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<p style="margin-top: 12px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"><b><a name="tx1129640_12"> </a>Note 12. Variable Interest Entities </b></font></p>
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<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">We are involved with various types of special purpose entities, some of which are variable interest entities, or VIEs, as defined by GAAP. Some of these special purpose entities are recorded in our consolidated financial statements. We also invest in various forms of asset-backed securities, which we carry in our investment securities portfolio. These asset-backed securities meet the GAAP definition of asset securitization entities, which entities are considered to be VIEs. We are not considered to be the primary beneficiary of these VIEs, as defined by GAAP, since we do not have control over their activities. Additional information about asset-backed securities is provided in note 3. </font></p></div>
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<p style="margin-top: 12px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Tax-Exempt Investment Program: </font></p>
<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In the normal course of our business, we structure and sell certificated interests in pools of tax-exempt investment-grade assets, principally to our mutual fund customers. We structure these pools as partnership trusts, and the trusts are recorded in our consolidated statement of condition as investment securities available for sale and other short-term borrowings. We may also provide liquidity and re-marketing services to the trusts. As of December 31, 2010 and 2009, we carried investment securities available for sale, composed of securities related to state and political subdivisions, with a fair value of $<font class="_mt">2.85</font> billion and $<font class="_mt">3.13</font> billion, respectively, and other short-term borrowings (see note 8) of $<font class="_mt">2.50</font> billion and $<font class="_mt">2.74<
;/font> billion, respectively, in our consolidated statement of condition in connection with these trusts. </font></p>
<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">We transfer assets to the trusts from our investment securities portfolio at adjusted book value, and the trusts finance the acquisition of these assets by selling certificated interests issued by the trusts to third-party investors and to State Street as residual holder. These transfers do not meet the de-recognition criteria defined by GAAP<i>,</i> and therefore are recorded in our consolidated financial statements. The trusts had a weighted-average life of approximately <font class="_mt">7.7</font> years at December 31, 2010, compared to approximately <font class="_mt">8.1</font> years at December 31, 2009. Under separate legal agreements, we provide standby bond purchase agreements to these trusts, which obligate State Street to acquire the certificated interests at par value in the ev
ent that the re-marketing agent is unable to place the certificated interests with investors. Our obligations as standby bond purchase agreement provider terminate in the event of the following credit events: payment default, bankruptcy of the issuer and the credit enhancer, if any, the imposition of taxability, or the downgrade of an asset held by the trust below investment grade. Our commitments to the trusts under these standby bond purchase agreements totaled $<font class="_mt">2.80</font> billion at December 31, 2010, none of which was utilized at period-end. In the event that our obligations under these agreements are triggered, no material impact to our consolidated results of operations or financial condition is expected to occur, because the securities are already recorded at fair value in our consolidated statement of condition.</font></p></div>
<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2"> </font></p>
<p style="margin-top: 12px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Asset-Backed Commercial Paper Program: </font></p>
<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">We sponsor and administer multi-seller asset-backed commercial paper programs, or conduits, which are recorded in our consolidated financial statements. These conduits, the first of which was established in 1992, were originally designed to satisfy the demand of our institutional clients, particularly mutual fund customers, for commercial paper. The conduits purchase financial assets with various asset classification from a variety of independent third parties and obtain funding through the issuance of the above-described commercial paper. We consider the activities of the conduits in our liquidity management process, and offer the program to our clients to fund the conduits' assets. The conduits hold diversified investments, which are primarily asset-backed securities purchased from independent third parties, collateralized by student loans, automobile and equipment l
oans and credit card receivables, among other asset types. </font></p>
<p style="margin-top: 6px; margin-bottom: 0px; font-size: 1px;"> </p>
