8.1 Bad Debts on Loans Receivable Excerpts from the 2008 Annual Report for J.P. Morgan Chase & Co. (JPMC) are provided in Exhibit 8.1. EXHIBIT 8.1Consolidated Balance Sheets December 31 (in millions, except share data) 2008 2007 Assets Cash and due from banks $26,895 $40,144 Deposits with banks 138,139 11,466 Federal funds sold and securities purchased under resale agreements (included $20,843 and $19,131 at fair value at December 31, 2008 and 2007, respectively) 203,115 170,897 Securities borrowed (included $3,381 and zero at fair value at December 31, 2008 and 2007, respectively) 124,000 84,184 Trading assets (included assets pledged of $75,063 and $79,229 at December 31, 2008 and 2007, respectively) 509,983 491,409 Securities (included $205,909 and $85,406 at fair value at December 31, 2008 and 2007, respectively, and assets pledged of $25,942 and $3,958 at December 31, 2008 and 2007, respectively) 205,943 85,450 Loans (included $7,696 and $8,739 at fair value at December 31, 2008 and 2007, respectively) 744,898 519,374 Allowance for loan losses (23,164) (9,234) Loans, net of allowance for loan losses 721,734 510,140 Accrued interest and accounts receivable 60,987 24,823 Premises and equipment 10,045 9,319 Goodwill 48,027 45,270 Other intangible assets: Mortgage servicing rights 9,403 8,632 Purchased credit card relationships 1,649 2,303 All other intangibles 3,932 3,796 Other assets (included $29,199 and $22,151 at fair value at December 31, 2008 and 2007, respectively) 111,200 74,314 Total assets $2,175,052 $1,562,147 Consolidated statements of cash flows Year ended December 31 (in millions) 2008 2007 2006 Operating activities Net income $5,605 $15,365 $14,444 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Provision for credit losses 20,979 6,864 3,270 Depreciation and amortization 3,143 2,427 2,149 Amortization of intangibles 1,263 1,394 1,428 Deferred tax (benefit) expense (2,637) 1,307 (1,810) Investment securities (gains) losses (1,560) (164) 543 Proceeds on sale of investment (1,540) Gains on disposition of businesses (199) (1,136) Stockbased compensation 2,637 2,025 2,368 Originations and purchases of loans heldforsale (34,902) (116,471) (178,355) Proceeds from sales, securitizations, and paydowns of loans heldforsale 38,036 107,350 173,448 Net change in: Trading assets (12,787) (121,240) (61,664) Securities borrowed 15,408 (10,496) 916 Accrued interest and accounts receivable 10,221 (1,932) (1,170) Other assets (33,629) (21,628) (7,193) Trading liabilities 24,061 12,681 (4,521) Accounts payable and other liabilities 1,012 4,284 7,815 Other operating adjustments (12,013) 7,674 (111) Net cash provided by (used in) operating activities 23,098 (110,560) (49,579) Consolidated statements of income Year ended December 31 (in millions, except per share data) 2008 2007 2006 Revenue Investment banking fees $5,526 $6,635 $5,520 Principal transactions (10,699) 9,015 10,778 Lending and depositrelated fees 5,088 3,938 3,468 Asset management, administration, and commissions 13,943 14,356 11,855 Securities gains (losses) 1,560 164 (543) Mortgage fees and related income 3,467 2,118 591 Credit card income 7,419 6,911 6,913 Other income 2,169 1,829 2,175 Noninterest revenue 28,473 44,966 40,757 Interest income 73,018 71,387 59,107 Interest expense 34,239 44,981 37,865 Net interest income 38,779 26,406 21,242 Total net revenue 67,252 71,372 61,999 Provision for credit losses 20,979 6,864 3,270 Noninterest expense Compensation expense 22,746 22,689 21,191 Occupancy expense 3,038 2,608 2,335 Technology, communications, and equipment expense 4,315 3,779 3,653 Professional and outside services 6,053 5,140 4,450 Marketing 1,913 2,070 2,209 Other expense 3,740 3,814 3,272 Amortization of intangibles 1,263 1,394 1,428 Merger costs 432 209 305 Total noninterest expense 43,500 41,703 38,843 Income from continuing operations before income tax expense (benefit) 2,773 22,805 19,886 Income tax expense (benefit) (926) 7,440 6,237 Income from continuing operations 3,699 15,365 13,649 Income from discontinued operations 795 Income before extraordinary gain 3,699 15,365 14,444 Extraordinary gain 1,906 Net income $5,605 $15,365 $14,444 Net income applicable to common stock $4,931 $15,365 $14,440 Note that the balance in the allowance for loan losses account at the end of JPMC's fiscal 2006 was $7,279 million, and the balance in their loan asset account was $483,127 million at the same date.

Required:

Calculate JPMC's allowance for loan losses as a percentage of gross loans outstanding for each of the three years for which information has been provided.

What is the dollar value of JPMC's loan writeoffs in 2007 and 2008? Comment upon JPMC's loan loss provisioning over the periods shown.

Do they appear to have used the provision to create hidden reserves? Are they sitting on a cookie jar reserve or are you expecting a big hit to the income statement in future periods as a result of past underprovisioning for bad loans?