v3.21.2
Fair Value Option
 6 Months Ended
Jun. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value Option
Note 10.
Fair Value Option
Other Financial Assets and Liabilities at Fair Value
In addition to trading assets and liabilities, and certain investments and loans, the firm accounts for certain of its other financial assets and liabilities at fair value, substantially all under the fair value option. The primary reasons for electing the fair value option are to:
 
•  
Reflect economic events in earnings on a timely basis;
 
•  
Mitigate volatility in earnings from using different measurement attributes (e.g., transfers of financial assets accounted for as financings are recorded at fair value, whereas the related secured financing would be recorded on an accrual basis absent electing the fair value option); and
 
•  
Address simplification and cost-benefit considerations (e.g., accounting for hybrid financial instruments at fair value in their entirety versus bifurcation of embedded derivatives and hedge accounting for debt hosts).
Hybrid financial instruments are instruments that contain bifurcatable embedded derivatives and do not require settlement by physical delivery of nonfinancial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative from the associated debt, the derivative is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedges. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option.
Other financial assets and liabilities accounted for at fair value under the fair value option include:
 
•  
Resale and repurchase agreements;
 
•  
Certain securities borrowed and loaned transactions;
 
•  
Certain customer and other receivables and certain other liabilities;
 
•  
Certain time deposits (deposits with no stated maturity are not eligible for a fair value option election), including structured certificates of deposit, which are hybrid financial instruments;
 
•  
Substantially all other secured financings, including transfers of assets accounted for as financings; and
 
•  
Certain unsecured short- and long-term borrowings, substantially all of which are hybrid financial instruments.
Fair Value of Other Financial Assets and Liabilities by Level
The table below presents, by level within the fair value hierarchy, other financial assets and liabilities at fair value, substantially all of which are accounted for at fair value under the fair value option.
 
$ in millions
     Level 1       Level 2       Level 3       Total  
As of June 2021
                                
Assets
                                
Resale agreements
  
 
$
 
 
–
 
  
 
$ 154,123
 
  
 
$         
  
–
 
  
 
$ 154,123
 
Securities borrowed
  
 
–
 
  
 
41,076
 
  
 
–
 
  
 
41,076
 
Customer and other receivables
  
 
–
 
  
 
57
 
  
 
–
 
  
 
57
 
Total
  
 
$
 
 
–
 
  
 
$ 195,256
 
  
 
$         
  
–
 
  
 
$ 195,256
 
 
Liabilities
                                
Deposits
  
 
$
 
 
–
 
  
 
$  (29,650
) 
  
 
$  (3,908
) 
  
 
$  (33,558
) 
Repurchase agreements
  
 
–
 
  
 
(151,692
) 
  
 
–
 
  
 
(151,692
) 
Securities loaned
  
 
–
 
  
 
(6,301
) 
  
 
–
 
  
 
(6,301
) 
Other secured financings
  
 
–
 
  
 
(23,279
) 
  
 
(2,891
) 
  
 
(26,170
) 
Unsecured borrowings:
                                
Short-term
  
 
–
 
  
 
(20,410
) 
  
 
(11,461
) 
  
 
(31,871
) 
Long-term
  
 
–
 
  
 
(34,682
) 
  
 
(9,714
) 
  
 
(44,396
) 
Other liabilities
  
 
–
 
  
 
(2
) 
  
 
(162
) 
  
 
(164
) 
Total
  
 
$
 
 
–
 
  
 
$(266,016
) 
  
 
$(28,136
) 
  
 
$(294,152
) 
 
As of December 2020
                                
Assets
                                
Resale agreements
     $
 
 
–		       $
 
 
108,060		       $
 
          –		       $
 
 108,060		  
Securities borrowed
     –       28,898       –       28,898  
Customer and other receivables
     –       82       –       82  
Total
     $
 
