BOARD OF GOVERNORS

OF TH e:

FEDERAL RESERVE SYSTEM

WASHINGTON, O. L 2055!.

ADDRESS OFFICIAL CORRESPONDENCE

TO THE BOARD

April 1, 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 (i) an exemption from section 23A ofthe Federal Reserve

"Act and the Board's Regulation WI that would permit JPMorgan Chase Bank,

National Association ("JPMC Bank"), Columbus, Ohio, to extend credit to affiliates

and issue guarantees on behalf of affiliates, in connection with the acquisition by

JPMC ofThe Bear Steams Companies, Inc. ("Bear Steams"), New York, New York;

and (ii) relieffrom the Board's risk-based and leverage capital guidelines for bank

holding companies2 in connection with the acquisition by JPMC ofBear Stearns. On

March 16, 2008, JPMC entered into an agreement to acquire Bear Stearns.

Exemption from Section 23A and Regulation W

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 with

all affiliates to 20 percent ofthe bank's capital stock and surplus.3 "Covered

transactions" include, among other things, the extension of credit by a bank to an

affiliate and the issuance by a bank of a guarantee on behalf of an affiliate.4 In

I 12 U.S.C. § 371c; 12 CFRpart 223.

2 12 CFR part 225, Appendices A and 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 CFR223.3(h).
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addition, the statute and rule require a bank to secure its extensions of credit to, and

guarantees on behalfof, affiliates with prescribed amounts of collateral.5

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 exemftion to be in the public interest and consistent with the

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

section 23A and Regulation W, for a period of 18 months, certain covered

transactions between JPMC Bank and its affiliates, up to an aggregate of 50 percent of

the bank's capital stock and surplus, to facilitate the acquisition by JPMC ofBear

Steams.

The Board previously has granted other companies exemptions from

section 23A and Regulation W that are similar to the exemption requested by JPMC.

The Board has provided temporary exemptions to facilitate the orderly integration of

merged companies,7 has provided exemptions to facilitate internal reorganization

transactions,8 and has provided exemptions for banks that engage in securities

financing transactions with their affiliates.9

The Board has determined to impose several conditions that would help protect

JPMC Bank in connection with the exemption request:

• The exemption would apply only to extensions of credit by JPMC Bank to an

affiliate and guarantees issued by JPMC Bank on behalf of an affiliate that

(i) are fully collateralized; and (ii) are subject to daily mark-to-market and remargining requirements.

5 12 U.S.C. § 371c(c) and 12 CFR 223.14.

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

7 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.

8 See,~, Board letter to Carl Howard, Esq. (Citigroup) dated June 30, 2006.

9 See, Board letter to Carl Howard, Esq. (Citigroup) dated August 20,2007;

Board letter to Courtney D. Allison, Esq. (Wachovia Corporation) dated June 12,

2007; Board letter to John H. Huffstutler, Esq. (Bank ofAmerica Corporation) dated

June 7, 2005.
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• JPMC must guarantee the performance ofthe affiliate for the benefit ofJPMC

Bank in connection with any exempt extension of credit or guarantee by JPMC

Bank.

• In the second quarter of 2008, the exemption would be limited in the aggregate

to 50 percent ofJPMC Bank's capital stock and surplus. The amount ofthe

exemption would then be reduced by one-sixth (that is, 8.33 percent ofthe

bank's capital stock and surplus) in each subsequent quarter until the

exemption expires after six quarters. For example, in the third quarter of2008,

the exemption would be limited in the aggregate to 41.67 percent ofthe bank's

capital stock and surplus.

• The exemption would expire on October 1,2009.

In addition, JPMC Bank would continue to be subject to the market-terms

requirement ofsection 23B ofthe Federal Reserve Act with respect to its transactions

with Bear Stearns. Section 23B requires that financial transactions between a bank

and an affiliate be on terms that are substantially the same, or at least as favorable to

the bank, as those that the bank would in good faith offer to nonaffiliates. 1O

Granting the requested exemption would have substantial public benefits. The

exemption would assist JPMC in ensuring the funding liquidity ofBear Steams and

would facilitate the orderly integration ofBear Steams with and into JPMC after the

acquisition. In light ofthese considerations, the proposed extensions of credit and

guarantees by JPMC Bank appear to be consistent with the purposes ofsection 23A

and in the public interest. Accordingly, the Board hereby grants the requested

exemption, subject to the conditions and limits discussed above.

