Securitization Activities

9 Months Ended

Sep. 30, 2020

Transfers and Servicing [Abstract]

Securitization Activities

Note 16.

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.

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.

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. Interests accounted for at fair value are primarily 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 4 through 10 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		2020	2019		2020	2019
Residential mortgages		$  7,717	$  4,955		$15,725	$10,258
Commercial mortgages		6,279	5,134		14,062	8,169
Other financial assets		66	218		1,189	564
Total financial assets securitized		$14,062	$10,307		$30,976	$18,991
Retained interests cash flows		$     130	$       91		$     274	$     267

In the table above, financial assets securitized included assets of $132 million during the three months ended September 2020, $185 million during the three months ended September 2019, $435 million during the nine months ended September 2020 and $391 million during the nine months ended September 2019, which were securitized in a non-cash exchange for loans and investments.

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 2020
U.S. government agency-issued CMOs	$21,836	$1,606	$  4
Other residential mortgage-backed	24,610	1,316	25
Other commercial mortgage-backed	35,442	767	30
Corporate debt and other asset-backed	4,094	159	10
Total	$85,982	$3,848	$69
As of December 2019
U.S. government agency-issued CMOs	$14,328	$1,530	$  3
Other residential mortgage-backed	24,166	1,078	24
Other commercial mortgage-backed	25,588	615	6
Corporate debt and other asset-backed	3,612	149	–
Total	$67,694	$3,372	$33

In the table above:

• CMOs represents collateralized mortgage obligations.

• 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 $3.85 billion as of September 2020 and $3.35 billion as of December 2019.

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 $83 million as of September 2020 and $57 million as of December 2019, and the notional amount of these derivatives and commitments was $1.47 billion as of September 2020 and $1.20 billion as of December 2019. The notional amounts of these derivatives and commitments are included in maximum exposure to loss in the nonconsolidated VIE table in Note 17.

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 2020		December 2019
Fair value of retained interests		$ 3,688		$  3,198
Weighted average life (years)		4.7		6.0
Constant prepayment rate		16.0%		12.9%
Impact of 10% adverse change		$     (28	)	$      (22	)
Impact of 20% adverse change		$     (52	)	$      (42	)
Discount rate		4.7%		4.7%
Impact of 10% adverse change		$     (53	)	$      (59	)
Impact of 20% adverse change		$   (104	)	$    (117	)

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 CMOs 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 $159 million and a weighted average life of 2.6 years as of September 2020, and a fair value of $149 million and a weighted average life of 3.3 years as of December 2019. 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 2020 and December 2019. The firm’s maximum exposure to adverse changes in the value of these interests is the carrying value of $159 million as of September 2020 and $149 million as of December 2019.