Cash Instruments

6 Months Ended

Jun. 30, 2011

Note 6. Cash Instruments

Cash instruments include U.S. government and federal agency obligations, non-U.S. government obligations, bank loans and bridge loans, corporate debt securities, equities and convertible debentures, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm’s fair value measurement policies and the fair value hierarchy.

Level 1 Cash Instruments

Level 1 cash instruments include U.S. government obligations and most non-U.S. government obligations, actively traded listed equities and certain money market instruments. These instruments are valued using quoted prices for identical unrestricted instruments in active markets.

The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.

The fair value of a level 1 instrument is calculated as quantity held multiplied by quoted market price. U.S. GAAP prohibits valuation adjustments being applied to level 1 instruments even in situations where the firm holds a large position and a sale could impact the quoted price.

Level 2 Cash Instruments

Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, less liquid publicly listed equities, certain state and municipal obligations and certain money market instruments and lending commitments.

Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Valuation adjustments are typically made to level 2 cash instruments (i) if the cash instrument is subject to transfer restrictions and/or (ii) for other premiums and discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.

Level 3 Cash Instruments

Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of level 3 financial assets.

The table below presents the valuation techniques and the nature of significant inputs generally used to determine the fair values of each class of level 3 cash instrument.


Level 3 Cash Instrument			Valuation Techniques and Significant Inputs

Loans and securities backed by commercial real estate • Collateralized by a single commercial real estate property or a portfolio of properties • May include tranches of varying levels of subordination			Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs for these valuations include: • Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral • Current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds) • Market yields implied by transactions of similar or related assets • Current performance of the underlying collateral • Capitalization rates and multiples


Loans and securities backed by residential real estate • Collateralized by portfolios of residential real estate • May include tranches of varying levels of subordination			Valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof. Significant inputs are determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles, including relevant indices such as the ABX (an index that tracks the performance of subprime residential mortgage bonds). Significant inputs include: • Home price projections, residential property liquidation timelines and related costs • Underlying loan prepayment, default and cumulative loss expectations • Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral • Market yields implied by transactions of similar or related assets


Loan portfolios • Acquired portfolios of distressed loans • Primarily backed by commercial and residential real estate collateral			Valuations are based on discounted cash flow techniques. Significant inputs are determined based on relative value analyses, which incorporate comparisons to recent auction data for other similar loan portfolios. Significant inputs include: • Amount and timing of expected future cash flows • Market yields implied by transactions of similar or related assets


Bank loans and bridge loans Corporate debt securities State and municipal obligations Other debt obligations			Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include: • Amount and timing of expected future cash flows • Current levels and trends of market indices such as CDX, LCDX and MCDX (indices that track the performance of corporate credit, loans and municipal obligations, respectively) • Market yields implied by transactions of similar or related assets • Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation


Equities and convertible debentures • Private equity investments			Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available: • Transactions in similar instruments • Discounted cash flow techniques • Third-party appraisals • Industry multiples and public comparables Evidence includes recent or pending reorganizations (e.g., merger proposals, tender offers, debt restructurings) and significant changes in financial metrics, such as: • Current financial performance as compared to projected performance • Capitalization rates and multiples • Market yields implied by transactions of similar or related assets

Fair Value of Cash Instruments by Level

The tables below present, by level within the fair value hierarchy, cash instrument assets and liabilities, at fair value. Cash instrument assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

Cash Instrument Assets at Fair Value as of June 2011

in millions

Level 1

Level 2

Level 3

Total

Commercial paper, certificates of deposit, time deposits and other money market instruments

3,354

3,832

—

7,186

U.S. government and federal agency obligations

34,736

52,339

—

87,075

Non-U.S. government obligations

49,036

5,987

—

55,023

Mortgage and other asset-backed loans and securities ¹:

Loans and securities backed by commercial real estate

—

4,298

2,395

6,693

Loans and securities backed by residential real estate

—

4,981

2,735

7,716

Loan portfolios

—

1,238

Bank loans and bridge loans

—

8,744

10,183

18,927

Corporate debt securities ²

114

22,721

2,747

25,582

State and municipal obligations

—

2,685

643

3,328

Other debt obligations ²

—

1,082

1,472

2,554

Equities and convertible debentures

44,558

13,616

⁴

13,452

⁵

71,626

Commodities

—

10,133

—

10,133

Total

131,798

130,418

34,865

297,081

Cash Instrument Liabilities at Fair Value as of June 2011

in millions

Level 1

Level 2

Level 3

Total

U.S. government and federal agency obligations

29,194

198

—

29,392

Non-U.S. government obligations

27,763

859

—

28,622

Mortgage and other asset-backed loans and securities:

