Variable Interest Entities

9 Months Ended

Sep. 30, 2021

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Note 17.

Variable Interest Entities

A variable interest in a VIE is an investment (e.g., debt or equity) 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 16, and investments in and loans to other types of VIEs, as described below. 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:

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Which variable interest holder has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance;

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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;

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The VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders;

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The VIE’s capital structure;

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The terms between the VIE and its variable interest holders and other parties involved with the VIE; and

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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.

The firm sells residential and commercial mortgage loans and securities to mortgage-backed VIEs and may retain beneficial interests in the assets sold to these VIEs. The firm purchases and sells beneficial interests issued by mortgage-backed 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.

Real Estate, Credit- and Power-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, power-related assets and equity securities. The firm generally does not sell assets to, or enter into derivatives with, these VIEs.

Corporate Debt and Other Asset-Backed VIEs.

The firm structures VIEs that issue notes to clients, purchases and sells beneficial interests issued by corporate debt and other asset-backed VIEs in connection with market-making activities, and makes loans to VIEs that warehouse corporate debt. Certain of these VIEs synthetically create the exposure for the beneficial interests they issue by entering into credit derivatives with the firm, rather than purchasing the underlying assets. In addition, the firm may enter into derivatives, such as total return swaps, with certain corporate debt and other asset-backed VIEs, under which the firm pays the VIE a return due to the beneficial interest holders and receives the return on the collateral owned by the VIE. The collateral owned by these VIEs is primarily other asset-backed loans and securities. The firm may be removed as the total return swap counterparty and may enter into derivatives with other counterparties to mitigate its risk related to these swaps. The firm may sell assets to the corporate debt and 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 its risk. The firm also obtains funding through these VIEs.

Investments in Funds.

The firm makes equity investments in certain investment fund VIEs it manages and is entitled to receive fees from these VIEs. The firm has generally not sold assets to, or entered into derivatives with, these VIEs.

Nonconsolidated VIEs

The table below presents a summary of the nonconsolidated VIEs in which the firm holds variable interests.



	As of

$ in millions		September 2021	December 2020
Total nonconsolidated VIEs
Assets in VIEs		$169,664	$148,665
Carrying value of variable interests — assets		$ 10,126	$ 8,624
Carrying value of variable interests — liabilities		$ 826	$ 888
Maximum exposure to loss:
Retained interests		$ 3,623	$ 3,182
Purchased interests		1,055	1,041
Commitments and guarantees		3,304	2,455
Derivatives		8,958	8,343
Debt and equity		5,142	4,020
Total		$ 22,082	$ 19,041

In the table above:

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The nature of the firm’s variable interests is described in the rows under maximum exposure to loss.

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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.

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

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

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The maximum exposure to loss from commitments and guarantees, and derivatives is the notional amount, which does not represent anticipated losses and has not been reduced by unrealized losses. As a result, the maximum exposure to loss exceeds liabilities recorded for commitments and guarantees, and derivatives.

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



	As of

$ in millions		September 2021	December 2020
Mortgage-backed
Assets in VIEs		$113,407	$99,353
Carrying value of variable interests — assets		$ 4,254	$ 4,014
Maximum exposure to loss:
Retained interests		$ 3,271	$ 2,990
Purchased interests		983	1,024
Commitments and guarantees		38	47
Derivatives		380	394
Total		$ 4,672	$ 4,455
Real estate, credit- and power-related and other investing
Assets in VIEs		$ 23,734	$20,934
Carrying value of variable interests — assets		$ 3,400	$ 3,288
Carrying value of variable interests — liabilities		$ 8	$ 14
Maximum exposure to loss:
Commitments and guarantees		$ 1,631	$ 1,374
Derivatives		64	84
Debt and equity		3,400	3,288
Total		$ 5,095	$ 4,746
Corporate debt and other asset-backed
Assets in VIEs		$ 19,704	$14,077
Carrying value of variable interests — assets		$ 2,052	$ 913
Carrying value of variable interests — liabilities		$ 818	$ 874
Maximum exposure to loss:
Retained interests		$ 352	$ 192
Purchased interests		72	17
Commitments and guarantees		1,597	989
Derivatives		8,511	7,862
Debt and equity		1,322	323
Total		$ 11,854	$ 9,383
Investments in funds
Assets in VIEs		$ 12,819	$14,301
Carrying value of variable interests — assets		$ 420	$ 409
Maximum exposure to loss:
Commitments and guarantees		$ 38	$ 45
Derivatives		3	3
Debt and equity		420	409
Total		$ 461	$ 457

As of both September 2021 and December 2020, the carrying values of the firm’s variable interests in nonconsolidated VIEs are included in the consolidated balance sheets as follows:

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Mortgage-backed: Assets primarily included in trading assets and loans.

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Real estate, credit- and power-related and other investing: Assets primarily included in investments and loans, and liabilities included in trading liabilities and other liabilities.

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Corporate debt and other asset-backed: Assets included in loans and trading assets, and liabilities included in trading liabilities.

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Investments in funds: Assets included in investments.

Consolidated VIEs

The table below presents a summary of the carrying value and balance sheet classification of assets and liabilities in consolidated VIEs.



	As of

$ in millions		September 2021	December 2020
Total consolidated VIEs
Assets
Cash and cash equivalents		$ 394	$ 312
Trading assets		128	96
Investments		872	880
Loans		2,133	2,099
Other assets		355	989
Total		$3,882	$4,376
Liabilities
Other secured financings		$1,180	$1,891
Customer and other payables		4	28
Trading liabilities		49	296
Unsecured short-term borrowings		156	43
Unsecured long-term borrowings		84	226
Other liabilities		931	948
Total		$2,404	$3,432

In the table above:

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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.

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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.

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

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



	As of

$ in millions		September 2021	December 2020
Real estate, credit-related and other investing
Assets
Cash and cash equivalents		$ 268	$ 229
Trading assets		28	8
Investments		872	880
Loans		2,133	2,099
Other assets		355	989
Total		$3,656	$4,205
Liabilities
Other secured financings		$ 158	$ 649
Customer and other payables		4	28
Trading liabilities		49	46
Other liabilities		931	948
Total		$1,142	$1,671
Corporate debt and other asset-backed
Assets
Cash and cash equivalents		$ 126	$ 83
Trading assets		20	–
Total		$ 146	$ 83
Liabilities
Other secured financings		$ 620	$ 679
Total		$ 620	$ 679
Principal-protected notes
Assets
Trading assets		$ 80	$ 88
Total		$ 80	$ 88
Liabilities
Other secured financings		$ 402	$ 563
Trading liabilities		–	250
Unsecured short-term borrowings		156	43
Unsecured long-term borrowings		84	226
Total		$ 642	$1,082

In the table above:

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

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Creditors and beneficial interest holders of real estate, credit-related and other investing VIEs do not have recourse to the general credit of the firm.