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; 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 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 as collateral for 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 a summary of the nonconsolidated VIEs in which the firm holds variable interests. The nature of the firm’s variable interests can take different forms, as described in the rows under maximum exposure to loss.


	As of
$ in millions		March 2017	December 2016
Total nonconsolidated VIEs
Assets in VIEs		$68,972	$70,083

Carrying value of variable interests — assets		6,385	6,199

Carrying value of variable interests — liabilities		183	254
Maximum exposure to loss:
Retained interests		1,470	1,564

Purchased interests		486	544

Commitments and guarantees		2,497	2,196

Derivatives		6,872	7,144

Loans and investments		4,148	3,760
Total maximum exposure to loss		$15,473	$15,208

In the table above:

•

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

•

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

•

The maximum exposure to loss from commitments and guarantees, and derivatives 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.

•

Total maximum exposure to loss from commitments and guarantees, and derivatives includes $1.40 billion and $1.28 billion as of March 2017 and December 2016, respectively, related to transactions with VIEs to which the firm transferred assets.

The table below disaggregates, by principal business activity, the information for nonconsolidated VIEs included in the summary table above.


	As of
$ in millions		March 2017	December 2016
Mortgage-backed
Assets in VIEs		$30,947	$32,714

Carrying value of variable interests — assets		1,826	1,936
Maximum exposure to loss:
Retained interests		1,418	1,508

Purchased interests		408	429

Commitments and guarantees		10	9

Derivatives		164	163
Total maximum exposure to loss		$ 2,000	$ 2,109
Corporate CDOs and CLOs
Assets in VIEs		$ 5,457	$ 5,391

Carrying value of variable interests — assets		700	393

Carrying value of variable interests — liabilities		26	25
Maximum exposure to loss:
Retained interests		1	2

Purchased interests		43	43

Commitments and guarantees		650	186

Derivatives		2,465	2,841

Loans and investments		467	94
Total maximum exposure to loss		$ 3,626	$ 3,166
Real estate, credit-related and other investing
Assets in VIEs		$ 9,495	$ 8,617

Carrying value of variable interests — assets		2,568	2,550

Carrying value of variable interests — liabilities		3	3
Maximum exposure to loss:
Commitments and guarantees		659	693

Loans and investments		2,568	2,550
Total maximum exposure to loss		$ 3,227	$ 3,243
Other asset-backed
Assets in VIEs		$ 6,240	$ 6,405

Carrying value of variable interests — assets		273	293

Carrying value of variable interests — liabilities		150	220
Maximum exposure to loss:
Retained interests		51	54

Purchased interests		35	72

Commitments and guarantees		275	275

Derivatives		4,237	4,134

Loans and investments		95	89
Total maximum exposure to loss		$ 4,693	$ 4,624
Investments in funds and other
Assets in VIEs		$16,833	$16,956

Carrying value of variable interests — assets		1,018	1,027

Carrying value of variable interests — liabilities		4	6
Maximum exposure to loss:
Commitments and guarantees		903	1,033

Derivatives		6	6

Loans and investments		1,018	1,027
Total maximum exposure to loss		$ 1,927	$ 2,066

In the table above, mortgage-backed includes assets in VIEs of $1.33 billion and $1.54 billion, and maximum exposure to loss of $253 million and $279 million, as of March 2017 and December 2016, respectively, related to CDOs backed by mortgage obligations.

As of both March 2017 and December 2016, 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: Substantially all assets were included in “Financial instruments owned, at fair value” and “Loans receivable.”

•

Corporate CDOs and CLOs: 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: 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: 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.”

•

Investments in funds and other: 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 a summary of the carrying value and classification of assets and liabilities in consolidated VIEs.


	As of
$ in millions		March 2017	December 2016
Total consolidated VIEs
Assets
Cash and cash equivalents		$ 997	$ 300

Loans receivable		528	603

Financial instruments owned, at fair value		2,256	2,047

Other assets		589	682
Total		$4,370	$3,632
Liabilities
Other secured financings		$1,561	$ 854

Payables to brokers, dealers and clearing organizations		9	1

Financial instruments sold, but not yet purchased, at fair value		15	7

Unsecured short-term borrowings		212	197

Unsecured long-term borrowings		323	334

Other liabilities and accrued expenses		959	803
Total		$3,079	$2,196

In the table above:

•

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

•

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

The table below disaggregates, by principal business activity, the information for consolidated VIEs included in the summary table above.


	As of
$ in millions		March 2017	December 2016
Real estate, credit-related and other investing
Assets
Cash and cash equivalents		$ 323	$ 300

Loans receivable		528	603

Financial instruments owned, at fair value		1,917	1,708

Other assets		580	680
Total		$ 3,348	$ 3,291
Liabilities
Other secured financings		$ 304	$ 284

Payables to brokers, dealers and clearing organizations		9	1

Financial instruments sold, but not yet purchased, at fair value		15	7

Other liabilities and accrued expenses		959	803
Total		$ 1,287	$ 1,095
CDOs, mortgage-backed and other asset-backed
Assets
Cash and cash equivalents		$ 674	$ —

Financial instruments owned, at fair value		251	253

Other assets		9	2
Total		$ 934	$ 255
Liabilities
Other secured financings		$ 825	$ 139
Total		$ 825	$ 139
Principal-protected notes
Assets
Financial instruments owned, at fair value		$ 88	$ 86
Total		$ 88	$ 86
Liabilities
Other secured financings		$ 432	$ 431

Unsecured short-term borrowings		212	197

Unsecured long-term borrowings		323	334
Total		$ 967	$ 962

In the table above:

•

The majority of the assets in principal-protected notes VIEs are intercompany and are eliminated in consolidation.

•

Creditors and beneficial interest holders 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.