Message from Sandie O'Connor

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Sandie O’Connor
Global Head of Financing and Market Products

2008 was a year for the record books. The pronounced liquidity/credit crunch that began in third quarter 2007, triggered by a surge of delinquencies in the sub-prime mortgage market, had far reaching effects in 2008, a year marked by a series of historic and unprecedented financial events, irrevocably changing the global financial landscape. The equity market sell-off along with the level of volatility was the most severe since the 1930s. Economic conditions worsened as consumer spending dramatically fell, unemployment rose sharply and housing prices declined. In response to these unprecedented events, the Federal Reserve (“Fed”) reduced the fed funds rate seven times during the year to the lowest level in its 94-year history–near zero–and more than doubled its balance sheet to $2.3 trillion by giving loans to participants in financial markets. Global central banks followed the Fed’s lead and lowered interest rates multiple times and injected capital into many financial entities.

During the final quarter of 2008, our Investment team continued to focus on maintaining liquidity and preserving capital. Fixed Income trading continued to navigate a difficult environment marked by volatility and changing market dynamics, such as borrower deleveraging and historic low rates. Our Equity lending team coped with extreme volatility in equity and cash markets, hedge fund deleveraging, short selling restrictions and increased regulatory oversight of markets as well as a general lack of deal activity, all leading to lower lending balances and volatile rebates/fees.

The Way Forward
The way forward for the Securities Lending industry will involve a reevaluation of risk and reward for all constituents. The market will focus on cash collateral investment strategies and pooling versus separately managed accounts. Both intrinsic value and the use of non-cash collateral will become more important. We expect that the renewed focus on liquidity, short duration investments, credit risk and reporting transparency will create opportunities for our clients and, while we cannot change the challenges that market conditions bring to bear, we can commit the full strength of J.P. Morgan’s resources to managing them.

We will continue to improve technology, enhance service and open new markets. By the close of 2008, J.P. Morgan was actively lending in over 30 global markets and 2009 began with Brazil and Ireland. We are monitoring other major non-lending markets, such as Russia, India and China, for positive changes in the environment. We will also continue to work with regulators in reshaping the broader financial markets and be a prominent voice in the Securities Lending community, through representation in industry trade groups including the Risk Management Association, the International Securities Lending Association, the Pan Asia Securities Lending Association and the Securities Industry and Financial Markets Association. We will maintain our presence as a sponsor at key industry conferences and take the lead in speaking on topics of interest pertinent to you. We view these opportunities as ideal ways to strengthen both our partnership with our clients and J.P. Morgan’s stature as a respected industry leader.

We continue to be committed to our clients in the face of market stress, adhering to disciplined risk management—as we stay the course—with the goal of maintaining liquidity and preserving capital. As always, we strive for complete transparency through high levels of communication with clients while meeting your individual needs for customized program parameters and reporting. These unsettling times serve to underscore the importance of relying on a strong lending agent. As a client, you benefit not only from the strength of our securities lending teams but from the entire J.P. Morgan franchise including our balance sheet, rigorous and disciplined risk management and team approach to deliver results to you.

Thank you for your business, confidence and trust. We will continue to be accessible to you as your partner and advocate to help you navigate the increasingly changing and challenging environment and to delivering results to you.

Sandie O’Connor
Global Head Financing & Markets Products