Loans and securities backed by residential real estate

—

Bank loans and bridge loans

—

1,240

583

1,823

Corporate debt securities ⁶

9,168

9,267

Other debt obligations

—

Equities and convertible debentures ⁷

32,196

819

33,019

Commodities

—

Total

89,231

12,304

612

102,147


1.	Includes $210 million and $684 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.

2.	Includes $786 million and $1.45 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

3.	Consists of publicly listed equity securities.

4.	Principally consists of restricted and less liquid publicly listed securities.

5.	Includes $11.93 billion of private equity investments, $1.17 billion of real estate investments and $348 million of convertible debentures.

6.	Includes $14 million of CDOs and CLOs backed by corporate obligations in level 3.

7.	Substantially all consists of publicly listed equity securities.



	Cash Instrument Assets at Fair Value as of December 2010
in millions	Level 1			Level 2			Level 3			Total

Commercial paper, certificates of deposit, time deposits and other money market instruments	$	4,344		$	6,918		$	—		$	11,262
U.S. government and federal agency obligations		36,184			48,744			—			84,928
Non-U.S. government obligations		35,504			5,171			—			40,675
Mortgage and other asset-backed loans and securities ¹:
Loans and securities backed by commercial real estate		—			3,381			2,819			6,200
Loans and securities backed by residential real estate		—			7,031			2,373			9,404
Loan portfolios		—			153			1,285			1,438
Bank loans and bridge loans		—			8,134			9,905			18,039
Corporate debt securities ²		108			21,874			2,737			24,719
State and municipal obligations		—			2,038			754			2,792
Other debt obligations		—			1,958			1,274			3,232
Equities and convertible debentures		41,660	³		15,113	⁴		11,060	⁵		67,833
Commodities		—			13,138			—			13,138


Total	$	117,800		$	133,653		$	32,207		$	283,660



	Cash Instrument Liabilities at Fair Value as of December 2010
in millions	Level 1			Level 2			Level 3			Total

U.S. government and federal agency obligations	$	23,191		$	73		$	—		$	23,264
Non-U.S. government obligations		28,168			841			—			29,009
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		—			5			—			5
Loans and securities backed by residential real estate		—			6			—			6
Bank loans and bridge loans		—			1,107			380			1,487
Corporate debt securities ⁶		26			7,133			60			7,219
Equities and convertible debentures ⁷		24,283			699			6			24,988
Commodities		—			9			—			9


Total	$	75,668		$	9,873		$	446		$	85,987


1.	Includes $212 million and $565 million of CDOs backed by real estate in level 2 and level 3, respectively.

2.	Includes $368 million and $1.07 billion of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.

3.	Consists of publicly listed equity securities.

4.	Substantially all consists of restricted and less liquid publicly listed securities.

5.	Includes $10.03 billion of private equity investments, $874 million of real estate investments and $156 million of convertible debentures.

6.	Includes $35 million of CDOs and CLOs backed by corporate obligations in level 3.

7.	Substantially all consists of publicly listed equity securities.

Level 3 Rollforward

If a cash instrument was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. Transfers between levels are reported at the beginning of the reporting period in which they occur.

The tables below present changes in fair value for all cash instrument assets and liabilities categorized as level 3 as of the end of the period.

See Note 5 for further information about unrealized gains and losses on level 3 cash instruments.

Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended June 2011

Net unrealized

gains/(losses)

Net

relating to

transfers

Balance,

realized

instruments

in and/or

Balance,

beginning

gains/

still held at

(out) of

end of

in millions

of period

(losses)

period-end

Purchases ¹

Sales

Settlements

level 3

period

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

$2,521

302

(436

)

(225

)

161

2,395

Loans and securities backed by residential real estate

2,636

382

(183

)

(148

)

(27

)

2,735

Loan portfolios

1,312

(15

)

(44

)

(44

)

(36

)

1,238

Bank loans and bridge loans

9,929

189

220

1,249

(559

)

(524

)

(321

)

10,183

Corporate debt securities

3,138

404

(627

)

(127

)

(148

)

2,747

State and municipal obligations

742

(119

)

643

Other debt obligations

1,483

158

(316

)

(90

)

166

1,472

Equities and convertible debentures

11,765

380

332

(208

)

(218

)

1,312

13,452

Total

$33,526

509

746

2,856

(2,492

)

(1,378

)

