august 19, 2009 managing international business

August 19, 2009

Managing International Business

in Turbulent Times

Association For Financial Professionals Of Atlanta

Tod GordonManaging Director, J.P.Morgan Liquidity Solutions

Stephen PhelpsExecutive Director, J.P.Morgan Commercial Banking-International

Managing International Business In Turbulent Times

Association For Financial Professionals Of Atlanta2

© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC

What we’ll discuss today

• The business and economic environment

• Client reactions to a changing climate

• Five principles of liquidity management




In 2008-Unprecedented Times on a Global Scale…

Auction Rate Securities Remarketing Failures

Bear Stearns acquired by JPMorgan Chase

Some monoline insurers downgraded by Moody’s

Crude oil soars to $147/bbl

Mortgage lender

IndyMac collapses

Fed Funds Rate cut 125 bps during January to 3.00%

Fed Funds Rate cut 75 bps to 2.25%

Fed Funds Rate cut 25 bps to 2.00%

Northern Rock nationalized by the UK

JulyJuneMayAprMar AugFebJan




…and Change Happening at an Unprecedented Pace

Fannie Mae and Freddie Mac placed into conservatorship by U.S. Government Merrill Lynch agrees to be sold to Bank of America in an all stock deal for $29 a share

Lehman Brothers files for protection under Chapter 11 of the U.S. Bankruptcy Code after losing 94% of its market value this year

U.S. government seizes control of AIG

Wells Fargo acquires Wachovia

Citi receives protection on $306B of troubled assets

National Bureau of Statistics announces U.S. has been in recession since Dec 2007

TARP funds extended to GM, Chrysler and Ford

American Express converts to bank holding company

The Fed announces that Goldman Sachs and Morgan Stanley are to become bank holding companies, marking the end of an era

Reserve Primary Fund breaks the buck

Putnam Investments LLC closes its institutional Prime Money Market Fund

Lloyds TSB Group agrees to acquire HBOS

Ireland guarantees deposits and bank debt

U.S. Treasury to insure Money-Market Fund holdings

The Fed in conjunction with other central banks quadruples the amount of dollars available to banks to $247B

Iceland nationalizes 3 largest banks

Singapore (MAS) guarantees deposits

South Korea guarantees bank debt

Australia guarantees bank senior debt

China announces $586B stimulus program

Washington Mutual banking business acquired by JPMorgan Chase

DecNovOctSep




In Search of Yield, Did Investors Go Too Far?

Retu

rn

Risk

Traditional Money Market Investments

High-Risk Money Market Investments

Enhanced Money Market Funds (3c7)

Variable Rate Demand Notes

Auction Rate Securities

Commercial Paper

Asset-Backed Commercial Paper

Money Market Funds (2a7)

Money Market Deposit AccountDeposit Account

Repurchase Agreements

SIV Paper




Reaction to Market Events: A Rush to Low Risk Investing

High-Risk Money Market Investments

“Low Risk” Money Market Investments

Traditional Money Market Investments

Auction Rate Securities

U.S. Treasuries

Asset-Backed Commercial Paper

Enhanced Money Market Funds (3c7)

Commercial Paper

Money Market Funds (2a7)

Variable Rate Demand Notes

Money Market Deposit AccountDeposit Account

Repurchase Agreements

Fed Funds

Offshore Time Deposit

Retu

rn

Risk




In 2009, clients are reevaluating liquidity management

processes in complex times…

Investment Management

Cash & Liquidity Management

Bala

nce

Sheet

Man

agem

ent

Govern

ance

& R

isk Man

ag

em

ent

Global Environment

Credit ContractionDebt & Capital Market AccessFX & Rate Market VolatilityLow Interest RatesEconomic Slowdown




…reexamining liquidity management priorities…



Bala

nce

Sheet

Man

agem

ent

Govern

ance

& R

isk Man

ag

em

ent

Cash is‘King’

