July 1, 2008 

Kathryn V. McCulloch, Esq. 

Senior Vice President and 

 Associate General Counsel 

JPMorgan Chase & Co. 

270 Park Avenue, 40th Floor 

New York, New York 10017 

Dear Ms. McCulloch: 

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

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

and the Board’s Regulation W to allow JPMorgan Chase Bank, National Association 

(“JPMC Bank”), Columbus, Ohio, to purchase from JPMC a portfolio of derivative 

transactions (and associated hedges) that were acquired by JPMC in connection with 

its acquisition of The Bear Stearns Companies, Inc. (“Bear Stearns”), New York, 

New York. 

 On March 16, 2008, JPMC agreed to acquire Bear Stearns and to provide a 

guarantee of a substantial portion of the liabilities of Bear Stearns. To facilitate the 

acquisition by JPMC of Bear Stearns, the Board agreed on that same date to 

authorize the Federal Reserve Bank of New York to extend credit under 

section 13(3) of the Federal Reserve Act in an amount up to $30 billion, secured by 

a pledge of up to $30 billion of assets of Bear Stearns. The Board also agreed on 

that date to provide a limited, temporary exemption from section 23A and 

Regulation W for certain proposed covered transactions between JPMC Bank and 

Bear Stearns (the “March 16 exemption”).1

 

1

 See Board letter to Kathleen A. Juhase, Esq. (JPMC) dated April 1, 2008. The 

Board also concurrently provided JPMC a limited, temporary exemption from the 

Board’s capital adequacy guidelines for bank holding companies with respect to 

the assets and exposures of Bear Stearns to be acquired by JPMC. Id. 

BOARD OF GOVERNORS

OF'THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D. C. 20551

ADDRESS OFFICIAL CORRESPON DENCE

TO THE BOARD
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 Specifically, the Board exempted for a period of 18 months extensions of 

credit by JPMC Bank to an affiliate and guarantees issued by JPMC Bank on 

behalf of an affiliate as long as (i) the transactions are fully collateralized; (ii) the 

transactions are subject to daily mark-to-market and re-margining requirements; 

and (iii) JPMC guarantees the performance of the affiliate on the transactions for 

the benefit of JPMC Bank. The Board limited the exemption to 50 percent of 

JPMC Bank’s capital stock and surplus and required a reduction of the exemption 

amount by one-sixth in each subsequent quarter (until expiration of the exemption 

on October 1, 2009). 

 JPMC acquired 39.5 percent of the outstanding common stock of 

Bear Stearns on April 8, 2008, and Bear Stearns merged with and into JPMC on 

May 30, 2008. JPMC now proposes to have JPMC Bank purchase from JPMC 

a portfolio of derivative transactions (and associated hedges) that JPMC acquired 

in connection with its acquisition of Bear Stearns (the “Portfolio”).2

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

transactions” between a bank and any single affiliate to 10 percent of the bank’s 

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

between a bank and all its affiliates to 20 percent of the bank’s capital stock and 

surplus.3

 “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.4

 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 collateral.5

 JPMC 

 

2

 The Portfolio represents the derivatives transactions of a number of companies 

previously owned by Bear Stearns, including Bear Stearns Forex, Inc. and 

Bear Stearns Credit Products Inc. JPMC also proposes to have JPMC Bank 

purchase from JPMC two mortgage companies previously owned by Bear Stearns: 

Bear Stearns Mortgage Capital Corporation and Bear Stearns Commercial 

Mortgage Inc. These two companies are engaged in a variety of residential and 

commercial mortgage financing activities. The bank’s acquisition of these 

companies was approved by the OCC on June 30, 2008, and appears to qualify for 

the step-transaction exemption in Regulation W. 12 CFR 223.31(d). 

3

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

4

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

5

 12 U.S.C. § 371c(c) and 12 CFR 223.14. 
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Bank’s purchase of the Portfolio from JPMC would be a covered transaction under 

section 23A and Regulation W.6

 

 The amount of the covered transaction – approximately $44 billion – would 

exceed JPMC Bank’s quantitative limits under the statute and rule. In addition, the 

covered transaction would not qualify for the March 16 exemption because the 

form of the transaction is an asset purchase by the bank, whereas the March 16 

exemption only applies to extensions of credit and guarantees by the bank. 