Regulatory Capital Relief

JPMC also has requested that the Board provide JPMC with relieffrom the

Board's risk-based and leverage capital guidelines for bank holding companies.

Specifically, JPMC has requested that the Board permit JPMC, for a period of

18 months, to exclude from its total risk-weighted assets (the denominator ofthe riskbased capital ratios) any risk-weighted assets associated with the assets and other

exposures ofBear Stearns, for purposes of applying the risk-based capital guidelines

to the bank holding company. In addition, JPMC has asked the Board to permit

10 See 12 U.S.C. § 371c-l(a)(1); 12 CFR223.51.
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JPMC, for a period of 18 months, to exclude from the denominator ofits tier 1

leverage capital ratio any balance-sheet assets ofBear Stearns acquired by JPMC, for

purposes of applying the leverage capital guidelines to the bank holding company.

The Board has authority to provide exemptions from its risk-based and leverage

capital guidelines for bank holding companies. I I

JPMC has agreed to several conditions that would limit the scope ofthe relief

request. First, JPMC proposes to exclude from its risk-weighted assets, for purposes

of applying the Board's risk-based capital guidelines for bank holding companies, the

risk-weighted assets ofBear Steams existing on the date of acquisition ofBear

Stearns by JPMC, up to a total amount not to exceed $220 billion. The amount ofthe

exemption will be reduced by one-sixth in each subsequent quarter. In addition to this

scheduled straight-line amortization ofthe exemption amount, the amount ofthe

exemption also will be reduced in the event that JPMC sells or otherwise transfers to

third parties any ofthe specified Bear Steams subsidiaries identified on the attached

Schedule. The amount ofthe reduction in such event would be the amount ofriskweighted assets in such subsidiary at the time oftransfer. This exemption would

expire on October 1, 2009.

Second, JPMC proposes to exclude from the denominator ofits tier 1 leverage

capital ratio, for purposes of applying the Board's tier 1 leverage capital guidelines for

bank holding companies, the assets ofBear Steams existing on the date of acquisition

ofBear Steams by JPMC, up to an amount not to exceed $400 billion. As with the

risk-based capital exemption, the amount ofthe leverage exemption will be reduced

by one-sixth in each subsequent quarter. In addition to this scheduled straight-line

amortization ofthe exemption amount, the amount ofthe exemption also will be

reduced in the event that JPMC sells or otherwise transfers to third parties any ofthe

specified Bear Steams subsidiaries identified on the attached Schedule. The amount

ofthe reduction in such event would be the amount of assets in such subsidiary at the

time oftransfer. This exemption also would expire on October 1, 2009.

These regulatory capital exemptions would assist JPMC in acquiring and

stabilizing Bear Stearns and would facilitate the orderly integration ofBear Steams

with and into JPMC. The Board notes that (i) JPMC would be well capitalized (as

defined in section 225.2 ofthe Board's Regulation yI2) upon consummation ofthe

acquisition ofBear Stearns, even without the regulatory capital relief provided by the

exemptions; and (ii) JPMC has committed to remain well capitalized (as defined in

II See 12 CFR part 225, App. A, § ITLA; 12 CFR part 225, App. D, § IT.b.

12 12 CFR 225.2(r).
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section 225.2 ofthe Regulation Y) during the term ofthe exemptions, even without

the regulatory capital relief provided by the exemptions.

In light ofthese considerations, the Board hereby grants the requested

regulatory capital relief, subject to the conditions and limits discussed above.

These determinations are specifically conditioned on compliance by JPMC and

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

the exemption requests. These commitments and representations are deemed to be

conditions imposed in writing by the Board in connection with granting the requests

and, as such, may be enforced in proceedings under applicable law. These

determinations are based on the specific facts and circumstances ofthe existing and

proposed relationships among JPMC, JPMC Bank, and Bear Steams. 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 different

determination or in revocation ofthe exemptions.

Sincerely yours, ...

Robert deY. Frierson

Deputy Secretary ofthe Board

Attachment

cc: Federal Reserve Bank ofNew York

Office ofthe Comptroller ofthe Currency

Federal Deposit Insurance Corporation
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SCHEDULE

Principal Subsidiaries ofBear Steams

• Bear Steams Asset Management Inc.

• Bear Steams Securities Corp.

• Bear Steams & Co. Inc.

• Texas Investment Holding Inc.

• Any other subsidiary ofBear Steams that represented more than 10 percent

ofthe total assets ofBear Steams on the date of acquisition ofBear Steams

by JPMC