Note 12.

Variable Interest Entities

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) that will absorb portions of the VIE’s expected losses and/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.

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 11, and investments in and loans to other types of VIEs, as described below. See Note 11 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.

VIE Consolidation Analysis

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.

VIE Activities

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 about 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. The firm typically does not sell assets to, or enter into derivatives with, these VIEs.

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.

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.

Investments in Funds and Other VIEs. The firm makes equity investments in certain of the investment fund VIEs it manages, and is entitled to receive fees from these VIEs. The firm typically does not sell assets to, or enter into derivatives with, these VIEs. Other VIEs primarily includes nonconsolidated power-related VIEs. The firm purchases debt and equity securities issued by VIEs that hold power-related assets, and may provide commitments to these VIEs.

Adoption of ASU No. 2015-02

The firm adopted ASU No. 2015-02 as of January 1, 2016. Upon adoption, certain of the firm’s investments in entities that were previously classified as voting interest entities are now classified as VIEs. These include investments in certain limited partnership entities that have been deconsolidated upon adoption as certain fee interests are not considered significant interests under the guidance, and the firm is no longer deemed to have a controlling financial interest in such entities. See Note 3 for further information about the adoption of ASU No. 2015-02.

Nonconsolidated VIEs. As a result of adoption as of January 1, 2016, “Investments in funds and other” nonconsolidated VIEs included $10.70 billion in “Assets in VIEs,” $543 million in “Carrying value of variable interests — assets” and $559 million in “Maximum Exposure to Loss” related to investments in limited partnership entities that were previously classified as nonconsolidated voting interest entities.

Consolidated VIEs. As a result of adoption as of January 1, 2016, “Real estate, credit-related and other investing” consolidated VIEs included $302 million of assets, substantially all included in “Financial instruments owned, at fair value,” and $122 million of liabilities, included in “Other liabilities and accrued expenses” primarily related to investments in limited partnership entities that were previously classified as consolidated voting interest entities.

Nonconsolidated VIEs

The table below presents information about nonconsolidated VIEs in which the firm holds variable interests.


	As of
$ in millions		September 2016	December 2015
Mortgage-backed
Assets in VIEs		$40,021	$62,672

Carrying value of variable interests — assets		2,340	2,439

Maximum exposure to loss:
Retained interests		1,817	1,115

Purchased interests		523	1,324

Commitments and guarantees		10	40

Derivatives		168	222
Total maximum exposure to loss		2,518	2,701
Corporate CDOs and CLOs
Assets in VIEs		5,071	6,493

Carrying value of variable interests — assets		335	624

Carrying value of variable interests — liabilities		26	29

Maximum exposure to loss:
Retained interests		2	3

Purchased interests		68	106

Commitments and guarantees		1,077	647

Derivatives		1,823	2,633

Loans and investments		38	265
Total maximum exposure to loss		3,008	3,654
Real estate, credit-related and other investing
Assets in VIEs		8,922	9,793

Carrying value of variable interests — assets		2,689	3,557

Carrying value of variable interests — liabilities		3	3

Maximum exposure to loss:
Commitments and guarantees		476	570

Loans and investments		2,689	3,557
Total maximum exposure to loss		3,165	4,127
Other asset-backed
Assets in VIEs		6,522	7,026

Carrying value of variable interests — assets		301	265

Carrying value of variable interests — liabilities		222	145

Maximum exposure to loss:
Retained interests		61	41

Purchased interests		43	98

Commitments and guarantees		500	500

Derivatives		4,056	4,075

Loans and investments		97	—
Total maximum exposure to loss		4,757	4,714
Investments in funds and other
Assets in VIEs		15,474	4,161

Carrying value of variable interests — assets		897	286

Carrying value of variable interests — liabilities		1	—

Maximum exposure to loss:
Commitments and guarantees		553	263

Derivatives		6	6

Loans and investments		898	286
Total maximum exposure to loss		1,457	555
Total nonconsolidated VIEs
Assets in VIEs		76,010	90,145

Carrying value of variable interests — assets		6,562	7,171

Carrying value of variable interests — liabilities		252	177

Maximum exposure to loss:
Retained interests		1,880	1,159

Purchased interests		634	1,528

Commitments and guarantees		2,616	2,020

Derivatives		6,053	6,936

Loans and investments		3,722	4,108
Total maximum exposure to loss		$14,905	$15,751

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. In the table above, 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 table above:

•

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.

