Variable Interest Entities

6 Months Ended

Jun. 30, 2011

Variable Interest Entities [Abstract]

Variable Interest Entities

Note 11.  Variable Interest Entities

VIEs generally finance the purchase of assets by issuing debt and equity securities that are either collateralized by or indexed to the assets held by the VIE. The debt and equity securities issued by a VIE may include tranches of varying levels of subordination. The firm’s involvement with VIEs includes securitization of financial assets, as described in Note 10, and investments in and loans to other types of VIEs, as described below. See Note 10 for additional information about securitization activities, including the definition of beneficial interests. See Note 3 for the firm’s consolidation policies, including the definition of a VIE.

The firm is principally involved with VIEs through the following business activities:

Mortgage-Backed VIEs and Corporate CDO and CLO VIEs.  The firm sells residential and commercial mortgage loans and securities to mortgage-backed VIEs and corporate bonds and loans to corporate CDO and CLO VIEs and may retain beneficial interests in the assets sold to these VIEs. The firm purchases and sells beneficial interests issued by mortgage-backed and corporate CDO and CLO VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain of these VIEs, primarily interest rate swaps, which are typically not variable interests. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs.

Certain mortgage-backed and corporate CDO and CLO VIEs, usually referred to as synthetic CDOs or credit-linked note VIEs, synthetically create the exposure for the beneficial interests they issue by entering into credit derivatives, rather than purchasing the underlying assets. These credit derivatives may reference a single asset, an index, or a portfolio/basket of assets or indices. See Note 7 for further information on credit derivatives. These VIEs use the funds from the sale of beneficial interests and the premiums received from credit derivative counterparties to purchase securities which serve to collateralize the beneficial interest holders and/or the credit derivative counterparty. These VIEs may enter into other derivatives, primarily interest rate swaps, which are typically not variable interests. The firm may be a counterparty to derivatives with these VIEs and generally enters into derivatives with other counterparties to mitigate its risk.

Real Estate, Credit-Related and Other Investing VIEs.  The firm purchases equity and debt securities issued by and makes loans to VIEs that hold real estate, performing and nonperforming debt, distressed loans and equity securities.

Other Asset-Backed VIEs.  The firm structures VIEs that issue notes to clients and purchases and sells beneficial interests issued by other asset-backed VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain other asset-backed VIEs, primarily total return swaps on the collateral assets held by these VIEs under which the firm pays the VIE the return due to the note holders and receives the return on the collateral assets owned by the VIE. The firm generally can be removed as the total return swap counterparty. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs. The firm typically does not sell assets to the other asset-backed VIEs it structures.

Power-Related VIEs.  The firm purchases debt and equity securities issued by and may provide guarantees to VIEs that hold power-related assets. The firm typically does not sell assets to or enter into derivatives with these VIEs.

Investment Funds.  The firm purchases equity securities issued by and may provide guarantees to certain of the investment funds it manages. The firm typically does not sell assets to or enter into derivatives with these VIEs.

Principal-Protected Note VIEs.  The firm structures VIEs that issue principal-protected notes to clients. These VIEs own portfolios of assets, principally with exposure to hedge funds. Substantially all of the principal protection on the notes issued by these VIEs is provided by the asset portfolio rebalancing that is required under the terms of the notes. The firm enters into total return swaps with these VIEs under which the firm pays the VIE the return due to the principal-protected note holders and receives the return on the assets owned by the VIE. The firm may enter into derivatives with other counterparties to mitigate the risk it has from the derivatives it enters into with these VIEs. The firm also obtains funding through these VIEs. These VIEs were consolidated by the firm upon adoption of changes to U.S. GAAP on January 1, 2010.

Municipal Bond Securitizations.  The firm sells municipal securities to VIEs that issue short-term qualifying tax-exempt securities. The firm consolidates these VIEs because it owns the residual interests, which allows the firm to make decisions that significantly impact the economic performance of these VIEs.

VIE Consolidation Analysis

A variable interest in a VIE is an investment (e.g., debt or equity securities) or other interest (e.g., derivatives or loans and lending commitments) in a VIE that will absorb portions of the VIE’s expected losses or receive portions of the VIE’s expected residual returns.