Strengthis an Asset

ImproveFinancialRatios

Oversight& Control

CounterpartyRisk

Systemic &OperatingRisk

Control &Visibilityof Cash

Optimize &Self-fund

Consolidate& Integrate

CapitalSafety

AmendInvestmentCriteria

InvestmentTransparency

Global Environment





…and talking to us about the evolution of liquidity management



Bala

nce

Sheet

Man

agem

ent

Govern

ance

& R

isk Man

ag

em

ent

Cash is‘King’

Strengthis an Asset


Oversight& Control

CounterpartyRisk



Optimize &Self-fund


CapitalSafety



Global Environment




Bala

nce

Sheet

Man

agem

ent

Govern

ance

& R

isk Man

ag

em

ent

Cash is‘King’

Strengthis an Asset


Oversight& Control

CounterpartyRisk



Optimize &Self-fund


CapitalSafety



Global Environment


Client Themes• Risk Aversion, De-leverage• Liquidity Preservation• Collateral Upgrades• Active Risk Management

Client Themes• Review Counterparties• Review Investment Choice• Reset Investment Guidelines• Examine Operating Processes

Client Themes• Reduce Bank Providers• Simplify Cash Positions• Focus on Transparency• Increase Daily Control

Client Themes• Local Market Capabilities• Local Ccy & Bal. Sheet• Integrated Products• Focus on Credit Providers




The Five Principles of Liquidity Management

1.Forecast and segment cash needs

2.Establish appropriate investment guidelines

3.Select investments appropriate for cash segments

4.Establish and verify diversified contingent funding sources

5.Maximize liquidity transparency and efficiency across geographies and legal entities




Principle 1Forecast and Segment Liquidity Needs

Forecasting

• Time bucket sources and uses of cash flows

• By significant legal entity

• By geography

• Consider transfer limitations arising from currencies, time zones, local law, tax, regulatory and lending agreements

• Time buckets progress from daily to weekly to monthly

• Continually revise based on latest information

• Stress assumptions for idiosyncratic and market risks

• Identify key drivers and dependencies

• Update periodically or more frequently as the environment changes




Principle 1Forecast and Segment Liquidity Needs

• Forecasted excess balances

• Cash is forecasted for

a particular near-term purpose (e.g., business investment and stock repurchase)• Near-term liquidity is a secondary concern

• Unsuitable for volatile cash flows/portfolio, temporary cash

Segmenting Cash

• Intended to fund daily operating needs which may be subject to unforeseen volatility

• Local or regional investment decisions required on daily/weekly basis

Strategic Cash (Horizon—Longer-term)

Sta

ble

Vola

tile

70

40

60

90

0

10

50

80

20

30

Cash Cycle

Operating Cash(Horizon—Daily)

Reserve Cash(Horizon—Daily/Monthly)

TIME

BA

LA

NC

ES

Restricted Cash Pools

• Balances trapped in regulated jurisdictions

• Cash collateral• Adverse tax

consequences




Principle 2Establish Appropriate Investment Guidelines

• State objectives

• Specify roles and responsibilities

• List authorized investments

• Balance flexibility and control

• Identify risk tolerances (aggregate and individual)

• Tenors

• Counterparties

• Complexity

• Report investments and any guideline breaches

• Incorporate into firm-wide risk framework

• Update with evolution business model

Safety &Availability

Maturity/Duration

AuthorizedInvestments

CreditQuality

Dealer/Counterparty

Concentration/Diversification




Principle 3Select Investments for Each Cash Segment

TotalBalance SheetCash

Operating Cash

• Demand deposit accounts

• Demand deposit accounts with end-of-day sweeps

• Interest bearing demand deposit accounts (non-U.S.)

