revenue by business
Investment banking fees	$3,572	$2,871	$2,707
Fixed income markets	6,314	6,987	5,450
Equities markets	1,491	1,406	1,018
Credit portfolio	1,228	1,420	1,507
Total net revenue	$12,605	$12,684	$10,682
Revenue by region
Americas	$6,870	$7,250	$6,360
Europe/Middle East/Africa	4,082	4,331	3,215
Asia/Pacific	1,653	1,103	1,107
Total net revenue	$12,605	$12,684	$10,682
Selected balance sheet (average)
Total assets	$473,121	$436,488	$429,866
Tradingassets – debt and equity instruments	173,086	156,408	134,191
Tradingassets – derivatives receivables	58,735	83,361	70,831
Loans(b)	42,618	45,037	55,998
Adjusted assets(c)	393,646	370,776	359,324
Equity	17,290	18,350	19,134
Headcount	17,478	14,691	15,012
Credit data and quality statistics
Net charge-offs	$47	$680	$1,627
Nonperforming assets:
Nonperforming loans(d)(e)	954	1,708	3,328
Other nonperforming assets	242	370	408
Allowance for loan losses	1,547	1,055	1,878
Allowance for lending related commitments	305	242	324
Net charge-off rate(b)	0.13%	1.65%	3.15%
Allowance for loan losses to average loans(b)	4.27	2.56	3.64
Allowance for loan losses to nonperforming loans(d)	163	63	57
Nonperforming loans to average loans	2.24	3.79	5.94
Market risk-average trading and credit portfolio VAR
Trading activities:
Fixed income(f)	$74	$61	NA
Foreign exchange	17	17	NA
Equities	28	18	NA
Commodities and other	9	8	NA
Diversification	-43	-39	NA
Total trading VAR	85	65	NA
Credit portfolio VAR(g)	14	18	NA
Diversification	-9	-14	NA
Total trading and credit portfolio VAR	$90	$69	NA

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2004	2003	2002
December 31,	Market Share	Rankings	Market Share	Rankings	Market Share	Rankings
Global debt, equity and equity-related	7%	# 3	8%	# 3	8%	#3
Global syndicated loans	20	# 1	20	# 1	26	#1
Global long-term debt	7	# 2	8	# 2	8	#2
Global equity and equity-related	6	# 6	8	# 4	4	#8
Global announced M&A	26	# 2	16	# 4	14	#5
U.S. debt, equity and equity-related	8	# 5	9	# 3	10	#2
U.S. syndicated loans	32	# 1	35	# 1	39	#1
U.S. long-term debt	12	# 2	10	# 3	13	#2
U.S. equity and equity-related	8	# 6	11	# 4	6	#6
U.S. announced M&A	33	# 1	13	# 8	14	#7

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Question: Does the value of Fixed income markets in 2004 greater than that in 2003?
Answer: No