1,098

34,865

Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended June 2011

Net unrealized

(gains)/losses

Net

relating to

transfers

Balance,

realized

instruments

in and/or

Balance,

beginning

(gains)/

still held at

(out) of

end of

in millions

of period

losses

period-end

Purchases

Sales

Settlements

level 3

period

Total

$482

(130

)

201

(21

)

(16

)

612


1.	Includes both originations and secondary market purchases.

Significant transfers in or out of level 3 financial assets during the three months ended June 2011 included:


•	Equities and convertible debentures: net transfer into level 3 of $1.31 billion, principally due to transfers into level 3 of certain private equity investments due to reduced transparency of market prices, partially offset by transfers to level 2 of certain private equity investments due to improved transparency of market prices as a result of market transactions in these financial instruments.

•	Bank loans and bridge loans: net transfer out of level 3 of $321 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of market transactions in these financial instruments, partially offset by transfers to level 3 of certain loans due to reduced transparency of market prices as a result of less market activity in these financial instruments.

Level 3 Cash Instrument Assets at Fair Value for the Six Months Ended June 2011

Net unrealized

gains/(losses)

Net

relating to

transfers

Balance,

realized

instruments

in and/or

Balance,

beginning

gains/

still held at

(out) of

end of

in millions

of year

(losses)

period-end

Purchases ¹

Sales

Settlements

level 3

period

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

$2,819

142

659

(803

)

(304

)

(197

)

2,395

Loans and securities backed by residential real estate

2,373

122

829

(394

)

(369

)

2,735

Loan portfolios

1,285

(77

)

(187

)

113

1,238

Bank loans and bridge loans

9,905

344

721

2,269

(802

)

(1,330

)

(924

)

10,183

Corporate debt securities

2,737

209

148

1,154

(889

)

(173

)

(439

)

2,747

State and municipal obligations

754

(135

)

643

Other debt obligations

1,274

441

(306

)

(153

)

1,472

Equities and convertible debentures

11,060

679

2,055

(700

)

(437

)

734

13,452

Total

$32,207

912

1,913

7,452

(4,106

)

(2,956

)

(557

)

34,865

Level 3 Cash Instrument Liabilities at Fair Value for the Six Months Ended June 2011

Net unrealized

(gains)/losses

Net

relating to

transfers

Balance,

realized

instruments

in and/or

Balance,

beginning

(gains)/

still held at

(out) of

end of

in millions

of year

losses

period-end

Purchases

Sales

Settlements

level 3

period

Total

$446

$(15

)

$67

$(193

)

$325

$(15

)

$(3

)

$612


1.	Includes both originations and secondary market purchases.

Significant transfers in or out of level 3 financial assets during the six months ended June 2011 included:


•	Bank loans and bridge loans: net transfer out of level 3 of $924 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of market transactions in these financial instruments, partially offset by transfers to level 3 of certain loans due to reduced transparency of market prices as a result of less market activity in these financial instruments.

•	Equities and convertible debentures: net transfer into level 3 of $734 million, principally due to transfers to level 3 of certain private equity investments due to reduced transparency of market prices, partially offset by transfers to level 2 of certain private equity investments due to improved transparency of market prices as a result of market transactions in these financial instruments.

•	Corporate debt securities: net transfer out of level 3 of $439 million, principally due to transfers to level 2 of certain corporate debt securities due to increased transparency of market prices as a result of market transactions in these financial instruments.



	Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended June 2010
						Net unrealized
						gains/(losses)						Net
			Net			relating to			Net			transfers
	Balance,		realized			instruments			purchases,			in and/or			Balance,
	beginning		gains/			still held at			sales and			(out) of			end of
in millions	of period		(losses)			period-end			settlements			level 3			period

Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	$	4,070	$	88		$	60		$	(327	)	$	(23	)	$	3,868
Loans and securities backed by residential real estate		2,131		57			61			37			(162	)		2,124
Loan portfolios		1,291		4			(16	)		(72	)		51			1,258
Bank loans and bridge loans		9,323		134			(205	)		(162	)		483			9,573
Corporate debt securities		2,703		36			49			(202	)		6			2,592
State and municipal obligations		870		(5	)		34			(73	)		(1	)		825
Other debt obligations		1,487		(1	)		78			(116	)		(72	)		1,376
Equities and convertible debentures		10,653		21			130			248			(717	)		10,335


Total	$	32,528	$	334		$	191		$	(667	)	$	(435	)	$	31,951




	Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended June 2010
						Net unrealized
						(gains)/losses						Net
			Net			relating to			Net			transfers
	Balance,		realized			instruments			purchases,			in and/or			Balance,
	beginning		(gains)/			still held at			sales and			(out) of			end of
in millions	of period		losses			period-end			settlements			level 3			period

Total	$	483	$	(112	)	$	109		$	113		$	2		$	595

Significant transfers in or out of level 3 financial assets during the three months ended June 2010 included:


•	Bank loans and bridge loans: net transfer into level 3 of $483 million, principally reflecting transfers from level 2 of certain loans due to reduced transparency of market prices as a result of less market activity in these loans.

