| Variable Interest Entity Disclosures |
13. Variable Interest Entities and Securitization Activities Overview The Firm is involved with various SPEs in the normal course of business. In most cases, these entities are deemed to be VIEs. The Firm’s variable interests in VIEs include debt and equity interests, commitments, guarantees, derivative instruments and certain fees. The Firm’s involvement with VIEs arises primarily from: • Interests purchased in connection with market-making activities, securities held in its Investment securities portfolio and retained interests held as a result of securitization activities, including re-securitization transactions. • Guarantees issued and residual interests retained in connection with municipal bond securitizations. • Loans made to and investments in VIEs that hold debt, equity, real estate or other assets. • Derivatives entered into with VIEs. • Structuring of CLNs or other asset-repackaged notes designed to meet the investment objectives of clients. • Other structured transactions designed to provide tax-efficient yields to the Firm or its clients. The Firm determines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE. This determination is based upon an analysis of the design of the VIE, including the VIE’s structure and activities, the power to make significant economic decisions held by the Firm and by other parties, and the variable interests owned by the Firm and other parties. The power to make the most significant economic decisions may take a number of different forms in different types of VIEs. The Firm considers servicing or collateral management decisions as representing the power to make the most significant economic decisions in transactions such as securitizations or CDOs. As a result, the Firm does not consolidate securitizations or CDOs for which it does not act as the servicer or collateral manager unless it holds certain other rights to replace the servicer or collateral manager or to require the liquidation of the entity. If the Firm serves as servicer or collateral manager, or has certain other rights described in the previous sentence, the Firm analyzes the interests in the VIE that it holds and consolidates only those VIEs for which it holds a potentially significant interest in the VIE. For many transactions, such as re-securitization transactions, CLNs and other asset-repackaged notes, there are no significant economic decisions made on an ongoing basis. In these cases, the Firm focuses its analysis on decisions made prior to the initial closing of the transaction and at the termination of the transaction. The Firm concluded in most of these transactions that decisions made prior to the initial closing were shared between the Firm and the initial investors based upon the nature of the assets, including whether the assets were issued in a transaction sponsored by the Firm and the extent of the information available to the Firm and to investors, the number, nature and involvement of investors, other rights held by the Firm and investors, the standardization of the legal documentation and the level of continuing involvement by the Firm, including the amount and type of interests owned by the Firm and by other investors. The Firm focused its control decision on any right held by the Firm or investors related to the termination of the VIE. Most re-securitization transactions, CLNs and other asset-repackaged notes have no such termination rights. Consolidated VIEs | Assets and Liabilities by Type of Activity | | | | | | | | | | | | At December 31, 2018 | | At December 31, 2017 | | $ in millions | VIE Assets | VIE Liabilities | VIE Assets | VIE Liabilities | | OSF | $ | 267 | $ | — | $ | 378 | $ | 3 | | MABS1 | | 59 | | 38 | | 249 | | 210 | | Other2 | | 809 | | 48 | | 1,174 | | 250 | | Total | $ | 1,135 | $ | 86 | $ | 1,801 | $ | 463 |
