The staff reviewed the Form 10-K filed by JPMorgan Chase & Co. ("JPM") and issued a number of comments, including a request for additional information regarding the substitution of securities into a credit card securitization trust acquired by the company from the failed bank Washing ton Mutual ("WaMu"). The staff observed that JPM had randomly removed $6.2 billion in low quality credit card loans from the Washington Mutual Master Trust and substituted $5.8 billion in loans with higher credit quality. In particular, the staff asked JPM to explain the following: 1) the business purpose of the transaction; 2) the identity of the party who initiated the transaction; 3) how JPM accounted for the acquisition of the seller's interest in the trust; 4) the terms for removing loans from the trust and the impact of such action on the seller's interest; 5) how JPM determined that the transaction satisfied SFAS 140; 6) a detailed description of the removal process; 7) whether the removal process was a removal of account provision ("ROAP") and whether the post-transaction quality of the acquired assets was the same, better, or worse than the seller's previous interest; 8) how JPM accounted for the transaction, and 9) how JPM accounted for the seller's interest as of December 31, 2008 and why the seller's interest was included in JPM's segment disclosures.

JPM replied that, upon acquiring the banking operations of WaMu, it also acquired the credit card securitization trust which at the time held primarily subprime loans. Pursuant to the terms of the trust's pooling and servicing agreement, JPM randomly removed loans from the trust and replaced them with loans from JPM's legacy portfolio. The purpose of the substitution was to bring the WaMu trust into compliance with the higher credit quality standards JPM adheres to in its own securitization transactions. JPM noted that the excess spread in the WaMu trust was positive and that no adverse event (e.g. early amortization) was imminent had the removal not occurred. JPM also observed that SFAS 140 permits such transactions to be accounted for as sales if the removal pursuant to a ROAP does not remove specific assets. Under the ROAP set forth in the pooling and servicing agreement, JPM was allowed to remove assets once per month only up to an amount required to maintain the seller's minimum interest. JPM stated that it had met the conditions of SFAS 140 by employing a random method to remove low-balance, homogenous loans. The method assigned a random number to each credit card account number, sorted the random numbers in ascending order, and then accounts were selected up to an amount that was set below the maximum permitted removal amount. After selection, JPM conducted a test of the removal account population and the total trust account population that resulted in a 99.9 percent confidence level that the two populations were similar regarding average account balance, average credit limit, and average age. JPM further replied that it accounted for its seller's interest in the trust as loans in its consolidated balance sheet with an allowance for loan losses. Aggregate seller's interest in the trust was treated as loans held for investment and reported as an asset in the card services market segment.

In several follow-up comments, the staff directed JPM to provide additional information about the business purpose of transactions with the credit card trust as well as the identity of the party initiating the transactions. In the case of the initiating party, the staff wanted to know if the request for the removal was made by other certificate holders, by JPM under a contractual obligation, or by JPM on a voluntary basis. JPM's future filings also should address the economic effects of such transactions, explain the consequences of taking no action regarding the trust, and detail additional items, including ratings, liquidity guarantees, and reputational risk. JPM's response noted that it had taken additional actions regarding the credit card trust following its reply to the staff's initial comment and would report those activities in its 2009 Q2 filings. Lastly, the staff inquired about JPM's treatment of loan losses regarding the trust. Much of JPM's reply was redacted under the confidentiality rules applicable to disclosure reviews. The staff subsequently indicated that it had no further comments.