 
–		       $
 
 
137,040		       $
 
          –		       $
 
 137,040		  
 
Liabilities
                                
Deposits
     $
 
 
–		       $ 
  
(11,955		 )      $  
 
(4,221		 )      $
 
  (16,176		 ) 
Repurchase agreements
     –       (126,569 )      (2 )      (126,571 ) 
Securities loaned
     –       (1,053 )      –       (1,053 ) 
Other secured financings
     –       (20,652 )      (3,474 )      (24,126 ) 
Unsecured borrowings:
                                
Short-term
     –       (19,227 )      (7,523 )      (26,750 ) 
Long-term
     –       (28,335 )      (12,576 )      (40,911 ) 
Other liabilities
     –       (1 )      (262 )      (263 ) 
Total
     $
 
 
–		       $
 
(207,792		 )      $
 
(28,058		 )      $
 
(235,850		 ) 
In the table above, other financial assets are shown as positive amounts and other financial liabilities are shown as negative amounts.
See Note 4 for an overview of the firm’s fair value measurement policies and the valuation techniques and significant inputs used to determine the fair value of other financial assets and liabilities.
Significant Unobservable Inputs
See below for information about the significant unobservable inputs used to value level 3 other financial assets and liabilities at fair value as of both June 2021 and December 2020.
Other Secured Financings.
The ranges and weighted averages of significant unobservable inputs used to value level 3 other secured financings are presented below. These ranges and weighted averages exclude unobservable inputs that are only relevant to a single instrument, and therefore are not meaningful.
As of June 2021:
 
•  
Yield: 1.4% to 7.1% (weighted average: 2.4%)
 
•  
Duration: 1.1 to 7.5 years (weighted average: 4.1 years)
As of December 2020:
 
•  
Yield: 1.4% to 7.1% (weighted average: 2.7%)
 
•  
Duration: 1.4 to 8.0 years (weighted average: 4.0 years)
Generally, increases in yield or duration, in isolation, would have resulted in a lower fair value measurement as of
period-end.
Due to the distinctive nature of each of level 3 other secured financings, the interrelationship of inputs is not necessarily uniform across such financings. See Note 11 for further information about other secured financings.
Deposits, Unsecured Borrowings and Other Liabilities.
Substantially all of the firm’s deposits, unsecured short- and long-term borrowings, and other liabilities that are classified in level 3 are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these deposits, unsecured borrowings and other liabilities, these unobservable inputs are incorporated in the firm’s derivative disclosures in Note 7. See Note 13 for further information about deposits, Note 14 for further information about unsecured borrowings and Note 15 for further information about other liabilities.
Repurchase Agreements.
As of June 2021, the firm had no level 3 repurchase agreements. As of December 2020, the firm’s level 3 repurchase agreements w
ere
 not material.
Level 3 Rollforward
The table below presents a summary of the changes in fair value for level 3 other financial liabilities accounted for at fair value.
 
   
Three Months
Ended June
        
Six Months
Ended June
  
           
$ in millions
  
 
2021
 
     2020           
 
2021
 
     2020  
Beginning balance
  
 
$(27,791
) 
     $(21,650 )       
 
$(28,058
) 
     $(21,036 ) 
Net realized gains/(losses)
  
 
(200
) 
     (109 )       
 
(294
) 
     (203 ) 
Net unrealized gains/(losses)
  
 
(612
) 
     (1,977 )       
 
(49
) 
     777  
Issuances
  
 
(7,776
) 
     (9,541 )       
 
(12,334
) 
     (15,206 ) 
Settlements
  
 
7,258
 
     7,707        
 
10,844
 
     11,132  
Transfers into level 3
  
 
(903
) 
     (628 )       
 
(980
) 
     (1,622 ) 
Transfers out of level 3
  
 
1,888
 
     235    
 
  
 
2,735
 
     195  
Ending balance
  
 
$(28,136
) 
     $(25,963 )   
 
  
 
$(28,136
) 
     $(25,963 ) 
In the table above:
 
•  
Changes in fair value are presented for all other financial liabilities that are classified in level 3 as of the end of the period.
 
