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JPMorgan Asset Management Global Liquidity
 

JPMorgan Asset Management Global Liquidity

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  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us
  • Is Your Money Market Fund Safe? Examining The Crisis in Cash June 10, 2008 © 2008 Crane Data LLC. All rights reserved. http://www.cranedata.com
  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us
  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us
  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us
  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us
  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us
  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us
  • Money Fund Intelligence Cash Outlook & Issues ‘07 October 24, 2007 © 2006 Crane Data LLC. All rights reserved. http://www.cranedata.us

JPMorgan Asset Management Global Liquidity JPMorgan Asset Management Global Liquidity Presentation Transcript

  • 2008 School of Government Finance Thursday, November 19, 2008 Topic: Analyzing Money Market Mutual Funds Speaker: Richard Daniels JPMorgan Asset Management 212-648-2543 Private/Confidential-Institutional Use Only FGFOA
  • A Challenging Environment
  • Challenging Environment UBS freezes high-profile hedge fund. (The Guardian 5-4-07) Countrywide the number 1 U.S. mortgage lender, announces it is facing “unprecedented” disruptions. WaMu the 3rd largest lender annouces similar uncertainty (L.A.Times, 8/10/07) First extensions in mortgage SLN programs.(Business Wire, Aug 8, 2007) Countrywide announces it is facing “unprecedented” disruptions. (Bloomberg.com 8/10/07) Northern Rock requests and receives emergency funding from Bank of England. (Bloomberg 10-14-07) July 2007 Despite the $1.6bn Bear Stearns pumps into two sub-prime mortgage heavy hedge funds in June, the funds virtually collapses and freezes assets in July (Reuters, 6-23-08, WSJ 3/17/08)) Aug. 9, 2007 ECB and the Fed step in to provide liquidity with an infusion of EUR 95 bn and USD 24 bn. BNP Paribas halts withdrawals from three ABS funds. (Bloomberg, Aug 9) Dutch bank NIBC announces losses of 137m EUR (News.BBC.uk 8.9.07) Aug. 21-24, 2007 “ SIV-lite” downgrades enforcement. (Reuters UK, 8/24//2007) Nov. 2007 Year-end pressure: ABCP spreads and LIBOR continue to ratchet up to record levels as bank/broker losses, money market fund bailouts and SIV downgrades continue to weaken investor demand. May 2007 Aug. 4-6, 2007 Aug. 10, 2007 Sept. 14, 2007 US New Century Financial files for bankruptcy due to overexposure to sub-prime mortgages (Reuters, 4/2/07) April 2 2007 Goldman Lehman Brothers and Merrill Lynch, inform investors the market for auction rate securities is frozen. Within one week almost 1,000 of these auctions fail. (NYT 2/15/08) February 2008
  • The Fed Reacts The Fed cuts rates to the lowest point in 4 years (NYTimes, 4/30/08) The FDIC takes over IndyMac, considered to be the 2nd largest bank failure in US history (Bloomberg.com 7/11/08) The President Bush signs housing bill that will allow borrowers to refinance into government-backed loans. (ABCnews.com) The Fed adds a 3-month extension to the emergency borrowing program for Wall Street. (Federal Reserve Press Release 7/30/08) July 9, 2008 April 30, 2008 July 30, 2008 March 16, 2008 The Fed orchestrates an emergency bailout of Bear Stearns, reaching out to JPMorgan in a coordinated effort to rescue the at-risk firm. (WSJ, 3/17/08) The Fed auctions another $25 billion on 84-day credit through TAF ((Federal Reserve Press Release 8/11/07) August 11, 2008 June 16, 2008 The Fed auctions another $75 billion to provide liquidity to cash strapped banks. The auction is the 14 th since the start of the initiative (Federal Reserve Press Release 6/17/08) March 11, 2008 The Fed leads coordinated liquidity measure. The Fed's TAFs increased to 2x 50b. New 28-day $ TSLF (Federal Reserve Press Release 3/11/08 ECB reintroduces $TAFs. BOE will extends £10 lending for three months. (ECB Press release 3/11/08; Guardian.uk.co 3/11/08) Dec. 12, 2007 The Fed announces the Term Auction Facility to provide liquidity to the short-term markets. (Federal Reserve Press Release 12/12/07 Standard & Poor's Ratings Services has lowered its ratings on 799 U.S. asset-backed securities as a result of recent rating actions on monoline insurers