The firm’s variable interests in VIEs include senior and subordinated debt in residential and commercial mortgage-backed and other asset-backed securitization entities, CDOs and CLOs; loans and lending commitments; limited and general partnership interests; preferred and common equity; derivatives that may include foreign currency, equity and/or credit risk; guarantees; and certain of the fees the firm receives from investment funds. Certain interest rate, foreign currency and credit derivatives the firm enters into with VIEs are not variable interests because they create rather than absorb risk.

The enterprise with a controlling financial interest in a VIE is known as the primary beneficiary and consolidates the VIE. The firm determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers:

•   which variable interest holder has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance;

•   which variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE;

•   the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders;

•   the VIE’s capital structure;

•   the terms between the VIE and its variable interest holders and other parties involved with the VIE; and

•   related party relationships.

The firm reassesses its initial evaluation of whether an entity is a VIE when certain reconsideration events occur. The firm reassesses its determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.

Nonconsolidated VIEs

The firm’s exposure to the obligations of VIEs is generally limited to its interests in these entities. In certain instances, the firm provides guarantees, including derivative guarantees, to VIEs or holders of variable interests in VIEs.

The tables below present information about nonconsolidated VIEs in which the firm holds variable interests. Nonconsolidated VIEs are aggregated based on principal business activity. The nature of the firm’s variable interests can take different forms, as described in the rows under maximum exposure to loss. In the tables below:

•   The maximum exposure to loss excludes the benefit of offsetting financial instruments that are held to mitigate the risks associated with these variable interests.

•   For retained and purchased interests and loans and investments, the maximum exposure to loss is the carrying value of these interests.

•   For commitments and guarantees, and derivatives, the maximum exposure to loss is the notional amount, which does not represent anticipated losses and also has not been reduced by unrealized losses already recorded. As a result, the maximum exposure to loss exceeds liabilities recorded for commitments and guarantees, and derivatives provided to VIEs.

The carrying values of the firm’s variable interests in nonconsolidated VIEs are included in the condensed consolidated statement of financial condition as follows:

•   Substantially all assets held by the firm related to mortgage-backed, corporate CDO and CLO and other asset-backed VIEs and investment funds are included in “Financial instruments owned, at fair value.” Substantially all liabilities held by the firm related to mortgage-backed, corporate CDO and CLO and other asset-backed VIEs are included in “Financial instruments sold, but not yet purchased, at fair value.”

•   Assets and liabilities held by the firm related to real estate, credit-related and other investing VIEs are primarily included in “Financial instruments owned, at fair value” and “Payables to customers and counterparties” and “Other liabilities and accrued expenses,” respectively.

•   Assets and liabilities held by the firm related to power-related VIEs are primarily included in “Other assets” and “Other liabilities and accrued expenses,” respectively.

	Nonconsolidated VIEs
	As of June 2011
				Corporate		Real estate, credit-		Other
	Mortgage-			CDOs and		related and		asset-		Power-		Investment
in millions	backed			CLOs		other investing		backed		related		funds		Total
Assets in VIE	$	94,287	2	$	25,377	$	8,813	$	4,267	$	529	$	2,557	$	135,830
Carrying Value of the Firm’s Variable Interests
Assets		6,835			1,383		1,421		220		271		4		10,134
Liabilities		—			87		1		25		5		—		118
Maximum Exposure to Loss in Nonconsolidated VIEs
Retained interests		5,605			43		—		18		—		—		5,666
Purchased interests		905			701		—		190		—		—		1,796
Commitments and guarantees 1		—			1		324		—		50		—		375
Derivatives 1		2,673			8,207		—		1,152		—		—		12,032
Loans and investments		110			—		1,421		—		271		4		1,806
Total	$	9,293	2	$	8,952	$	1,745	$	1,360	$	321	$	4	$	21,675