•  
Net unrealized gains/(losses) relates to other financial liabilities that were still held at
period-end.
 
•  
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. If a financial liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is classified in level 3.
 
•  
For level 3 other financial liabilities, increases are shown as negative amounts, while decreases are shown as positive amounts.
 
•  
Level 3 other financial liabilities are frequently economically hedged with trading assets and liabilities. Accordingly, gains or losses that are classified in level 3 can be partially offset by gains or losses attributable to level 1, 2 or 3 trading assets and liabilities. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.
The table below presents information, by the consolidated balance sheet line items, for liabilities included in the summary table above.
 
   
Three Months
Ended June
           
Six Months
Ended June
  
           
$ in millions
  
 
2021
 
     2020    
 
  
 
2021
 
     2020  
Deposits
                                    
Beginning balance
  
 
$  (3,984
) 
     $  (3,996 )       
 
$  (4,221
) 
     $  (4,023 ) 
Net realized gains/(losses)
  
 
(9
) 
     (1 )       
 
(16
) 
     4  
Net unrealized gains/(losses)
  
 
(110
) 
     (79 )       
 
(111
) 
     (75 ) 
Issuances
  
 
(125
) 
     (3,929 )       
 
(215
) 
     (4,025 ) 
Settlements
  
 
313
 
     3,796        
 
625
 
     3,919  
Transfers into level 3
  
 
(7
) 
     (44 )       
 
(28
) 
     (66 ) 
Transfers out of level 3
  
 
14
 
     36    
 
  
 
58
 
     49  
Ending balance
  
 
$  (3,908
) 
     $  (4,217 )   
 
  
 
$  (3,908
) 
     $  (4,217 ) 
 
Repurchase agreements
                                    
Beginning balance
  
 
$        
 
(1
) 
     $       (12 )       
 
$        
 
(2
) 
     $    
    
  (30		 ) 
Net unrealized gains/(losses)
  
 
–
 
     (4 )       
 
–
 
     (1 ) 
Settlements
  
 
1
 
     6    
 
  
 
2
 
     21  
Ending balance
  
 
$          
 
–
 
     $       (10 )   
 
  
 
$
 
          –
 
     $    
    
  (10		 ) 
 
Other secured financings
                                    
Beginning balance
  
 
$  (3,224
) 
     $  (1,230 )       
 
$  (3,474
) 
     $     (386 ) 
Net realized gains/(losses)
  
 
(9
) 
     2        
 
(6
) 
     5  
Net unrealized gains/(losses)
  
 
(1
) 
     (32 )       
 
35
 
     26  
Issuances
  
 
(34
) 
     (806 )       
 
(62
) 
     (806 ) 
Settlements
  
 
92
 
     293        
 
323
 
     373  
Transfers into level 3
  
 
(111
) 
     –        
 
(304
) 
     (985 ) 
Transfers out of level 3
  
 
396
 
     –    
 
  
 
597
 
     –  
Ending balance
  
 
$  (2,891
) 
     $  (1,773 )   
 
  
 
$  (2,891
) 
     $  (1,773 ) 
Unsecured short-term borrowings
 
                            
Beginning balance
  
 
$(10,246
) 
     $  (5,411 )       
 
$  (7,523
) 
     $  (5,707 ) 
Net realized gains/(losses)
  
 
(103
) 
     (48 )       
 
(130
) 
     (81 ) 
Net unrealized gains/(losses)
  
 
(184
) 
     (735 )       
 
(135
) 
     605  
Issuances
  
 
(6,012
) 
     (2,853 )       
 
(9,480
) 
     (5,339 ) 
Settlements
  
 
4,510
 
     2,572        
 
5,303
 
     4,008  
Transfers into level 3
  
 
(395
) 
     (445 )       
 
(218
) 
     (353 ) 
Transfers out of level 3
  
 
969
 
     114    
 
  
 
722
 
     61  
Ending balance
  
 
$(11,461
) 
     $  (6,806 )   
 
  
 