  • September 7, 2008 September 14, 2008 September 15, 2008 September 16-17, 2008 September 18, 2008 September 19, 2008 Fannie Mae and Freddie Mac placed into conservatorship by US Government (cnn,com) Merrill Lynch agrees to be sold to Bank of America in an all stock deal for $29 a share (Bloomberg.com 9/15) Lehman Brothers files for protection under Chapter 11 of the U.S. Bankruptcy Code after losing 94% of its market value this year (Bloomberg, 9/17/08) U.S. government seizes control of AIG (Bloomberg.com 9/16) Reserve Primary Fund breaks the buck. (Bloomberg.com 9/17) Lloyds TSB Group agrees to acquire HBOS. (CNN.com 9/17/08) Putnam Investments LLC closes its institutional Prime Money Market Fund (Bloomberg.com 9/17) Goldman Sachs shares fall 26% and Morgan Stanley plunges 44% on NYSE (Reuters 9/17/08) Plans to rescue Scotland's HBOS by merger with UK bank Lloyds TSB. (CNN 9/17/08) The Fed in conjunction with other central banks quadruples the amount of dollars available to banks to $247bn (International Herald Tribune 9/18/08) U.S. Treasury to insure Money-Market Fund holdings. (US Treasury Press Release 9/19/08) The Fed announces that Goldman Sachs and Morgan Stanley to become bank holding companies, marking the end of an era (NYT 9/21/08) Two weeks that changed the world September 21, 2008
  • September 24-28, 2008 September 29, 2008 September 22-23, 2008 Black Monday October 10, 2008 October 5, 2008 October 3, 2008 October 8-9, 2008 Citigroup working with the FDIC strike an agreement to acquire the majority of Wachovia The U.S Congress fails to pass “Bail Out Plan”; global markets decline. (WSJ online 10/4) UK lender, Bradford & Bingley PLC is nationalized US Regulators seize Washington Mutual, and sold to JPMorgan.The WaMu collapse represents the largest bank failure in U.S. history Belgium's largest financial services firm, $16.3 bn bailout of Fortis by Belgian, Dutch and Luxembourg governments. (CNN) Nomura of Japan acquires Lehman’s Asian Pacific and some European and Middle Eastern operations (AP 9/23) Warren Buffet invests $5 billion into Goldman Sachs (Bloomberg.com 9/23) U.S. stock markets suffer record fall for the week with the DJIA capping worst week in its 112-yr history Global markets see record dips and confidence continues to wane. (WSJ 10/10) After meeting in Washington the G7 finance ministers announce they will take “ decisive action” (BBC News 10/10) Germany works to bail out Hypo Real Estate (WSJ 10/6) Germany guarantees all consumer bank deposits (WSJ 10/6) 10/2 Wells Fargo offers to buy Wachovia for $15.4 bn, overriding the Citigroup deal (WSJ Online 10/4) 10/3 The US Senate passes the revised bailout plan the bail out plan enacted. (WSJ Online 10/4) JPMorgan proceeds to participate in U.S Treasury’s Temporary Guarantee Program protecting shareholders against losses on 2a-7 funds until 12/18/08 (JPMAM 10/3/08) The Fed, ECB, Bank of England, Bank of Canada and Sweden's each reduced benchmark rates by half a percentage point. (WSJ 10-8-08) Iceland halts trading. Takes over, the last of its 3 largest banks, Landbaskil, to avoid a “national bankruptcy” (Reuters) Markets Unsettled
  • October 14-15, 2008 October 16-17, 2008 October 12-13, 2008 October 22, 2008 October 20, 2008 Britain makes £ 37 bn ($64 USD) available to RBOS, HBOS and Lloyds TSB. (Reuters.com) Iceland’s stock market plunges 76% as it resumes trading. Talks continue with Russia to secure an emergency loan. (CNN) The U.S. infuses $250 bn to nine top U.S. banks (Reuters.com) Southeast Asian markets backed by japan, South Korea, China and the World bank agree to create a multibillion fund to help banks. (Reuters.com) The Fed offers working with major financial institutions offers a plan to make available up to $540 bn of debt financing to the money market fund industry by creating 5 special purpose vehicles to be managed by JPMorgan. (WSJ 10-22) The head of the UK bank warns of impending recession (WSJ 10-22) UK continues ban on short selling of financial institutions. The U.S. had let a similar ban expire (WSJ 10-22) Continued Global Response European leaders meet in in Paris (Reuters.com) Britain makes £ 37 bn ($64 USD) available to their RBOS, HBOS and Lloyds TSB. (Reuters.com) The Netherlands agreed to inject €10 billion ($13.4 billion) into ING Groep NV, the banking and insurance giant that was looked as the bailout out of Fortis NV. Germany expected to work out a €500 billion rescue package. South Korea announced a $100 billion government guarantee on foreign-currency loans and a $30 billion infusion into the Korean banking system (WSJ 10/20) EU leaders summit held in Brussels. (CNN) ECB extends an emergency $6.5 bn loan to Hungary (WSJ 10/17/08)
    • Impact of Liquidity Crisis on Corporate Clients
    • With recent market events and the “flight to quality,” corporations are moving to less risky investments such as money market funds.