<p style="margin-top: 0px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In May 2009, we elected to take action that resulted in the consolidation, for financial reporting purposes, of all of the assets and liabilities of the conduits into our consolidated balance sheet. This consolidation was required by GAAP following the voluntary redemption by us, as administrator of the conduits, of the conduits' aggregate outstanding subordinated debt, or first-loss notes, of approximately $<font class="_mt">67</font> million. We consolidated the conduits only for accounting purposes and did not legally acquire all of their assets and liabilities. </font></p>
<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">In accordance with GAAP, our redemption of the first-loss notes resulted in our determination that we were the primary beneficiary of the conduits, which meet the GAAP definition of a VIE, and as a result we were required to consolidate them. Accordingly, we recorded the conduits' aggregate assets and liabilities in our consolidated balance sheet at their estimated fair values on the date of consolidation, and recorded a pre-tax extraordinary loss of approximately $<font class="_mt">6.10</font> billion, or approximately $<font class="_mt">3.68</font> billion after-tax, in our consolidated statement of income. This loss was primarily related to the difference between the fair value of the conduits' aggregate assets, primarily mortgage- and asset-backed securities, and the conduits' aggregate liabilities, primarily short-term borrowings composed o
f commercial paper issued by the conduits. </font></p>
<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">The difference between the aggregate fair value of the conduits' investment securities and their par value on the date of consolidation created a discount. Based on a detailed security-by-security analysis, we believe that the vast majority of this discount is related to factors other than credit. To the extent that the projected future cash flows from the securities we continue to hold exceed their recorded carrying amounts, the portion of the discount not related to credit will accrete into interest revenue over the securities' remaining terms. The sale of any of these securities will reduce the accretion recorded for the period in which the securities are sold and in future periods. During the years ended December 31, 2010 and 2009, we recorded accretion of approximately $<font class="_mt">712</font> million and $<font class="_mt">621</font>
million, respectively, in interest revenue in our consolidated statement of income.</font></p>
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<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"> </p>
<p style="margin-top: 12px; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">Collateralized Debt Obligations: </font></p>
<p style="margin-top: 6px; text-indent: 4%; margin-bottom: 0px;"><font style="font-family: Times New Roman;" class="_mt" size="2">We serve as collateral manager for a series of collateralized debt obligations, referred to as CDOs. A CDO is a structured investment vehicle which purchases a portfolio of assets funded through the issuance of several classes of debt and equity, the repayment of and return on which are linked to the performance of the underlying assets. We have determined that we are not the primary beneficiary of these VIEs, and do not record them in our consolidated financial statements. At December 31, 2010 and 2009, the aggregate notional value of these CDOs was $<font class="_mt">1.0</font> billion and $<font class="_mt">2.0</font> billion, respectively. At December 31, 2010 and 2009, the carrying value of the underlying collateral was $<font class="_mt">323</font> million and $<font class="_mt">1.2</font>
billion, respectively. We did not acquire or transfer any investment securities to a CDO during 2010 or 2009. </font></p></div> </div>Note 12. Variable Interest Entities
We are involved with various types of special purpose entities, some of which are variablefalsefalsefalsefalsefalseOtherus-types:textBlockItemTypestringDisclosure of variable interest entities (VIE), including, but not limited to the nature, purpose, size, and activities of the VIE, the carrying amount and classification of consolidated assets that are collateral for the VIE's obligations, lack of recourse if creditors (or beneficial interest holders) of a consolidated VIE have no recourse to the general credit of the primary beneficiary. An enterprise that holds a significant variable interest in a V
IE but is not the primary beneficiary may disclose the nature of its involvement with the VIE and when that involvement began, the nature, purpose, size, and activities of the VIE and the enterprise's maximum exposure to loss as a result of its involvement with the VIE.Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 140
-Paragraph 35
Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name FASB Interpretation (FIN)
-Number 46R
-Paragraph 2, 14, 15, 16, 23, 24, 25, 26
Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name FASB Interpretation (FIN)
-Number 46R
-Paragraph 4
-Subparagraph g
Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name FASB Staff Position (FSP)
-Number FAS140-4 and FIN46(R)-8
-Paragraph C4
-Subparagraph d
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