$(11,461
) 
     $  (6,806 ) 
Unsecured long-term borrowings
 
                            
Beginning balance
  
 
$(10,177
) 
     $(10,676 )       
 
$(12,576
) 
     $(10,741 ) 
Net realized gains/(losses)
  
 
(79
) 
     (70 )       
 
(142
) 
     (146 ) 
Net unrealized gains/(losses)
  
 
(314
) 
     (1,132 )       
 
62
 
     393  
Issuances
  
 
(1,605
) 
     (1,945 )       
 
(2,577
) 
     (5,021 ) 
Settlements
  
 
2,342
 
     1,040        
 
4,591
 
     2,811  
Transfers into level 3
  
 
(390
) 
     (139 )       
 
(430
) 
     (218 ) 
Transfers out of level 3
  
 
509
 
     85    
 
  
 
1,358
 
     85  
Ending balance
  
 
$  (9,714
) 
     $(12,837 )   
 
  
 
$  (9,714
) 
     $(12,837 ) 
 
Other liabilities
                                    
Beginning balance
  
 
$    
 
(159
) 
     $    
    
(325		 )       
 
$    
 
(262
) 
     $     (149 ) 
Net realized gains/(losses)
  
 
–
 
     8        
 
–
 
     15  
Net unrealized gains/(losses)
  
 
(3
) 
     5        
 
100
 
     (171 ) 
Issuances
  
 
–
 
     (8 )   
 
  
 
–
 
     (15 ) 
Ending balance
  
 
$    
 
(162
) 
     $     (320 )   
 
  
 