•	Equities and convertible debentures: net transfer out of level 3 of $717 million, principally due to transfers to level 2 of certain private equity investments reflecting improved transparency of market prices as a result of market transactions.



	Level 3 Cash Instrument Assets at Fair Value for the Six Months Ended June 2010
						Net unrealized
						gains/(losses)						Net
						relating to			Net			transfers
	Balance,		Net			instruments			purchases,			in and/or			Balance,
	beginning		realized			still held at			sales and			(out) of			end of
in millions	of year		gains/(losses)			period-end			settlements			level 3			period

Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	$	4,620	$	172		$	202		$	(1,002	)	$	(124	)	$	3,868
Loans and securities backed by residential real estate		1,880		66			143			52			(17	)		2,124
Loan portfolios		1,364		28			(6	)		(194	)		66			1,258
Bank loans and bridge loans		9,560		260			83			(404	)		74			9,573
Corporate debt securities		2,235		72			141			793			(649	)		2,592
State and municipal obligations		1,114		(3	)		26			(299	)		(13	)		825
Other debt obligations		2,235		(10	)		119			(105	)		(863	)		1,376
Equities and convertible debentures		11,871		150			147			(903	)		(930	)		10,335


Total	$	34,879	$	735		$	855		$	(2,062	)	$	(2,456	)	$	31,951




	Level 3 Cash Instrument Liabilities at Fair Value for the Six Months Ended June 2010
						Net unrealized
						(gains)/losses						Net
						relating to			Net			transfers
	Balance,		Net			instruments			purchases,			in and/or			Balance,
	beginning		realized			still held at			sales and			(out) of			end of
in millions	of year		(gains)/losses			period-end			settlements			level 3			period

Total	$	572	$	(132	)	$	60		$	169		$	(74	)	$	595

Significant transfers in or out of level 3 financial assets during the six months ended June 2010 included:


•	Equities and convertible debentures: net transfer out of level 3 of $930 million, principally due to transfers into level 2 of certain private equity investments reflecting improved transparency of market prices as a result of market transactions.

•	Other debt obligations: net transfer out of level 3 of $863 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE, which holds real estate assets. Such assets are included in “Other assets” in the condensed consolidated statements of financial condition.

•	Corporate debt securities: net transfer out of level 3 of $649 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE, which holds identifiable intangible assets, as a result of the adoption of ASU No. 2009-17. Such assets are included in “Other assets” in the condensed consolidated statements of financial condition.

Investments in Funds That Calculate Net Asset
Value Per Share

Cash instruments at fair value include investments in funds that are valued based on the net asset value per share (NAV) of the investment fund. The firm uses NAV as its measure of fair value for fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value.

The firm’s investments in funds that calculate NAV primarily consist of investments in firm-sponsored funds where the firm co-invests with third-party investors. The private equity, private debt and real estate funds are primarily closed-end funds in which the firm’s investments are not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated and it is estimated that substantially all of the underlying assets of existing funds will be liquidated over the next 10 years. The firm’s investments in hedge funds are generally redeemable on a quarterly basis with 91 days’ notice, subject to a maximum redemption level of 25% of the firm’s initial investments at any quarter-end.

The table below presents the fair value of the firm’s investments in, and unfunded commitments to, funds that calculate NAV.

As of June 2011

As of December 2010

Fair Value of

Unfunded

Fair Value of

Unfunded

in millions

Investments

Commitments

Investments

Commitments

Private equity funds ¹

8,507

4,326

7,911

4,816

Private debt funds ²

3,884

3,406

4,267

3,721

Hedge funds ³

3,213

—

3,169

—

Real estate and other funds ⁴

1,292

1,809

1,246

1,884

Total

16,896

9,541

16,593

10,421


1.	These funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations and growth investments.

2.	These funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for mid- to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers.

3.	These funds are primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage/special situations and capital structure arbitrage.

4.	These funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and direct property.