Accordingly, the bank has requested an exemption from section 23A and 

Regulation W to permit it to acquire the Portfolio from JPMC. Section 23A and 

Regulation W specifically authorize the Board to exempt transactions or 

relationships from the requirements of the statute and rule if the Board finds such 

an exemption to be in the public interest and consistent with the purposes of 

section 23A.7

 The Board previously has indicated that the purposes of section 23A 

are (i) to protect against a depository institution suffering losses in transactions 

with affiliates and (ii) to limit the ability of a depository institution to transfer to its 

affiliates the subsidy arising from the institution’s access to the Federal safety net.8

 The Board routinely has approved exemptions under section 23A for 

one-time asset transfers that are part of a corporate reorganization and that are 

structured to ensure the quality of the transferred assets.9

 The Board also has 

routinely approved exemptions under section 23A to facilitate the integration of 

recently merged companies.10 The proposed transaction in this case is a byproduct 

of a one-time corporate reorganization and would facilitate the integration of 

recently merged companies. 

 JPMC has indicated that granting the requested exemption would provide 

substantial benefits to JPMC, JPMC Bank, and the public. Currently, JPMC 

 

6

 See 12 CFR 223.3(h)(3). 

7

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

8

 67 Federal Register 76560 (Dec. 12, 2002). 

9

 See, e.g., Board letter to Carl Howard, Esq. (Citigroup) dated June 30, 2006; 

Travelers Group Inc. and Citicorp, 84 Federal Reserve Bulletin 985, 1013-14 

(1998). 

10 See Board letter to Troland S. Link, Esq. (Deutsche Bank AG) dated May 28, 

1999; Board letter to Ronald C. Mayer, Esq. (The Chase Manhattan Bank) dated 

August 18, 2000. 
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principally operates its derivatives business in JPMC Bank, and transfer of the 

Portfolio to the bank would expand the bank’s base of derivatives counterparties, 

enhance the bank’s relationship with existing derivatives counterparties, and 

correspondingly increase the bank’s revenues. In addition, the transfer of 

derivatives transactions with overlapping clients gives JPMC and the bank the 

potential to reduce their credit exposures and collateral-posting requirements 

through netting of offsetting mark-to-market values. Moreover, consolidating the 

Portfolio with the derivatives transactions already at JPMC Bank should reduce the 

operational risk and increase the systems efficiency of JPMC and the bank. 

Beyond the benefits to JPMC and the bank, the expanded scope for netting 

agreements should result in increased overall liquidity in the financial markets. 

The proposed transaction will reduce the credit exposure of JPMC and the bank to 

major financial institution counterparties and the credit exposure of major financial 

institutions to JPMC. 

 JPMC has made a number of commitments designed to help ensure that the 

proposed transaction would not harm JPMC Bank. First, JPMC has represented 

that JPMC Bank’s acquisition of the Portfolio would not result in the bank 

purchasing any low-quality assets (as defined in Regulation W). In addition, 

JPMC has committed that if JPMC Bank downgrades a Portfolio derivatives 

counterparty to a [ ] in the bank’s internal credit rating system at any 

time between the date of the proposed transfer until June 30, 2013, JPMC will 

promptly after the end of the quarter pay JPMC Bank an amount equal to any 

change in the credit valuation adjustment (“CVA”) of the counterparty from 

June 30, 2008, to the time of the downgrade, multiplied by the allocation 

percentage (defined below).11 Moreover, JPMC has committed that, if a Portfolio 

derivatives counterparty defaults at any time between the date of the proposed 

transfer and June 30, 2013, JPMC will promptly pay JPMC Bank an amount equal 

to the then replacement cost of the bank’s derivative transactions with the 

counterparty (net of proceeds from any liquidation of collateral) multiplied by the 

allocation percentage. In calculating JPMC’s payment obligation to the bank on 

counterparty default, JPMC may net any previous payment made by JPMC to the 

bank as a result of an internal-rating downgrade of the counterparty. For purposes 

of these commitments, the allocation percentage would equal (i) 100 percent, for 

any Portfolio derivatives counterparty that is not a derivatives counterparty of 

JPMC Bank; or (ii) for any other Portfolio derivatives counterparty, the ratio of the 

 

11 [ ]. 
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counterparty’s CVA in the Portfolio on June 30, 2008, to the counterparty’s 

combined Portfolio/JPMC Bank CVA on June 30, 2008. 