$    
 
(162
) 
     $     (320 ) 
Level 3 Rollforward Commentary
Three Months Ended June 2021.
The net realized and unrealized losses on level 3 other financial liabilities of $812 million (reflecting $200 million of net realized losses and $612 million of net unrealized losses) for the three months ended June 2021 included gains/(losses) of $(862) million reported in market making, $(10) million reported in other principal transactions and $(4) million reported in interest expense in the consolidated statements of earnings and $64 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.
The
net
unrealized losses on level 3 other financial liabilities for the three months ended June 2021 primarily reflected losses on certain hybrid financial instruments included in unsecured long- and short-term borrowings and deposits (in each case, principally due to an increase in global equity prices).
Transfers into level 3 other financ
i
al liabilities during the three months ended June 2021 primarily reflected transfers of certain hybrid financial instruments included in unsecured short- and long-term borrowings from level 2 (principally due to reduced transparency of certain volatility and correlation inputs used to value these instruments).
Transfers out of level 3 other financial liabilities during the three months ended June 2021 primarily reflected transfers of certain hybrid financial instruments included in unsecured short- and long-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments) and transfers of certain other secured financings to level 2 (principally due to increased price transparency of certain yield and duration inputs used to value these instruments).
Six Months Ended June 2021.
The net realized and unrealized losses on level 3 other financial liabilities of $343 million (reflecting $294 million of net realized losses and $49 million of net unrealized losses) for the six months ended June 2021 included gains/(losses) of $(428) million reported in market making, $29 million reported in other principal transactions and $(7) million reported in interest expense in the consolidated statements of earnings and $63 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.
The
net
unrealized losses on level 3 other financial liabilities for the six months ended June 2021 primarily reflected losses on certain hybrid financial instruments included in unsecured short-term borrowings and deposits (in each case, principally due to an increase in global equity prices), partially offset by gains on other liabilities (principally due to an increase in the market value of the underlying assets) and gains on certain hybrid financial instruments included in unsecured long-term borrowings (principally due to an increase in interest rates).
Transfers into level 3 other financial liabilities during the six months ended June 2021 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings from level 2 (principally due to reduced transparency of certain volatility and correlation inputs used to value these instruments) and transfers of certain other secured financings from level 2 (principally due to reduced price transparency of certain yield and duration inputs used to value these instruments).
Transfers out of level 3 other financial liabilities during the six months ended June 2021 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments) and transfers of certain other secured financings to level 2 (principally due to increased price transparency of certain yield and duration inputs used to value these instruments).
Three Months Ended June 2020.
The net realized and unrealized losses on level 3 other financial liabilities of $2.09 billion (reflecting $109 million of net realized losses and $1.98 billion of net unrealized losses) for the three months ended June 2020 included losses of $1.24 billion reported in market making, $10 million reported in other principal transactions and $2 million reported in interest expense in the consolidated statements of earnings and $839 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.
The net unrealized losses on level 3 other financial liabilities for the three months ended June 2020 primarily reflected losses on certain hybrid financial instruments included in unsecured long- and short-term borrowings (principally due to an increase in global equity prices).
Transfers into level 3 other financial liabilities during the three months ended June 2020 primarily reflected transfers of certain hybrid financial instruments included in unsecured short- and long-term borrowings from level 2 (principally due to reduced transparency of certain volatility and correlation inputs used to value these instruments).
Transfers out of level 3 other financial liabilities during the three months ended June 2020 primarily reflected transfers of certain hybrid financial instruments included in unsecured short- and long-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments).
Six Months Ended June 2020.
The net realized and unrealized gains on level 3 other financial liabilities of $574 million (reflecting $203 million of net realized losses and $777 million of net unrealized gains) for the six months ended June 2020 included gains/(losses) of $247 million reported in market making, $55 million reported in other principal transactions and $(5) million reported in interest expense in the consolidated statements of earnings and $277 million reported in debt valuation adjustment in the consolidated statements of comprehensive income.
The net unrealized gains on level 3 other financial liabilities for the six months ended June 2020 primarily reflected gains on certain hybrid financial instruments included in unsecured short- and long-term borrowings (principally due to a decrease in global equity prices and interest rates), partially offset by losses on other liabilities and deposits (in each case, principally due to changes in the market value of the underlying assets).
Transfers into level 3 other financial liabilities during the six months ended June 2020 primarily reflected transfers of certain other secured financings and hybrid financial instruments included in unsecured short- and long-term borrowings from level 2 (in each case, principally due to reduced transparency of certain volatility and correlation inputs used to value these instruments).
Transfers out of level 3 other financial liabilities during the six months ended June 2020 primarily reflected transfers of certain hybrid financial instruments included in unsecured long- and short-term borrowings to level 2 (principally due to increased price transparency of certain volatility and correlation inputs used to value these instruments).
Gains and Losses on Other Financial Assets and Liabilities Accounted for at Fair Value Under the Fair Value Option
The table below presents the gains and losses recognized in earnings as a result of the election to apply the fair value option to certain financial assets and liabilities.
 
   
Three Months
Ended June
           
Six Months
Ended June
  
           
$ in millions
  
 
2021
 
     2020    
 
  
 
2021
 
     2020  
Unsecured short-term borrowings
  
 
$  
 
(850
) 
     $(2,352 )       
 
$(1,810
) 
     $ 2,129  
Unsecured long-term borrowings
  
 
(1,473
) 
     (2,015 )       
 
(1,702
) 
     (1,023 ) 
Other
  
 
(177
) 
     (492 )   
 
  
 
(71
) 
     (94 ) 
Total
  
 
$(2,500
) 
     $(4,859 )   
 
  
 
$(3,583
) 
     $ 1,012  
In the table above:
 
•  
Gains/(losses) were substantially all included in market making.
 
•  
Gains/(losses) exclude contractual interest, which is included in interest income and interest expense, for all instruments other than hybrid financial instruments. See Note 23 for further information about interest income and interest expense.
 
•  
Gains/(losses) included in unsecured short- and long-term borrowings were substantially all related to the embedded derivative component of hybrid financial instruments for both the three and six months ended June 2021 and June 2020. These gains and losses would have been recognized under other U.S. GAAP even if the firm had not elected to account for the entire hybrid financial instrument at fair value.
 