Pote

nti

al S

olu

tion

s

Strategic Cash

Reserve Cash Solutions plus

• Longer tenor customized separately managed accounts

• Fixed income securities2

• Bond funds2

Liq

uid

ity N

eed

• Money market deposit account

• AAA-rated domestic and international money market funds1

• Certificate/Time Deposits

• Short tenor customized separately managed accounts

Reserve Cash

• Demand deposit accounts

• Money market deposit account

• Private placement vehicles

• Customized separately managed accounts

• Fixed income securities2

• AAA-rated offshore USD and foreign currency funds

• Multi currency interest program

Restricted Cash

1 US registered J.P. Morgan Money Market Funds are distributed by J.P. Morgan Distribution Services, Inc.(“JPMDS”), which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the Funds. Treasury & Security Services and JPMorgan Asset Management activity may be offered by J.P. Morgan Institutional Investments, Inc.(“JPMII”) member FINRA/SIPC.

2 Fixed income securities products are not FDIC-insured, are not deposits of or guaranteed by JPMorgan Chase Bank, N.A., or any affiliates, and are subject to investment risks, including the possible loss of the principal amount invested. Fixed income products are offered through J.P. Morgan Securities Inc. (“JPMSI”), member FINRA/SIPC, a separately incorporated subsidiary of JPMorgan Chase & Co. and an affiliate of JPMorgan Chase Bank, N.A. JPMSI and/or its affiliates may hold a position or act as market maker in the financial instruments mentioned herein (or related instruments) and may also act as underwriter, placement agent, advisor or lender to an issuer of such financial instruments. JPMSI and/or its affiliates may participate or be financially interested in a primary or secondary distribution in the instruments (or related instruments) purchased by you.




Principle 4Establish and Diversify Contingent Funding Sources

View as a cost of business—similar to insurance

• Arrange excess contingent funding sources

• Secured and unsecured

• Committed and advised (periodically verify)

• Strive to avoid clauses and terms that restrict availability

• Access/tap cash reserves before needed

• Require counterparties to post collateral as necessary




Principle 5Maximize Liquidity Transparency and Efficiency

Centralize treasury management

• Implement information reporting

• better visibility and access to cash balances

• multibank reporting for up-streaming or investing cash

• Reduce administrative expenses

• Improve ability to review banking partners

• Establish contingency requirements




Clients are Trending Towards a Global Cash Management Model

Strategic drivers:

• Centralize the application of investment policy

• Enhance visibility and control over internal sources of liquidity

• Minimize FX risks by rationalizing non-strategic currencies

Source: J.P. Morgan Asset Management Global Cash Management Survey 2008

2008 Global Corporate Survey

Globally 29%

Global Oversight/Regional Autonomy 29%

Regionally 19%

Global Oversight/Local Autonomy 12%

Local Autonomy 11%

Globally 45%

Global Oversight/Regional Autonomy 32%

Regionally 13%

Global Oversight/Local Autonomy 7%

Local Autonomy 3%

Now Future





Optimize cash position across geographies and legal entities

• Streamline banking relationships

• Rationalize banks—one banking partner per country

• Rationalize accounts—one account per currency per legal entity

• Transition non-native accounts to a “friendly” location

• Reduce banking fees

• Simplify account administration

• Distribute business among credit banks

• Take advantage of SEPA Credit Transfers (SCTs)

• Cross-border EUR transfers

• Domestic non-urgent EUR transfers





Centralize liquidity management through a cash concentration structure

• Reduce idle balances• Maximize funds available for investment/to pay down debt

• Realize savings though self-funding—reduces overdrafts and/or external funding requirements

• Enhance returns on concentrated cash—active investment of larger balances

• Centralize FX management • Reduce FX spreads

• Perform fewer, larger FX trades

• Implement a centralized credit facility based on parent company credit standing• Reduce overall borrowing costs

• Simplify overall process

• Consider alternative tax effective structures




“The time to repair the roof is when the sun is shining.”

John F. Kennedy

august 19, 2009 managing international business

Documents

market events

market value

moneymarket fund holdings

fed funds rate cut25

investment guidelines

rates economic slowdown

cash pos

liquidity managementprocesses