	Nonconsolidated VIEs
	As of December 2010
				Corporate		Real estate, credit-		Other
	Mortgage-			CDOs and		related and		asset-		Power-		Investment
in millions	backed			CLOs		other investing		backed		related		funds		Total
Assets in VIE	$	88,755	2	$	21,644	$	12,568	$	5,513	$	552	$	2,330	$	131,362
Carrying Value of the Firm’s Variable Interests
Assets		8,076			909		1,063		266		239		5		10,558
Liabilities		—			114		1		19		14		—		148
Maximum Exposure to Loss in Nonconsolidated VIEs
Retained interests		6,887			50		—		12		—		—		6,949
Purchased interests		839			353		—		247		—		—		1,439
Commitments and guarantees 1		—			1		125		—		69		—		195
Derivatives 1		3,128			7,593		—		1,105		—		—		11,826
Loans and investments		104			—		1,063		—		239		5		1,411
Total	$	10,958	2	$	7,997	$	1,188	$	1,364	$	308	$	5	$	21,820

1.	The aggregate amounts include $4.10 billion and $4.52 billion as of June 2011 and December 2010, respectively, related to guarantees and derivative transactions with VIEs to which the firm transferred assets.
2.	Assets in VIE and maximum exposure to loss include $5.55 billion and $2.78 billion, respectively, as of June 2011, and $6.14 billion and $3.25 billion, respectively, as of December 2010, related to CDOs backed by mortgage obligations.

Consolidated VIEs

The tables below present the carrying amount and classification of assets and liabilities in consolidated VIEs, excluding the benefit of offsetting financial instruments that are held to mitigate the risks associated with the firm’s variable interests. Consolidated VIEs are aggregated based on principal business activity and their assets and liabilities are presented net of intercompany eliminations. The majority of the assets in principal-protected notes VIEs are intercompany and are eliminated in consolidation.

Substantially all the assets in consolidated VIEs can only be used to settle obligations of the VIE.

The tables below exclude VIEs in which the firm holds a majority voting interest if (i) the VIE meets the definition of a business and (ii) the VIE’s assets can be used for purposes other than the settlement of its obligations.

The liabilities of real estate, credit-related and other investing VIEs and CDOs, mortgage-backed and other asset-backed VIEs do not have recourse to the general credit of the firm.

	Consolidated VIEs
	As of June 2011
					CDOs,
	Real estate,				mortgage-
	credit-related		Municipal		backed and		Principal-
	and other		bond		other asset-		protected
in millions	investing		securitizations		backed		notes		Total
Assets
Cash and cash equivalents	$	446	$	—	$	48	$	13	$	507
Cash and securities segregated for regulatory and other purposes		169		—		—		—		169
Receivables from brokers, dealers and clearing organizations		3		—		—		—		3
Receivables from customers and counterparties		—		—		17		—		17
Financial instruments owned, at fair value		2,277		191		580		699		3,747
Other assets		2,546		—		468		—		3,014
Total	$	5,441	$	191	$	1,113	$	712	$	7,457
Liabilities
Other secured financings	$	2,037	$	200	$	473	$	3,234	$	5,944
Payables to customers and counterparties		—		—		24		36		60
Financial instruments sold, but not yet purchased, at fair value		—		—		58		—		58
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings		4		—		—		2,132		2,136
Unsecured long-term borrowings		173		—		—		—		173
Other liabilities and accrued expenses		1,691		—		32		305		2,028
Total	$	3,905	$	200	$	587	$	5,707	$	10,399

	Consolidated VIEs
	As of December 2010
					CDOs,
	Real estate,				mortgage-
	credit-related		Municipal		backed and		Principal-
	and other		bond		other asset-		protected
in millions	investing		securitizations		backed		notes		Total
Assets
Cash and cash equivalents	$	248	$	—	$	39	$	52	$	339
Cash and securities segregated for regulatory and other purposes		205		—		—		—		205
Receivables from brokers, dealers and clearing organizations		4		—		—		—		4
Receivables from customers and counterparties		1		—		27		—		28
Financial instruments owned, at fair value		2,531		547		550		648		4,276
Other assets		3,369		—		499		—		3,868
Total	$	6,358	$	547	$	1,115	$	700	$	8,720
Liabilities
Other secured financings	$	2,434	$	630	$	417	$	3,224	$	6,705
Payables to customers and counterparties		—		—		12		—		12
Financial instruments sold, but not yet purchased, at fair value		—		—		55		—		55
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings		302		—		—		2,359		2,661
Unsecured long-term borrowings		6		—		—		—		6
Other liabilities and accrued expenses		2,004		—		32		—		2,036
Total	$	4,746	$	630	$	516	$	5,583	$	11,475