 JPMC also has committed that the proposed transaction will not have an 

adverse impact on the regulatory capital position of JPMC Bank as of June 30, 

2008. Specifically, JPMC has stated that it would make a cash capital infusion into 

JPMC Bank on July 1, 2008, in an amount equal to the estimated amount of 

additional regulatory capital that would be required to ensure that each of the 

bank’s regulatory capital ratios as of June 30, 2008 – its tier 1 risk-based capital 

ratio, total risk-based capital ratio, and tier 1 leverage capital ratio – does not 

decline as a result of the proposed transaction (regardless of any regulatory capital 

relief provided to the bank by the OCC) (the “Estimated Payment”).12 JPMC also 

will compute the actual regulatory capital impact of the proposed transfer during 

the calendar quarter in which the transfer occurs. To the extent that the actual 

regulatory capital impact exceeds the Estimated Payment, JPMC promptly will pay 

the bank the difference. To the extent that the Estimated Payment exceeds the 

actual regulatory capital impact, the bank will pay JPMC the difference (but will in 

no circumstance be obligated to pay back to JPMC more than the Estimated 

Payment). 

 The purchase of the Portfolio by JPMC Bank from JPMC would be subject 

to the market-terms requirement of section 23B of the Federal Reserve Act. 

Section 23B requires that the proposed transaction be on terms that are 

substantially the same, or at least as favorable to JPMC Bank, as those prevailing 

at the time for comparable transactions with unaffiliated companies.13

 In light of these considerations, the Board has determined that providing an 

exemption from section 23A and Regulation W for the proposed transaction would 

be consistent with the purposes of the statute and in the public interest. 

Accordingly, the Board hereby grants the requested exemption. 

 

12 JPMC Bank requested that the OCC allow the bank, on a temporary basis, to 

exclude (i) from its total on-balance-sheet assets (the denominator of its tier 1 

leverage capital ratio) certain Bear Stearns-related assets the bank might acquire 

from JPMC; and (ii) from its total risk-weighted assets (the denominator of its 

tier 1 and total risk-based capital ratios) certain risk-weighted assets generated by 

Bear Stearns–related exposures the bank might acquire from JPMC. The OCC 

granted this request on June 30, 2008. 

13 See 12 U.S.C. § 371c-1(a)(1). 
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 The Board granted the March 16 exemption to JPMC Bank to permit it to 

finance the operations of Bear Stearns temporarily and in limited amounts. The 

amount of the March 16 exemption is 50 percent of the bank’s capital stock and 

surplus for the second quarter of 2008 (approximately $58 billion) and falls to 

approximately 42 percent of the bank’s capital for the third quarter of 2008 

(approximately $48 billion). The Board granted the March 16 exemption subject 

to the understanding that it would be revoked to the extent that JPMC transferred 

Bear Stearns businesses to third parties or to JPMC Bank. The combined covered 

transaction amount of the proposed Portfolio transfer and certain other imminent 

transfers of Bear Stearns positions to JPMC Bank equals approximately $46 billion 

and substantially accomplishes the purpose of the original exemption. In light of 

the exemption granted for this transaction, the Board has determined to reduce the 

March 16 exemption in connection with granting this exemption request to 

$5 billion as of July 1, 2008, and revoke the March 16 exemption in full as of 

October 1, 2008. 

 These determinations are 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. These 

determinations are based on the specific facts and circumstances of the proposed 

transaction. Any material change in those facts and circumstances or any failure 

by JPMC or JPMC Bank to observe any of its commitments or representations may 

result in a revocation of the exemption. 

Sincerely yours, 

(signed) 

 Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Federal Reserve Bank of New York 

 Office of the Comptroller of the Currency 

 Federal Deposit Insurance Corporation