OSF—Other structured financings 1. Amounts include transactions backed by residential mortgage loans, commercial mortgage loans and other types of assets, including consumer or commercial assets. The value of assets is determined based on the fair value of the liabilities and the interests owned by the Firm in such VIEs as the fair values for the liabilities and interests owned are more observable. 2. Other primarily includes investment funds, certain operating entities and structured transactions. During 2018, Other included a fund managed by Mesa West Capital, LLC (which was acquired by the Firm in the first quarter of 2018), until the fund was deconsolidated in the fourth quarter of 2018 due to the termination of a credit facility provided by the Firm to this fund. | Assets and Liabilities by Balance Sheet Caption | | | | | | | | | | | | | | | | | At | At | | December 31, | December 31, | | $ in millions | 2018 | 2017 | | Assets | | | | | | Cash and cash equivalents: | | | | | | Cash and due from banks | $ | 77 | $ | 69 | | Restricted cash | | 171 | | 222 | | Trading assets at fair value | | 314 | | 833 | | Customer and other receivables | | 25 | | 19 | | Goodwill | | 18 | | 18 | | Intangible assets | | 128 | | 155 | | Other assets | | 402 | | 485 | | Total | $ | 1,135 | $ | 1,801 | | Liabilities | | | Other secured financings | $ | 64 | $ | 438 | | Other liabilities and accrued expenses | | 22 | | 25 | | Total | $ | 86 | $ | 463 | | Noncontrolling interests | $ | 106 | $ | 189 |
Consolidated VIE assets and liabilities are presented in the previous tables after intercompany eliminations. Most assets owned by consolidated VIEs cannot be removed unilaterally by the Firm and are not generally available to the Firm. Most related liabilities issued by consolidated VIEs are non-recourse to the Firm. In certain other consolidated VIEs, the Firm either has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement. In general, the Firm’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE net assets recognized in its financial statements, net of amounts absorbed by third-party variable interest holders. | | | At December 31, 2018 | | $ in millions | MABS | CDO | MTOB | OSF | Other | | VIE assets (UPB) | $ | 71,287 | $ | 10,848 | $ | 7,014 | $ | 3,314 | $ | 19,682 | | Maximum exposure to loss1 | | | | | Debt and equity | | | | | | | | | | | | interests | $ | 8,234 | $ | 1,169 | $ | — | $ | 1,622 | $ | 4,645 | | Derivative and | | | | | | | | | | | | other contracts | | — | | — | | 4,449 | | — | | 1,768 | | Commitments, | | | | | | | | | | | | guarantees | | | | | | | | | | | | and other | | 397 | | 3 | | — | | 235 | | 327 | | Total | $ | 8,631 | $ | 1,172 | $ | 4,449 | $ | 1,857 | $ | 6,740 | | | | | | | | | | | | | | | Carrying value of exposure to loss—Assets | | | | | Debt and equity | | | | | | | | | | | | interests | $ | 8,234 | $ | 1,169 | $ | — | $ | 1,205 | $ | 4,645 | | Derivative and | | | | | | | | | | | | other contracts | | — | | — | | 6 | | — | | 87 | | Total | $ | 8,234 | $ | 1,169 | $ | 6 | $ | 1,205 | $ | 4,732 | | Additional VIE assets owned2 | | | | | | | $ | 11,969 | | | | | | | | | | | | | | | Carrying value of exposure to loss—Liabilities | | | | | Derivative and | | | | | | | | | | | | other contracts | $ | — | $ | — | $ | — | $ | — | $ | 185 | | Total | $ | — | $ | — | $ | — | $ | — | $ | 185 |
| | | At December 31, 2017 | | $ in millions | | MABS | | CDO | | MTOB | | OSF | | Other | | VIE assets (UPB) | $ | 89,288 | $ | 9,807 | $ | 5,306 | $ | 3,322 | $ | 31,934 | | Maximum exposure to loss1 | | | | | Debt and equity | | | | | | | | | | | | interests | $ | 10,657 | $ | 1,384 | $ | 80 | $ | 1,628 | $ | 4,730 | | Derivative and | | | | | | | | | | | | other contracts | | — | | — | | 3,333 | | — | | 1,686 | | Commitments, | | | | | | | | | | | | guarantees | | | | | | | | | | | | and other | 1,214 | | 668 | | — | | 164 | | 433 | | Total | $ | 11,871 | $ | 2,052 | $ | 3,413 | $ | 1,792 | $ | 6,849 | | | | | | | | | | | | | | | Carrying value of exposure to loss—Assets | | | | | Debt and equity | | | | | | | | | | | | interests | $ | 10,657 | $ | 1,384 | $ | 43 | $ | 1,202 | $ | 4,730 | | Derivative and | | | | | | | | | | | | other contracts | | — | | — | | 5 | | — | | 184 | | Total | $ | 10,657 | $ | 1,384 | $ | 48 | $ | 1,202 | $ | 4,914 | | Additional VIE assets owned2 | | | | | | | $ | 11,318 |
MTOB—Municipal tender option bonds 1. Where notional amounts are utilized in quantifying the maximum exposure related to derivatives, such amounts do not reflect changes in fair value recorded by the Firm. 2. Additional VIE assets owned represents the carrying value of total exposure to non-consolidated VIEs for which the maximum exposure to loss is less than specific thresholds, primarily interests issued by securitization SPEs. The Firm’s primary risk exposure is to the most subordinate class of beneficial interest and maximum exposure to loss generally equals the fair value of the assets owned. These assets are primarily included in Trading assets and Investment securities and are measured at fair value (see Note 3). The Firm does not provide additional support in these transactions through