•

Mortgage-backed includes Assets in VIEs of $3.38 billion and $4.08 billion, and Maximum exposure to loss of $339 million and $502 million, as of September 2016 and December 2015, respectively, related to CDOs backed by mortgage obligations.

•

Total maximum exposure to loss for Commitments and guarantees, and Derivatives include $1.50 billion and $1.52 billion as of September 2016 and December 2015, respectively, related to transactions with VIEs to which the firm transferred assets.

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

•

Mortgage-backed: As of September 2016, substantially all assets were included in “Financial instruments owned, at fair value,” “Loans receivable” and “Receivables from customers and counterparties.” As of December 2015, all assets were included in “Financial instruments owned, at fair value;”

•

Corporate CDOs and CLOs: As of both September 2016 and December 2015, substantially all assets were included in “Financial instruments owned, at fair value” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value;”

•

Real estate, credit-related and other investing: As of both September 2016 and December 2015, all assets were included in “Financial instruments owned, at fair value,” “Loans receivable” and “Other assets,” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value” and “Other liabilities and accrued expenses;”

•

Other asset-backed: As of both September 2016 and December 2015, all assets were included in “Financial instruments owned, at fair value” and “Loans receivable” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value;” and

•

Investments in funds and other: As of both September 2016 and December 2015, substantially all assets were included in “Financial instruments owned, at fair value” and all liabilities were included in “Financial instruments sold, but not yet purchased, at fair value.”

Consolidated VIEs

The table below presents the carrying amount and classification of assets and liabilities in consolidated VIEs.


	As of
$ in millions		September 2016	December 2015
Real estate, credit-related and other investing
Assets
Cash and cash equivalents		$ 386	$ 374

Cash and securities segregated for regulatory and other
purposes		34	49

Receivables from brokers, dealers and clearing organizations		1	1

Loans receivable		740	1,534

Financial instruments owned, at fair value		1,893	1,585

Other assets		692	456
Total		3,746	3,999
Liabilities
Other secured financings		318	332

Payables to customers and counterparties		1	2

Financial instruments sold, but not yet purchased, at fair value		10	16

Other liabilities and accrued expenses		796	556
Total		1,125	906
CDOs, mortgage-backed and other asset-backed
Assets
Financial instruments owned, at fair value		251	572

Other assets		6	15
Total		257	587
Liabilities
Other secured financings		141	113

Payables to customers and counterparties		—	432
Total		141	545
Principal-protected notes
Assets
Financial instruments owned, at fair value		112	126
Total		112	126
Liabilities
Other secured financings		474	413

Unsecured short-term borrowings		381	416

Unsecured long-term borrowings		353	312
Total		1,208	1,141
Total consolidated VIEs
Assets
Cash and cash equivalents		386	374

Cash and securities segregated for regulatory and other
purposes		34	49

Receivables from brokers, dealers and clearing organizations		1	1

Loans receivable		740	1,534

Financial instruments owned, at fair value		2,256	2,283

Other assets		698	471
Total		4,115	4,712
Liabilities
Other secured financings		933	858

Payables to customers and counterparties		1	434

Financial instruments sold, but not yet purchased, at fair value		10	16

Unsecured short-term borrowings		381	416

Unsecured long-term borrowings		353	312

Other liabilities and accrued expenses		796	556
Total		$2,474	$2,592

In the table above:

•

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.

•

VIEs in which the firm holds a majority voting interest are excluded 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.

•

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

•

Assets and liabilities exclude the benefit of offsetting financial instruments that are held to mitigate the risks associated with the firm’s variable interests.