    • Corporations are establishing procedures on how to handle credit downgrades and revising investment policies.
    • With the expertise required to self direct investments, corporations are now looking to outsource asset management.
    • There is focus from audit firms to understand corporate cash investments and the liquidity, pricing and credit exposure of the associated investment vehicles.
    Short-Term Investment Trends
  • Growth in 2a-7 Money Market Funds Past performance is not necessarily a guide to future returns. The above chart is for illustrative purposes only. Flight to Quality Since July 2007 AAA-rated international liquidity fund assets are up 21 % to $610 Billion* ^iMoneyNet as of Sept. 30, 2008 *iMoneyNet Offshore as of Sept. 30, 2008, historical FX rates applied Since July 2007 US institutional money-market fund assets are up 44% to $2.032 Trillion^
  • Changes in Corporate Governance Investment policy revisions
      • Ensure that procedures are in place for when a security falls out of compliance
        • Notification to senior management
        • Approval needed if “hold” strategy pursued
        • Approval needed if security is to be sold
        • Process to monitor and track the security going forward
      • Implement concentration limits per security type not just by credit quality
      • Allow for addendums to be put in place to tailor investment policy to reflect current market environment
      • Clearly define security type and ensure senior management understands definitions of duration, reset dates, liquidity expectations, etc.
      • Consider adding into investment policy preference for taking interest rate duration versus spread duration
    Due diligence on investment providers
      • Make sure investment providers are sharing detailed, timely and transparent information on all funds and underlying assets for individual securities
      • Establish a process to gather information from all providers on a regular basis
    Integrated investment oversight
      • Understand investment practices of all subsidiaries worldwide
      • Move towards consolidated investment reporting on all holdings
  • The Role of Money Market Funds
  • What is a Money Market or Liquidity Fund?
    • Features and benefits of a money market fund:
    • Yields competitive with direct investments
    • Ability to meet liquidity needs
    • Convenient purchase and redemption cut-off times for same-day transactions
    • Ease of transaction processing and record-keeping
    • Substantial diversification
    • Strict federal regulatory requirements (Rule 2a-7 – US only)
    Money Market and Liquidity funds invest in short-term debt instruments with remaining maturities of 13 months or less. Safety of principal is a primary objective for a money market fund.* *An investment in a money market fund is not insured by the FDIC or any other government agency. Although money market funds strive to preserve the value of the investment at $1.00 per share, it is possible to lose money by investing in a money market fund.
  • Rule 2a-7
    • Objective
      • Parameters to ensure a stable $1 NAV
    • The rule
      • Maximum WAM (weighted average maturity) of 90 days, 397 day maximum per security
      • Maximum of 5% invested in any one issuer, 25% per industry
      • Maximum of 1% per A2/P2 name, 5% of total basket
      • Credit documentation procedures - ongoing credit analysis
    US Money Market Funds are managed according to Rule 2a-7 of the U.S. Investment Company Act of 1940
  • Comparison Between Bank Deposits and JPMAM Money Market Funds The above chart is for illustrative purposes only.
    • Stable or accumulating NAV
    • Paid daily
    • Interest
    • Funds rated AAA
    • Credit diversification and reduced volatility through broad portfolio mix
    • No settlement/execution risk (use of the “Global Cash Portal” with access to transactions history)
    • Off balance sheet
    • Concentrated credit exposure
    • Diversification achieved only by placing deposits with a given number of banks
    • Greater execution risk and IR risk
    • Liquidity risk may mean selling at a loss
    • Risks
    • Daily Access
    • Daily access available only with 1-day deposit
    • Liquidity
    • Economies of scale control cost and enhanced yield potential through larger asset pool
    • In standard market conditions (i.e., when yield curve is not flat), fund manager can invest in underlying with longer duration to increase portfolio’s yield
    • Limited yield potential
    • Yield
    • No need to reinvest. Active management based on credit and macro research
    • No subscription or redemption fees, published management fee
    • Daily management through reinvestment incurring costs and treasury resources
    • Custody expenses, settlement issues
    • Rolling and breakage costs
    Operational and Costs
    • JPMAM Money Market Funds
    • Bank Deposits
  • Definition What is a Yield? Definition: The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.