contractual facilities, guarantees or similar derivatives. The majority of the VIEs included in the previous tables are sponsored by unrelated parties; the Firm’s involvement generally is the result of its secondary market-making activities, securities held in its Investment securities portfolio (see Note 5) and certain investments in funds. The Firm’s maximum exposure to loss is dependent on the nature of the Firm’s variable interest in the VIE and is limited to: ● notional amounts of certain liquidity facilities; ● other credit support; ● total return swaps; ● written put options; and ● fair value of certain other derivatives and investments the Firm has made in the VIE. The Firm’s maximum exposure to loss in the previous tables does not include the offsetting benefit of hedges or any reductions associated with the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss. Liabilities issued by VIEs generally are non-recourse to the Firm. | Mortgage- and Asset-Backed Securitization Assets | | | | | | | | | | | | | | | | At December 31, 2018 | | At December 31, 2017 | | | | UPB | Debt and Equity Interests | UPB | Debt and Equity Interests | | | | | $ in millions | | Residential mortgages | $ | 6,954 | $ | 745 | $ | 15,636 | $ | 1,272 | | Commercial mortgages | | 42,974 | | 1,237 | | 46,464 | | 2,331 | | U.S. agency collateralized | | | | | | | | | | mortgage obligations | | 14,969 | | 3,443 | | 16,223 | | 3,439 | | Other consumer or | | | | | | | | | | commercial loans | | 6,390 | | 2,809 | | 10,965 | | 3,615 | | Total | $ | 71,287 | $ | 8,234 | $ | 89,288 | $ | 10,657 |
Securitization Activities In a securitization transaction, the Firm transfers assets (generally commercial or residential mortgage loans or U.S. agency securities) to an SPE, sells to investors most of the beneficial interests, such as notes or certificates, issued by the SPE, and, in many cases, retains other beneficial interests. The purchase of the transferred assets by the SPE is financed through the sale of these interests. In many securitization transactions involving commercial mortgage loans, the Firm transfers a portion of the assets to the SPE with unrelated parties transferring the remaining assets. In some of these transactions, primarily involving residential mortgage loans in the U.S., the Firm serves as servicer for some or all of the transferred loans. In many securitizations, particularly involving residential mortgage loans, the Firm also enters into derivative transactions, primarily interest rate swaps or interest rate caps, with the SPE. Although not obligated, the Firm generally makes a market in the securities issued by SPEs in securitization transactions. As a market maker, the Firm offers to buy these securities from, and sell these securities to, investors. Securities purchased through these market-making activities are not considered to be retained interests; these beneficial interests generally are included in Trading assets—Corporate and other debt and are measured at fair value. The Firm enters into derivatives, generally interest rate swaps and interest rate caps, with a senior payment priority in many securitization transactions. The risks associated with these and similar derivatives with SPEs are essentially the same as similar derivatives with non-SPE counterparties and are managed as part of the Firm’s overall exposure. See Note 4 for further information on derivative instruments and hedging activities. Available-for-Sale Securities The Firm holds AFS issued by VIEs not sponsored by the Firm within the Investment securities portfolio. These securities are composed of those related to transactions sponsored by the federal mortgage agencies and the most senior securities issued by VIEs backed by student loans, automobile loans, commercial mortgage loans or CLOs. Transactions sponsored by the federal mortgage agencies include an explicit or implicit guarantee provided by the U.S. government. See Note 5 for further information on the Investment Securities Portfolio. Municipal Tender Option Bond Trusts In a municipal tender option bond trust transaction, the client transfers a municipal bond to a trust. The trust issues short-term securities that the Firm, as the remarketing agent, sells to investors. The client generally retains a residual interest. The short-term securities are supported by a liquidity facility pursuant to which the investors may put their short-term interests. In some programs, the Firm provides this liquidity facility; in most programs, a