Securitization Activities

9 Months Ended

Sep. 30, 2019

Note 11.

Securitization Activities

The firm securitizes residential and commercial mortgages, corporate bonds, loans and other types of financial assets by selling these assets to securitization vehicles (e.g., trusts, corporate entities and limited liability companies) or through a resecuritization. The firm acts as underwriter of the beneficial interests that are sold to investors. The firm’s residential mortgage securitizations are primarily in connection with government agency securitizations.

Beneficial interests issued by securitization entities are debt or equity instruments that give the investors rights to receive all or portions of specified cash inflows to a securitization vehicle and include senior and subordinated interests in principal, interest and/or other cash inflows. The proceeds from the sale of beneficial interests are used to pay the transferor for the financial assets sold to the securitization vehicle or to purchase securities which serve as collateral.

The firm accounts for a securitization as a sale when it has relinquished control over the transferred financial assets. Prior to securitization, the firm generally accounts for assets pending transfer at fair value and therefore does not typically recognize significant gains or losses upon the transfer of assets. Net revenues from underwriting activities are recognized in connection with the sales of the underlying beneficial interests to investors.

For transfers of financial assets that are not accounted for as sales, the assets remain in financial instruments owned and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 10 for further information about collateralized financings and Note 23 for further information about interest expense.

The firm generally receives cash in exchange for the transferred assets but may also have continuing involvement with the transferred financial assets, including ownership of beneficial interests in securitized financial assets, primarily in the form of debt instruments. The firm may also purchase senior or subordinated securities issued by securitization vehicles (which are typically VIEs) in connection with secondary market-making activities.

The primary risks included in beneficial interests and other interests from the firm’s continuing involvement with securitization vehicles are the performance of the underlying collateral, the position of the firm’s investment in the capital structure of the securitization vehicle and the market yield for the security. These interests are primarily accounted for at fair value and classified in level 2 of the fair value hierarchy. Interests not accounted for at fair value are carried at amounts that approximate fair value. See Notes 5 through 8 for further information about fair value measurements.

The table below presents the amount of financial assets securitized and the cash flows received on retained interests in securitization entities in which the firm had continuing involvement as of the end of the period.



	Three Months Ended September			Nine Months Ended September

$ in millions		2019	2018		2019	2018
Residential mortgages		$ 4,955	$4,004		$10,258	$20,508
Commercial mortgages		5,134	2,883		8,169	7,079
Other financial assets		218	267		564	882
Total financial assets securitized		$10,307	$7,154		$18,991	$28,469
Retained interests cash flows		$ 91	$ 81		$ 267	$ 241

In the table above, financial assets securitized included assets of $185 million during the three months ended September 2019, $139 million during the three months ended September 2018, $391 million during the nine months ended September 2019 and $648 million during the nine months ended September 2018, which were securitized in a

non-cash

exchange for loans receivable and

held-to-maturity

securities.

The table below presents information about nonconsolidated securitization entities to which the firm sold assets and had continuing involvement as of the end of the period.



$ in millions	Outstanding Principal Amount	Retained Interests	Purchased Interests
As of September 2019
U.S. government agency-issued collateralized mortgage obligations	$12,889	$1,321	$ 2
Other residential mortgage-backed	22,101	984	18
Other commercial mortgage-backed	21,450	554	5
Corporate debt and other asset-backed	2,862	103	–
Total	$59,302	$2,962	$25
As of December 2018
U.S. government agency-issued collateralized mortgage obligations	$24,506	$1,758	$29
Other residential mortgage-backed	19,560	941	15
Other commercial mortgage-backed	15,088	448	10
Corporate debt and other asset-backed	3,311	133	3
Total	$62,465	$3,280	$57

In the table above:

•	The outstanding principal amount is presented for the purpose of providing information about the size of the securitization entities and is not representative of the firm’s risk of loss.

•	The firm’s risk of loss from retained or purchased interests is limited to the carrying value of these interests.

•	Purchased interests represent senior and subordinated interests, purchased in connection with secondary market-making activities, in securitization entities in which the firm also holds retained interests.

•	Substantially all of the total outstanding principal amount and total retained interests relate to securitizations during 2014 and thereafter.

•	The fair value of retained interests was $2.97 billion as of September 2019 and $3.28 billion as of December 2018.

In addition to the interests in the table above, the firm had other continuing involvement in the form of derivative transactions and commitments with certain nonconsolidated VIEs. The carrying value of these derivatives and commitments was a net asset of $70 million as of September 2019 and $75 million as of December 2018, and the notional amount of these derivatives and commitments was $1.16 billion as of September 2019 and $1.09 billion as of December 2018. The notional amounts of these derivatives and commitments are included in maximum exposure to loss in the nonconsolidated VIE table in Note 12.

The table below presents information about the weighted average key economic assumptions used in measuring the fair value of mortgage-backed retained interests.



	As of

$ in millions		September 2019		December 2018
Fair value of retained interests		$ 2,867		$ 3,151
Weighted average life (years)		5.4		7.2
Constant prepayment rate		14.6%		11.9%
Impact of 10% adverse change		$ ( 25	)	$ (27	)
Impact of 20% adverse change		$ ( 47	)	$ (53	)
Discount rate		4.8%		4.7%
Impact of 10% adverse change		$ ( 49	)	$ (75	)
Impact of 20% adverse change		$ ( 97	)	$ (147	)

In the table above:

•	Amounts do not reflect the benefit of other financial instruments that are held to mitigate risks inherent in these retained interests.

•	Changes in fair value based on an adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value is not usually linear.

•	The impact of a change in a particular assumption is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.

•	The constant prepayment rate is included only for positions for which it is a key assumption in the determination of fair value.

•	The discount rate for retained interests that relate to U.S. government agency-issued collateralized mortgage obligations does not include any credit loss. Expected credit loss assumptions are reflected in the discount rate for the remainder of retained interests.

The firm has other retained interests not reflected in the table above with a fair value of $103 million and a weighted average life of 3.6 years as of September 2019, and a fair value of $133 million and a weighted average life of 4.2 years as of December 2018. Due to the nature and fair value of certain of these retained interests, the weighted average assumptions for constant prepayment and discount rates and the related sensitivity to adverse changes are not meaningful as of both September 2019 and December 2018. The firm’s maximum exposure to adverse changes in the value of these interests is the carrying value of $103 million as of September 2019 and $133 million as of December 2018.