  • Yield Reporting Fund complexes typically report three types of yields using three different increments of time. Below are brief descriptions of each and an explanation of their usage. 1, 7, and 30 days are the most commonly used increments of time. (X) Day Average Yield: This is an annualized yield illustrating the average income and capital gains earned by one share of the fund over (x) number of days. In other words, it is the average daily income that a client accrues while owning a share of the fund. This type of yield takes into consideration all income and capital gains. This figure does not account of the effect of compounded dividend reinvestment. (X) Day Effective Yield: This is an annualized yield illustrating the average income and capital gains earned by one share of the fund over (x) number of days and considers the effect of compounded dividend reinvestment. 7 Day SEC Yield: Same as (x) day average except does not take into account capital gains/losses, or unrealized appreciation/depreciation and does not consider the compounding effects of dividend reinvestment
  • Yield Calculations Distribution Factor (Calculated Daily)= Daily Income of Portfolio/ Total outstanding shares = Daily Income per Share Yield (Calculated Daily) = Distribution Factor * 365 * 100 Accrued Dividend (Calculated Daily) = Distribution Factor * End of day balance = Daily income earned
  • Calculation - Example Example Client invests in Prime MMF Institutional Share Class Daily Balance = $100 million 01/02/07: Distribution Factor = 0.000131352 0.000131352 * $100,000,000 = $13,135.20 daily income Average yield on annualized basis = Average income earned over 1 year period 0.000131352* 365 * 100 = 4.79% = Annualized 1 day yield Proof $100,000,000 * (1.00 + .0479) = $104,790,000 (Approximately $4,790,000 income for year) $13,135.20 * 365 = $4,790,000 (Approximately $4,790,000 income for year)
  • Weighted Average Maturity WAM = Weighted-average maturity of the underlying securities in a given portfolio. Or, weighted-average time to the return of a dollar of principal. Money market funds must invest in securities that are considered "short-term." In general, money market funds cannot acquire an underlying security with a remaining maturity of greater than 397 days. In addition, a money market fund's weighted average maturity (WAM)-an average of the maturities of all securities held in the portfolio, weighted by each security's percentage of net assets-must not exceed 90 days. WAM is calculated nightly by Fund Accounting. It is calculated by taking the value of each underlying security, dividing it by the total value of the portfolio, which finds the weight. This number, the weight, is then multiplied by the amount of time on that security.
  • The Role of the Credit Process
  • Rating Agencies Guidelines for AAA-rated Funds * WAM = Weighted Average Maturity 1 S&P does not formally propose any diversification guidelines for overnight repo with any single A-1+ counterparty 2 Illiquid securities include Repos and Depos >7 days
    • Percentage Limit – Max 10%
    • A-1+ Min 50
    • A-1 Max 50%
    • Issuer Diversification – Max 5%
    • Issuer Concentration – Tier II is not eligible for AAAm ratings
    • A-1+ or A-1
    • (A-1 maturing in 7days counted toward A-1+)
    • Fixed 397 days
    • FRN/VRN - U.S. Registered 1 year - Govt Issues 2 years
    • 60 days
    • Standard & Poor’s AAA Rating
    Repo (lend cash)
    • Percentage Limit – Max 10%
    • Percentage Limit – Max 10%
    Illiquid Securities 2
    • Tier I – Min 100%
    • Tier II - Max 0%
    • A-1+, A-1, P1+, P1 – Minimum 95%
    • A-2 – Max 5%
    • Issuer Diversification – Max 5%
    • Issuer Concentration – Max 1% on A-2
    • Diversification/ Concentration
    • Tier I
    • - F1+ or F1 (short term)
    • - A or higher (long term)
    • A2/P1 and above
    • (P1 without long term rating is comparable to A2/P1)
    • Min Credit Rating
    • Fixed 397 days
    • FRN/VRN –
    • Non Govt Issues 2 years
    • Govt Issues 5 years
    • Fixed 397 days
    • Max Maturity
    • 60 days
    • 60 days
    Max WAM* Fitch’s AAA
    • Moody’s Aaa Rating
    • Guideline
    N/A 10% 10% P-2 10% 10% 30% P-1 7+Days 2-7Days O/N 10% 10% 25% A-1 10% 25% 40% 1 A-1+ 7+Days 2-7Days O/N 0% 0% 0% Tier II 10% 35% 35% Tier I 7+Days 2-7Days O/N
  • Global Liquidity Credit Process
    • Credits that meet the quantitative tests
    • Risk Management:
    • Establishes internal rating system and outlines investment parameters
    • Monitors internal ratings, account concentrations and maturities
    • Approved credits
    • Assigned internal rating
    • Follow up with continuous monitoring
    • Periodic reporting
    • Portfolio manager receives quick communication of any changes
    • Credits that meet the qualitative tests
    • Credit Research:
    • Evaluates issuer’s ability to avoid credit problems and event risks
    • Reviews operating trends, cash flows, industry or product dominance and relative performance, compared with a peer group