third-party provider will provide such liquidity facility. The Firm may, in lieu of purchasing short term securities for remarketing, decide to extend a temporary loan to the trust. The client can generally terminate the transaction at any time. The liquidity provider can generally terminate the transaction upon the occurrence of certain events. When the transaction is terminated, the municipal bond is generally sold or returned to the client. Any losses suffered by the liquidity provider upon the sale of the bond are the responsibility of the client. This obligation is generally collateralized. Liquidity facilities provided to municipal tender option bond trusts are classified as derivatives. The Firm consolidates any municipal tender option bond trusts in which it holds the residual interest. Credit Protection Purchased through Credit-Linked Notes CLN transactions are designed to provide investors with exposure to certain credit risk on referenced asset. In these transactions, the Firm transfers assets (generally high-quality securities or money market investments) to an SPE, enters into a derivative transaction in which the SPE sells protection on an unrelated referenced asset or group of assets, through a credit derivative, and sells the securities issued by the SPE to investors. In some transactions, the Firm may also enter into interest rate or currency swaps with the SPE. Upon the occurrence of a credit event related to the referenced asset, the SPE will deliver securities collateral as payment to the Firm, which exposes the Firm to changes in the collateral’s value. Depending on the structure, the assets and liabilities of the SPE may be recognized in the Firm’s balance sheets or accounted for as a sale of assets and the SPE is not consolidated. Derivative payments by the SPE are collateralized. The risks associated with these and similar derivatives with SPEs are essentially the same as those with non-SPE counterparties, and are managed as part of the Firm’s overall exposure. Other Structured Financings The Firm invests in interests issued by entities that develop and own low-income communities (including low-income housing projects) and entities that construct and own facilities that will generate energy from renewable resources. The interests entitle the Firm to a share of tax credits and tax losses generated by these projects. In addition, the Firm has issued guarantees to investors in certain low-income housing funds. The guarantees are designed to return an investor’s contribution to a fund and the investor’s share of tax losses and tax credits expected to be generated by the fund. The Firm is also involved with entities designed to provide tax-efficient yields to the Firm or its clients. Collateralized Loan and Debt Obligations CLOs and CDOs are SPEs that purchase a pool of assets consisting of corporate loans, corporate bonds, ABS or synthetic exposures on similar assets through derivatives, and issues multiple tranches of debt and equity securities to investors. The Firm underwrites the securities issued in CLO transactions on behalf of unaffiliated sponsors and provides advisory services to these unaffiliated sponsors. The Firm sells corporate loans to many of these SPEs, in some cases representing a significant portion of the total assets purchased. Although not obligated, the Firm generally makes a market in the securities issued by SPEs in these transactions and may retain unsold securities. These beneficial interests are included in Trading assets and are measured at fair value. Equity-Linked Notes ELN transactions are designed to provide investors with exposure to certain risks related to the specific equity security, equity index or other index. In an ELN transaction, the Firm typically transfers to an SPE either a note issued by the Firm, the payments on which are linked to the performance of a specific equity security, equity index, or other index, or debt securities issued by other companies and a derivative contract, the terms of which will relate to the performance of a specific equity security, equity index or other index. These ELN transactions with SPEs were not consolidated at December 31, 2018 and December 31, 2017. | Transfers of Assets with Continuing Involvement | | | | | | | | | | | | | | | | At December 31, 2018 | | | RML | CML | U.S. Agency CMO | CLN and Other1 | | $ in millions | | SPE assets (UPB)2 | $ | 14,376 | $ | 68,593 | $ | 16,594 | $ | 14,608 | | Retained interests | | Investment grade | $ | 17 | $ | 483 | $ | 1,573 | $ | 3 | | Non-investment grade | | | | | | | | | | (fair value) | | 4 | | 212 | | — | | 210 | | Total | $ | 21 | $ | 695 | $ | 1,573 | $ | 213 | | Interests purchased in the secondary market (fair value) | | Investment grade | $ | 7 | $ | 91 | $ | 102 | $ | — | | Non-investment grade | | 28 | | 71 | | — | | — | | Total | $ | 35 | $ | 162 | $ | 102 | $ | — | | Derivative assets (fair value) | $ | — | $ | — | $ | — | $ | 216 | | Derivative liabilities (fair value) | — | | — | | — | | 178 |
