SecProbe.io

CORRESP
1
filename1.htm

RESPONSE LETTER

Confidential Treatment

Requested by JPMorgan Chase & Co.

Page 1

July 13, 2006

Ms. Joyce Sweeney, Accounting Branch Chief

Ms. Sharon M. Blume, Staff Accountant

Division of Corporation Finance

United States Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20002

Mail Stop 4561

    Re:

    JPMorgan Chase & Co.

    Form 10-K for the Fiscal Year Ended December 31, 2005

    Filed March 9, 2006

    File No. 1-5805

Dear Ms. Sweeney and Ms. Blume:

     JPMorgan Chase & Co. (the “Company”) hereby submits this letter to respond to comments by the
Staff of the Securities and Exchange Commission contained in your letter dated May 23, 2006
addressed to the undersigned.

     To assist in your review of our responses, we have set forth below in full the comments
contained in the letter, together with our responses to such comments.

     The Company hereby requests that the Securities and Exchange Commission afford confidential
treatment, pursuant to Rule 83, of the indicated portions of the response to Comment 1 of the
letter.

Form 10-K for Fiscal Year Ended December 31, 2005

Consolidated Financial Statements

     Statements of Cash Flows, page 90

1. We note in your response to comment one of our letter dated April 11, 2006 that you have
historically classified cash flows related to loan activities as investing activities, regardless
of whether a loan is classified as held-for-sale at inception or subsequent to origination.
Paragraph 9 of SFAS 102 requires that cash flows resulting from originations, acquisitions and
sales of loans should be classified as operating cash flows if those loans are acquired
specifically for resale. Please amend your December 31, 2005 10-K and

Confidential Treatment

Requested by JPMorgan Chase & Co.

Page 2

applicable Forms 10-Q to revise your Statements of Cash Flows to present as operating activities
the cash flows related to the origination/purchase and sales/securitization of loans for which you
had the intent to sell or securitize when the loan was originated or purchased. If you do not
believe this would result in a material change to your Statements of Cash Flows, please provide us
with a comprehensive analysis of the impact, including the applicable gross and net cash flows.

As requested by the Staff, JPMorgan Chase has prepared the accompanying analysis of its
gross and net cash flows for the years ended December, 31, 2005, 2004 and 2003, related to
the origination/purchase and sale/securitization of loans for which it had the intent to
sell or securitize when the loans were originated or purchased:

[redacted]

The above analysis shows that, while the Firm’s gross cash flows related to these activities
were large, the net cash flows that would have been reclassified from “investing” activities
to “operating” activities would have been [redacted]. For the reasons discussed below,
these net amounts, in management’s view, are not material to the Statements of Cash Flow as
a whole, either on a quantitative or qualitative basis.

Unlike misstatements affecting the income statement, where errors can be assessed in
relation to their effect on net income, it is more difficult to assess the quantitative
effect of cash flow reporting errors for a multi-line financial institution. Cash flows for
a multi-line financial institution, such as the Firm, can fluctuate widely from period to
period depending on the growth or contraction of the Firm’s balance sheet, and can shift
between operating and investing cash flows driven solely by normal day-to-day business
activities. These dynamics reduce the importance of reported cash
flow statement classification and, for this reason, changes in the
cash flow statement are generally not used by investors
or analysts to assess the operating performance of the Firm. While we understand this
information is central to the analysis by investors and analysts of manufacturing or service
organizations, management believes this difference is critical to an evaluation of
the materiality of cash flow classification in the Firm’s circumstances. Recognizing these limitations, management believes
that the most relevant quantitative measure for assessing the identified cash flow
reclassification is to note that such reclassification does not impact the aggregate net
cash inflow/outflow of the Firm and is immaterial in relation to the Firm’s stockholders’
equity and balance sheet.

Management has also reviewed qualitative factors, including those set out in SAB 99, to
assess the potential materiality of the reclassification and, based upon that review,
believes that these qualitative factors all indicate that the change in presentation would
not be material to users of the Firm’s financial information. In summary, the net amounts
that would be reclassified from investing to operating activities do not mask a change in
earnings or other trends, do not affect the Firm’s segment
information (since they only involve financial information reported at the consolidated level), do
not conceal an unlawful transaction, have no effect on the
Firm’s regulatory capital or covenants for borrowed
money, and have no effect on management compensation. Further, the amounts to be

Confidential Treatment

Requested by JPMorgan Chase & Co.

Page 3

reclassified do not involve significant estimates or difficult measurements (the cash flows
that would be subject to reclassification were all originally included in investing
activities to be consistent with the balance sheet treatment where all loans, including
loans held for sale, are recorded) and, as noted above, management believes these amounts generally do
not affect analysts’ expectations regarding the Firm’s financial performance. Finally,
management believes that the Firm’s disclosures in the Statements of Cash Flows and in the
footnotes to the Firm’s financial statements related to loan purchases/originations and
sales/securitization provide investors and analysts with appropriate information to evaluate
the Firm’s performance.

Considering all of the above, in management’s view, the change in classification of loans
originated/purchased for resale and related sales/securitizations from investing to
operating is not material to the Firm’s Statements of Cash Flows or financial statements
taken as a whole. In management’s view, the reclassification of these amounts would not
significantly change a reader’s understanding of the cash used in or provided by the Firm’s
activities, particularly in light of the fact that the Firm has an unclassified balance
sheet, comprised almost totally of liquid financial assets aggregating $1.2 trillion.

We would also like to note that the current presentation is consistent with the presentation
of our peer competitors, thereby providing investors and analysts with consistent
information if they should choose to compare cash flow information. In assessing the Firm’s
disclosures, including the Statements of Cash Flows, management reviews each quarter the
disclosures contained in the Forms 10-K and Forms 10-Q of the Firm’s principal competitors.
We note that while mono-line financial services companies, such as mortgage banking
businesses, have generally reported cash flows from loans originated or purchased for resale
as operating activities, many of the Firm’s competitors that are global financial firms
engaged in commercial and/or investment banking activities continue to report cash flows
related to all loans as investing activities, consistent with the Firm’s presentation as of
December 31, 2005.

However, in reviewing paragraph 9 of SFAS 102, as requested by the Staff, JPMorgan Chase
will change its reporting of cash flows from loans specifically originated or purchased for
resale or securitization from investing to operating activities in its Statements of Cash
Flows, commencing with its Form 10-Q for the quarter ended June 30, 2006. In this
connection, it will also reclassify former periods presented in the Statements to conform to
the current presentation.

2. We have reviewed your response to comment three of our letter dated April 11, 2006. Regarding
cash flow hedges of short-term assets and liabilities that rollover or reprice, please tell us the
defined time period over which you typically forecast interest receipts and payments.

The interest receipts or payments designated as hedged in cash flow hedges of short-term
assets or liabilities that rollover or reprice are forecasted to occur over a ten-year
period. Based on the notional amounts of derivatives open at December 31, 2005, 87% of the
hedged rollovers and repricings are forecasted to occur within the first five years. The
remaining 13% are forecasted to occur ratably over the following five years.

    Very truly yours,

    /s/ Michael J. Cavanagh

    Chief Financial Officer