    • Reviews issuer’s underlying collateral and the originator’s or administrator’s ability to control and maintain the quality of that collateral
    • EXECUTIVE OVERSIGHT
    • Research and portfolio management:
    • Discuss market environment and portfolio holdings frequently
    • Global Liquidity Investment Policy Committee evaluates credit issues and portfolios at monthly formal planning and policy meeting
    • Funds and key topics are reviewed quarterly with the board of directors and money market subcommittee, comprised of highly experienced board members
    • TRADING CONTROLS
    • JPMorgan portfolio managers purchase only issuers that are on the Approved List
    • Pre-trade clearance limits apply to all issuers
    Process Monitoring & Review
  • Rigorous Proprietary Credit Process
    • Dedicated macro sector and credit analysts leveraging JPM globally and our 69 equity analysts*
    • Active review process integrated into trading and exposure systems
    • Dedicated short-term approved list
    Management Risk Legal Issues • Government Protection • Structural Issues • Bankruptcy Law Business Risk • Industry Analysis • Competitive Position • Event Risk Financial Risk • Capital Structure • Cash Flow • Profitability Management Risk • Experience • Quality of Disclosure • Strategy Company Analysis Proprietary Rating * As of 12/31/07
  • Credit Risk Management – JPMAM Global Liquidity Credit Teams Note: Credit analysts serve both Global Liquidity and term fixed-income portfolios. Jimmie Irby serves as the credit and risk administrator and research coordinator for Global Liquidity. Analysts report to sector heads, which in turn report directly to unit CIOs. Jimmie Irby Global Liquidity Credit Administration Graham Nicol London Robert Kendrick Finance Marileen Koppenberg Autos, Consumer Lilliana Slavova Structured Credit Nathalie Cuadrado Energy Anthony Candelmo Corporate, NY Armand Ursino European Banks Fay Wong European Insurance Mark Stancher Asset Backed Lisa Shin ABCP Jem Tien ABCP Thanh Nguyen ABS Greg Reed Corporate, Columbus Roger Craig Basic Industry Tim Bond Brokers, Monolines Kevin Martinez Insurance Steve Mayes U.S. Banks Greg Reed Municipals John Blakely Housing, Health, Ed. Dave Fucio State and Local Government John Updegraf State and Local Government Jeff Fountain Energy, Sovereigns Theo Hadiwidjaja Structured Munis Greg Swisher Structured Munis
    • What is the Fund’s internal policy regarding shareholder concentration limits? Are they willing to provide a list of Top 10 Shareholders, including percent of ownership and industry / client type for each?
    • Has the Fund had to step in to buy out any securities in the portfolio?
    • Has anything in the portfolio been downgraded?
    • How big is the Money Market Fund business within the overall Asset Management business? Is the Asset Management firm part of a larger organization?
    • Does the money market fund invest in SIVs? If so, do the SIV holdings represent more than 1/2 of 1% of net assets in the fund?
    • How much of the Fund is invested in overnight securities?
    • Does the fund have exposure to the mortgage market (either directly through holdings in mortgage backed securities or through companies that are exposed to the market, like home builders)?
    • Has the client received any notification from the fund or fund sponsor that the fund value may deviate from $1.00 NAV per share?
    • Has the Fund ever restricted withdrawals from the fund?
    • How often are detailed portfolio holdings reports available?
    • Does the Fund provide access to the Portfolio Managers?
    Common Questions for Fund Providers
  • The Government Steps In
    • Comes out of the $700 bn TARP
    • Buying a non-dilutive preferred share, carrying 5% annual dividend, that rises to 9% after five years
    • Includes all major US Banks (no Foreign Banks)
    • Involves certain restrictions: caps on executive pay, no new employment contracts containing golden parachutes, caps on using executive salaries as tax deduction
    • Potentially thousands of US banks can participate
    • None of the major banks (including JPM) had a choice in the investment (We did not need it, others might have)
    The Beginning of the End? Bank of America $25 bn - including Merrill Lynch Citigroup $25 bn JPMorgan Chase $25 bn Wells Fargo $20 bn to $25 bn Goldman Sachs $10 bn Morgan Stanley $10 bn Bank of NY Mellon $3 bn State Street $2 bn A host of massive new sweeping programs from the US Treasury, Federal Reserve and the FDIC should provide the necessary confidence to the market to end this crisis. US Treasury makes an investment of up to $250bn into the US Financial Institutions The Government’s investment bolsters JPMC’s already strong capital base
    • Provides us with additional resources to build our company, serve clients and further take advantage of market opportunities
    • We do not expect JPMC’s participation in the plan to materially restrict, in any way, how the firm operates
    Source: J.P. Morgan Chase & Co.