•  
Other primarily consists of gains/(losses) on customer and other receivables, deposits, other secured financings and other liabilities.
•  
Other financial assets and liabilities at fair value are frequently economically hedged with trading assets and liabilities. Accordingly, gains or losses on such other financial assets and liabilities can be partially offset by gains or losses on trading assets and liabilities. As a result, gains or losses on other financial assets and liabilities do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.
See Note 8 for information about gains/(losses) on equity securities and Note 9 for information about gains/(losses) on loans which are accounted for at fair value under the fair value option. Gains/(losses) on trading assets and liabilities accounted for at fair value under the fair value option are included in market making. See Note 5 for further information about gains/(losses) from market making.
Long-Term Debt Instruments
The difference between the aggregate contractual principal amount and the related fair value of long-term other secured financings, for which the fair value option was elected, was not material as of both June 2021 and December 2020.
The fair value of unsecured long-term borrowings, for which the fair value option was elected, exceeded the related aggregate contractual principal amount by $298 million as of June 2021 and $445 million as of December 2020. The amounts above include both principal-protected and
non-principal-protected
long-term borrowings.
Debt Valuation Adjustment
The firm calculates the fair value of financial liabilities for which the fair value option is elected by discounting future cash flows at a rate which incorporates the firm’s credit spreads.
The table below presents information about the net debt valuation adjustment (DVA) gains/(losses) on financial liabilities for which the fair value option was elected.
 
   
Three Months
Ended June
               
Six Months
Ended June
  
           
$ in millions
  
 
2021
 
      2020    
 
  
 
2021
 
      2020  
DVA
(pre-tax)
  
 
$159
 
      $(2,938 )       
 
$130
 
      $933  
DVA (net of tax)
  
 
$117
 
      $(2,218 )   
 
  
 
$  98
 
      $696  
In the table above:
 
•  
DVA (net of tax) is included in debt valuation adjustment in the consolidated statements of comprehensive income.
 
•  
The gains/(losses) reclassified to earnings from accumulated other comprehensive income/(loss) upon extinguishment of such financial liabilities were not material for both the three and six months ended June 2021 and June 2020.
Loans and Lending Commitments
The table below presents the difference between the aggregate fair value and the aggregate contractual principal amount for loans (included in trading assets and loans in the consolidated balance sheets) for which the fair value option was elected.
 
    As of  
     
$ in millions
  
 
June
2021
 
 
    
December
2020
  
 
Performing loans
                
Aggregate contractual principal in excess of fair value
  
 
$  1,398
 
     $     958  
 
Loans on nonaccrual status and/or more than 90 days past due
 
Aggregate contractual principal in excess of fair value
  
 
$11,120
 
     $10,526  
Aggregate fair value
  
 
$  3,498
 
     $  3,519  
In the table above, the aggregate contractual principal amount of loans on nonaccrual status and/or more than 90 days past due (which excludes loans carried at zero fair value and considered uncollectible) exceeds the related fair value primarily because the firm regularly purchases loans, such as distressed loans, at values significantly below the contractual principal amounts.
The fair value of unfunded lending commitments for which the fair value option was elected was a liability of $7 million as of June 2021 and $25 million as of December 2020, and the related total contractual amount of these lending commitments was $808 million as of June 2021 and $1.64 billion as of December 2020. See Note 18 for further information about lending commitments.
Impact of Credit Spreads on Loans and Lending Commitments
The estimated net gain/(loss) attributable to changes in instrument-specific credit spreads on loans and lending commitments for which the fair value option was elected was $71 million for the three months ended June 2021, $(30) million for the three months ended June 2020, $203 million for the six months ended June 2021 and $(224) million for the six months ended June 2020. The firm generally calculates the fair value of loans and lending commitments for which the fair value option is elected by discounting future cash flows at a rate which incorporates the instrument-specific credit spreads. For floating-rate loans and lending commitments, substantially all changes in fair value are attributable to changes in instrument-specific credit spreads, whereas for fixed-rate loans and lending commitments, changes in fair value are also attributable to changes in interest rates.