BOARD OF GOVERNORS

OF" THE

FEDERAL RESERVE SYSTEM

WASHINGTON, O. r:. 20551

ADDRESS OFFICIAL CORRESPONDENCE

TO THE BOARD

June 26, 2008

Kathleen A. Juhase, Esq.

Senior Vice President and

Associate General Counsel

JPMorgan Chase & Co.

277 Park Avenue, 19th Floor

New York, New York 10172

Dear Ms. Juhase:

This is in response to the request by JPMorgan Chase & Co. ("JPMC"),

New York, New York, for an exemption from section 23A ofthe Federal Reserve Act

and the Board's Regulation W for transactions entered into by JPMorgan Chase Bank,

National Association ("JPMC Bank"), Columbus, Ohio, with or relating to Maiden

Lane LLC ("Maiden Lane"). 1

Maiden Lane is a Delaware limited liability company established for the

purpose of holding and liquidating certain assets ofThe Bear Steams Companies, Inc.

("Bear Stearns") that will secure a credit facility to be provided by the Federal

Reserve Bank ofNew York ("FRBNY") to facilitate the acquisition ofBear Steams

by JPMC. Maiden Lane will be capitalized by a $29 billion senior credit facility

provided by the FRBNY and a $1 billion subordinated loan provided by JPMC. The

anticipated closing date for the FRBNY and JPMC facilities is Thursday, June 26,

2008.

Maiden Lane will use most ofthe proceeds ofthese two facilities to purchase

from JPMC a portfolio ofsecurities and other financial assets previously owned by

Bear Steams. Maiden Lane will use the remainder ofthe proceeds ofthe two facilities

to acquire from JPMC the risk positions embedded in a portfolio ofrelated hedge

transactions previously owned by Bear Stearns ("Hedge Positions"). To accomplish

the transfer ofthe Hedge Positions, Maiden Lane will enter into a swap transaction

with JPMC Bank (the "Master Swap") under which JPMC Bank will synthetically

transfer the Hedge Positions to Maiden Lane. To obtain the economics ofthe Hedge

Positions for on-transfer to Maiden Lane, JPMC Bank will in tum enter into swap

1 12 U.S.C. § 371c; 12 CFR part 223.
- 2-

transactions with JPMC ("Bridge Swaps") that will synthetically transfer the Hedge

Positions from JPMC to the bank.

Section 23A and Regulation W limit the aggregate amount of "covered

transactions" between a bank and any single affiliate to 10 percent ofthe bank's

capital stock and surplus, and limit the aggregate amount of covered transactions

between a bank and all its affiliates to 20 percent ofthe bank's capital stock and

surplus.2 "Covered transactions" include the purchase of assets by a bank from an

affiliate, the extension of credit by a bank to an affiliate, the issuance of a guarantee

by a bank on behalf of an affiliate, and certain other transactions? The statute and

regulation also require a bank to secure its extensions of credit to, and guarantees on

behalf of, affiliates with prescribed amounts of collatera1.4

Regulation W provides that a company that owns 25 percent or more ofthe

total equity capital of another company controls the other company, unless the

company presents information to the Board that demonstrates, to the Board's

satisfaction, that the company does not control the other company.5 Because the

JPMC facility represents a substantial first-loss exposure to Maiden Lane, JPMC

could be viewed as owning more than 25 percent ofthe total equity capital ofMaiden

Lane for purposes ofRegulation W. Therefore, Maiden Lane could be viewed as an

affiliate ofJPMC Bank. IfMaiden Lane were viewed as an affiliate ofJPMC Bank,

the Master Swap could be viewed as a covered transaction subject to the quantitative

and qualitative limits ofsection 23A and Regulation W. In addition, regardless ofthe

affiliate status ofMaiden Lane, the Bridge Swaps could be viewed as covered

transactions between JPMC Bank and JPMC.

Section 23A and Regulation W authorize the Board to exempt, at its discretion,

a transaction or relationship from the requirements ofthe statute and the regulation if

the Board finds the exemption to be in the public interest and consistent with the

purposes ofsection 23A.6 JPMC has requested that the Board exempt from

section 23A and Regulation W transactions entered into by JPMC Bank with or

relating to Maiden Lane, including the Master Swap and the Bridge Swaps.

2 12 U.S.C. § 371c(a)(1) and 12 CFR 223.11 and 223.12.

3 12 U.S.C. § 371c(b)(7) and 12 CFR 223.3(h).

4 12 U.S.C. § 371c(c) and 12 CFR223.14.

5 12 CFR 223.3(g)(5).

6 12 U.S.C. § 371c(f)(2) and 12 CFR 223.43.
- 3 -

For the following reasons, the Board has determined to exempt from the statute

and rule the Master Swap, the Bridge Swaps, and any other transactions between

JPMC Bank and either Maiden Lane or JPMC that result in the transfer ofthe Hedge

Positions from JPMC to Maiden Lane. First, the derivative transactions between

Maiden Lane, JPMC Bank, and JPMC will be largely offsetting mirror transactions

that pass risk positions from JPMC to Maiden Lane. JPMC Bank will act solely as an

intermediary between JPMC and Maiden Lane. Although JPMC Bank incurs some

amount of counterparty credit risk in the series of derivative transactions, this risk is

substantially mitigated by the fact that the bank will at all times be fully collateralized

by cash for its mark-to-market exposure to JPMC under the Bridge Swaps.

Second, JPMC will not, directly or indirectly, own any membership interest in

Maiden Lane and will have no voting rights with respect to Maiden Lane. In addition,

no directors or officers ofJPMC will serve as directors, officers, or employees of

Maiden Lane. Moreover, although JPMC has a substantial subordinated exposure to

Maiden Lane, the FRBNY has the predominant economic interest in Maiden Lane.

Granting the exemption also appears to be in the public interest because it will

facilitate the consummation ofthe FRBNY facility.

This determination is specifically conditioned on compliance by JPMC and

JPMC Bank with all the commitments and representations made in connection with

the request. These commitments and representations are deemed to be conditions

imposed in writing by the Board in connection with granting the request and, as such,

may be enforced in proceedings under applicable law. This determination is based on

the specific facts and circumstances ofthe existing and proposed relationships among

JPMC, JPMC Bank, and Maiden Lane. Any material change in those facts and

circumstances or any failure by JPMC or JPMC Bank to observe any ofits

commitments or representations may result in a revocation ofthe exemption.

Sincerely yours,

[!v<.Jd~1/ t~ Robert deY. Frierson

Deputy Secretary ofthe Board

cc: Federal Reserve Bank ofNew York

Office ofthe Comptroller ofthe Currency

Federal Deposit Insurance Corporation