  • Expanded FDIC Coverage FDIC will temporarily guarantee, for a fee, senior unsecured debt issued by all FDIC insured institutions
    • Applies to debt issued by June 30, 2009, with maturities up to three years.
    • Allows banks and their holding companies to roll maturing senior debt into new issues fully backed by the FDIC.
    • This should bring down short-term lending rates (such us LIBOR).
    FDIC is temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts
    • Voluntary for banks
    • To extend the $250,000 per depositor limit established two weeks ago.
    Federal Reserve pledged unlimited USD lending to central banks around the world EUR Countries have already taken similar steps
    • UK, France, Germany, Spain, Netherlands, Italy and Australia
    • Issued guarantees on bank loans and taken equity stakes in financial institutions worth over $1.8 trillion
    • Authorizes the Secretary of the Treasury to establish the Troubled Asset Relief Program (TARP) to purchase troubled assets from any financial institution.
    • Permits the Government to acquire equity interests in participating firms. The Treasury Secretary can purchase non-voting stock in companies ― if a financial warrant is issued ― or, senior debt from any firm participating in the program.
    • The Act provides for the establishment of an Office of Financial Stability at Treasury, overseen by an Assistant Secretary appointed by the President and confirmed by the Senate.
    • Establishes the Troubled Assets Insurance Financing Fund for deposit of premiums collected from participating financial institutions in order to fund such guarantee program.
    • Treasury will hire 5 to 10 asset management firms and hire at least two dozen new employees and contractors. Guidelines on compensation and conflicts of interest are still being developed.
    • An initial tranche of $250 billion for the purchase of assets was authorized upon enactment of the Act. An additional $100 billion will be available upon certification by the President. The remaining $350 billion will be available after the President sends a report to Congress detailing the Secretary’s plan to exercise the remaining authority. Congress will be able to vote to disapprove the funds.
    • The increase in deposit insurance coverage from $100,000 to $250,000 is effective upon enactment and will remain in effect until the end of 2009.
    The US Treasury Description Troubled Assets Relief Program (TARP) Market Impact
    • TARP has paved the way for capital injections into financial institutions.
  • Market Facilities at the Federal Reserve Description
    • Asset-Backed Commercial Paper Purchase Facility
    • Extends non-recourse loans at the primary credit rate (currently 2.25%).
    • To help U.S. depository institutions and bank holding companies to finance the purchase of high-quality ABCP from money market mutual funds.
    • To assist MMF holding ABCP in meeting investors redemption demands.
    • To foster liquidity in the ABCP markets and broader money markets.
    ABCP Facility Market Impact
    • Unique way to allow 2a-7 MMF to access the discount window via banks.
    • Provides immediate liquidity for MMF faced with redemption pressures from investors.
    • Encourages purchases of term ABCP by 2a-7 MMF.
    • Provides ABCP conduits with a stable source of funding in uncertain markets.
    • ABCP superior liquidity created disadvantage for issuers of unsecured paper – leading to the introduction of CPFF.
  • Market Facilities at the Federal Reserve Description
    • Agency Discount Notes (ADN) are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Lone Banks.
    • Permits the Federal Reserve to purchase ADN from primary dealers, through the open market trading desk.
    • To create liquidity in the Agency Discount Note Market
    ADN Purchase Facility Market Impact
    • Only three operations conducted since its introduction, none since Sept. 26.
    • Fed has bought $14.5 Billion out of $28.1 Billion offered.
    • Majority of this activity conducted by a handful of dealers.
    • Useful facility to help dealers to reduce balance sheet as we approached quarter end.
    • New quarter brings less stress in the ADN market:
      • GSE Issuance is down.
      • Govt. MMF are actively participating in the ADN market.
      • Dealers have fresh balance sheet.
  • Market Facilities at the Federal Reserve Description
    • Federal Reserve has created a Special Purpose Vehicle (SPV) to buy short-term CP.
    • SPV will purchase directly from eligible issuers.