| | | At December 31, 2017 | | | RML | CML | U.S. Agency CMO | CLN and Other1 | | $ in millions | | SPE assets (UPB)2 | $ | 15,555 | $ | 62,744 | $ | 11,612 | $ | 17,060 | | Retained interests | | Investment grade | $ | — | $ | 293 | $ | 407 | $ | 4 | | Non-investment grade | | | | | | | | | | (fair value) | | 1 | | 98 | | — | | 478 | | Total | $ | 1 | $ | 391 | $ | 407 | $ | 482 | | Interests purchased in the secondary market (fair value) | | Investment grade | $ | — | $ | 94 | $ | 439 | $ | — | | Non-investment grade | | 16 | | 66 | | — | | 4 | | Total | $ | 16 | $ | 160 | $ | 439 | $ | 4 | | Derivative assets (fair value) | $ | 1 | $ | — | $ | — | $ | 226 | | Derivative liabilities (fair value) | | — | | — | | — | | 85 |
RML—Residential mortgage loans CML—Commercial mortgage loans 1. Amounts include CLO transactions managed by unrelated third parties. 2. Amounts include assets transferred by unrelated transferors. | | Fair Value at December 31, 2018 | | $ in millions | Level 2 | Level 3 | Total | | Retained interests | | | | | | | | Investment grade | $ | 1,580 | $ | 13 | $ | 1,593 | | Non-investment grade | | 174 | | 252 | | 426 | | Total | $ | 1,754 | $ | 265 | $ | 2,019 | | Interests purchased in the secondary market | | Investment grade | $ | 193 | $ | 7 | $ | 200 | | Non-investment grade | | 83 | | 16 | | 99 | | Total | $ | 276 | $ | 23 | $ | 299 | | Derivative assets | $ | 121 | $ | 95 | $ | 216 | | Derivative liabilities | | 175 | | 3 | | 178 |
| | Fair Value at December 31, 2017 | | $ in millions | Level 2 | Level 3 | Total | | Retained interests | | | | | | | | Investment grade | $ | 407 | $ | 4 | $ | 411 | | Non-investment grade | | 22 | | 555 | | 577 | | Total | $ | 429 | $ | 559 | $ | 988 | | Interests purchased in the secondary market | | Investment grade | $ | 531 | $ | 2 | $ | 533 | | Non-investment grade | | 57 | | 29 | | 86 | | Total | $ | 588 | $ | 31 | $ | 619 | | Derivative assets | $ | 78 | $ | 149 | $ | 227 | | Derivative liabilities | | 81 | | 4 | | 85 |
The previous tables include transactions with SPEs in which the Firm, acting as principal, transferred financial assets with continuing involvement and received sales treatment. Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the income statements. The Firm may act as underwriter of the beneficial interests issued by these securitization vehicles, for which Investment banking revenues are recognized. The Firm may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are generally carried at fair value in the balance sheets with changes in fair value recognized in the income statements. | Proceeds from New Securitization Transactions and Sales of Loans | | | | | | | | | | $ in millions | | 2018 | | 2017 | | 2016 | | New transactions1 | $ | 23,821 | $ | 23,939 | $ | 18,975 | | Retained interests | | 2,904 | | 2,337 | | 2,701 | | Sales of corporate loans to | | | | | | | | CLO SPEs1, 2 | | 317 | | 191 | | 475 |
1. Net gains on new transactions and sales of corporate loans to CLO entities at the time of the sale were not material for all periods presented. 2. Sponsored by non-affiliates. The Firm has provided, or otherwise agreed to be responsible for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by the Firm (see Note 12). | Assets Sold with Retained Exposure | | | | | | | At | At | | December 31, | December 31, | | $ in millions | 2018 | 2017 | | Gross cash proceeds from sale of assets1 | $ | 27,121 | $ | 19,115 | | Fair value | | | | | | Assets sold | $ | 26,524 | $ | 19,138 | | Derivative assets recognized | | | | | | in the balance sheets | | 164 | | 176 | | Derivative liabilities recognized | | | | | | in the balance sheets | | 763 | | 153 |
1. The carrying value of assets derecognized at the time of sale approximates gross cash proceeds. The Firm enters into transactions in which it sells securities, primarily equities and contemporaneously enters into bilateral OTC derivatives with the purchasers of the securities, through which it retains exposure to the sold securities. |