    • To include 3-months, USD-denominated CP at a spread over the 3-month Overnight Index Swap (OIS) rate.
    • Only CP rated at least A1/P1/F1 by a major NRSRO and not rated below this grade by any NRSRO.
    • Only U.S. domestic CP will be purchased.
    • Terminates on April 30, 2009.
    CP Purchase Facility Market Impact
    • Should temporarily offset the effects of the rapid decline in investor demand for unsecured CP.
    • Gives issuers the ability to continue funding CP until market conditions improve or the need for short-term debt declines.
    • Yankee banks issuing through U.S. affiliates should benefit most, while lower-rated issuers should continue to face difficulty in the term CP market.
    • Should eventually help bring overall market rates down – including LIBOR.
  • Market Facilities at the Federal Reserve Description
    • Federal Reserve will lend $540bn to the MMF industry.
    • MMF industry will team up to create 5 new special purpose vehicles, established by the private sector (PSPV), and managed by JPMorgan.
    • PSPVs will buy USD-denominated CDs, bank notes, and commercial papers held by MMFs, with maturities of 90days or less.
    • Seller will get cash back in addition to an ABCP representing 10% of the asset’s sell price, same maturity.
    • Only debt instruments rated at least A1/P1/F1 by two major NRSROs.
    • Each PSPV will purchase debt instruments issued by 10 financial institutions.
    • Terminates on April 30, 2009.
    Money Market Investor Funding Facility (MMIFF) Market Impact
    • Eligible investors are US MMFs, and over time may include other US money market investors.
    • Money Market Funds can raise cash quickly from the Fed.
    • It will help restore normal functioning of the credit market.
  • The US Treasury Description
    • Open only to U.S. MMF registered under 2a-7.
    • Available to all 2a-7 MMF types, including Prime, Muni and Govt/Treas.
    • Only shares held in a participating money market fund on September 19, 2008 are insured.*
    • Any increase in the number of shares an investor holds after the close of business on September 19, 2008, will not be guaranteed.
    • Insurance program set to expire on December 19, 2008 – unless extended by the U.S. Treasury.
    • Insurance protects shareholders in the event an MMF NAV falls below .995 (breaking the buck).
    • Insurance would make up the difference between mark-to-market NAV and $1.00.
    • JPM has opted into the program for all of our U.S. 2a-7 MMF, with the exception of 100% U.S. Treasury MMF.
    The Treasury Guarantee Program Market Impact
    • Helps provide a stable asset base in Money Market Funds.
    * If a customer closes his/her account with a fund or broker-dealer, any future investment in the fund will not be guaranteed. If the number of shares an investor holds fluctuates over the period, the investor will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less.
  • Appendix
  • Money Market Mutual Fund Assets ’78–’08 U.S. Money Market Fund Assets ($ Billions)
  • Money Funds Gain $492B Over 52 Weeks (17%)
  • Current State of Money Mkt Fund Industry
    • Assets: Record $3.6, Now $3.4 Trillion
      • Bank Savings Total $4.0 Trillion
    • Almost 40 Million Shareholders
    • Almost $13 Billion Revenue
      • More than Hollywood @ Box Office
    • Over 1/3 Share of “Cash” Market
    • Reserve Primary Fund “Breaks the Buck”
    • Big Run: A Near-Death Experience
    • Government Insurance
  • Changes in Money Fund Portfolio Composition
  • AFP Liquidity Survey
    • AFP Liquidity Survey
      • Money funds: 39.​4%, up from 30.​9%.
      • Bank deposits: 25.​0%, ​down from 27.​1% in '​07.
      • Enhanced cash, ARS: 2.​2% and 5.​1%, respectively,
      • T-​bills, agency security and Eurodollar deposit allocations rose, while CP, repo and separately managed accounts all declined over the past year.
  • Business Short-Term Assets in Money Funds
  • Money Fund Family Market Share ($bils) 19.9% 531,941 -0.6% -20,015 -4.4% -140,803 100.0% 3,201,487 TOTAL   -6.7% -1,188 -7.1% -1,257 -23.1% -4,934 0.5% 16,471 Barclays 25 21.9% 3,090 2.9% 479 0.7% 124 0.5% 17,174 Tamarack 24 47.4% 6,145 18.2% 2,940 9.8% 1,700 0.6% 19,108 American Funds 23 6.2% 1,393 -3.0% -728 1.6% 383 0.7% 23,840 Ridgeworth (STI) 22 46.6% 7,621 6.5% 1,464 6.2% 1,399 0.7% 23,968 TDAM 21 76.3% 15,887 38.3% 10,169 12.0% 3,926 1.1% 36,712 HSBC 20 23.1% 7,708 1.4% 553 -5.7% -2,478 1.3% 41,074 SSgA 19 -3.6% -1,774 -14.5% -8,121 -14.9% -8,341 1.5% 47,771 Evergreen 18 47.5% 17,537 -3.9% -2,215 -3.8% -2,166 1.7% 54,492 UBS 17 6.1% 3,226 -9.5% -5,947 -13.3% -8,610 1.8% 56,330 DWS (Deutsche) 16 26.0% 12,459 2.6% 1,509 1.2% 698 1.9% 60,465 First American 15 22.6% 11,864 -7.3% -5,064 -9.3% -6,592 2.0% 64,301 AIM 14 30.0% 15,752 16.9% 9,858 7.5% 4,775 2.1% 68,183 Northern 13 -10.6% -9,191 -27.0% -28,625 -31.2% -35,099 2.4% 77,484 Morgan Stanley 12 14.7% 14,050 -2.3% -2,547 -0.8% -832 3.4% 109,753 Western 11 35.0% 30,372 15.5% 15,727 12.9% 13,368 3.7% 117,222 Wells Fargo 10 -2.0% -3,272 10.6% 15,113 7.3% 10,696 4.9% 157,524 Columbia 9 45.7% 55,871 3.4% 5,920 -2.9% -5,404 5.6% 178,230 Goldman Sachs 8 11.4% 19,698 2.0% 3,743 0.2% 359 6.0% 191,837 Vanguard 7 25.6% 40,618 5.4% 10,284 2.3% 4,511 6.2% 198,994 Schwab 6 69.6% 83,458 11.3% 20,682 2.1% 4,207 6.4% 203,304 Dreyfus 5 11.3% 22,480 -13.1% -33,530 -14.7% -38,081 6.9% 221,742 BlackRock 4 37.6% 67,543 7.4% 17,095 6.9% 15,870 7.7% 246,987 Federated 3 45.7% 93,394 19.2% 48,027 11.1% 29,704 9.3% 297,625 JPMorgan 2 34.5% 110,675 7.7% 30,836 1.3% 5,377 13.5% $431,040 Fidelity 1 %Chg $Chg %Chg $Chg %Chg $Chg 9/30/08 9/30/08 Family Rank 12-Mo 12-Mo 3-Mo 3-Mo 1-Mo 1-Mo Mkt Shr Assets$M Fund MF
  • Enhanced Cash and Money Fund Plus
    • Implosion: Less Than $50 Billion (from $200 Billion)
    • Axa, BNP, State Street (not enhanced, but …)
    • Buck-Breakings & Freezes
    • 3c-7’s Gone: StratCash, BlackRock
    • Ultra-Short Massacre: Fidelity, Schwab, SSgA
    • Spreads Sowing Seeds of Resurgence?
    • Lessons: No Regulation, Differentiation,
      • No Diversification of Investor Base (Know Your Company)
  • Offshore & International MMFs
    • $5 Trillion Worldwide
    • Rule 2a-7 in Europe?
    • IMMFA & European Issues
      • $600 Billion But No Insurance
    • France
      • Definition of “Money Fund”
    • Enhanced Cash Problems
      • Exits: Standard Chartered
    • Asia: Japan, Australia, etc.
  • Income may be subjected to state and local taxes. A portion of the Fund’s income may be subject to the federal Alternative Minimum Tax. The NAIC, Moody's, Fitch IBCA and S&P ratings are historical and signify that the Fund's safety is excellent, with superior capacity to maintain a net asset value of $1.00 per share. The ratings do not eliminate the risks associated with investing in the Fund. The National Association of Insurance Commissioner's (NAIC) "approved" status indicates that the Fund meets certain pricing and quality guidelines. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds strive to preserve the value of the investment at $1.00 per share, it is possible to lose money by investing in a money market fund. This document is intended solely to report on various investment views held by JPMorgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Total return assumes reinvestment of dividends and capital gains distributions and reflects the deduction of any sales charges or redemption fees. Performance may reflect the waiver of a portion of the Fund's advisory or administrative fees for certain periods since the inception date. If fees had not been waived, performance would have been less favorable. Indices do not include fees or operating expenses and are not available for actual investment. Contact JPMorgan Funds Distribution Services at 1-800-338-4345 for a Fund prospectus. You can also visit us at  www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing. JPMorgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. Products and services may be offered by JPMorgan Distribution Services, Inc., member FINRA/SIPC. JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors, Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. © JPMorgan Chase & Co., 2008. U.S. Disclosure