Goldman Sachs 2007 Annual Report Download - page 108

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Notes to Consolidated Financial Statements
VIEs generally purchase assets by issuing debt and equity
instruments. In certain instances, the firm provides guarantees
to VIEs or holders of variable interests in VIEs. In such cases,
the maximum exposure to loss included in the tables set forth
below is the notional amount of such guarantees. Such amounts
do not represent anticipated losses in connection with these
guarantees.
The firm’s variable interests in VIEs include senior and
subordinated debt; loan commitments; limited and general
partnership interests; preferred and common stock; interest
rate, foreign currency, equity, commodity and credit derivatives;
guarantees; and residual interests in mortgage-backed and
asset-backed securitization vehicles, CDOs and CLOs. The
firm’s exposure to the obligations of VIEs is generally limited
to its interests in these entities.
The following tables set forth total assets in nonconsolidated
VIEs in which the firm holds significant variable interests and
the firm’s maximum exposure to loss associated with these
variable interests. The firm has aggregated nonconsolidated
VIEs based on principal business activity, as reflected in the
first column. The nature of the firm’s variable interests can take
different forms, as described in the columns under maximum
exposure to loss.
In addition to the retained interests described above, the firm
also held interests in residential mortgage QSPEs purchased in
connection with secondary market-making activities. These
purchased interests approximated $6 billion and $8 billion as
of November 2007 and November 2006, respectively.
As of November 2007 and November 2006, the firm held
mortgage servicing rights with a fair value of $93 million and
$62 million, respectively, substantially all of which were retained
in connection with residential mortgage securitizations. These
servicing assets represent the firm’s right to receive a future
stream of cash flows associated with the firm’s obligation to
service residential mortgages. The fair value of mortgage
servicing rights will fluctuate in response to changes in certain
economic variables, such as interest rates, loan prepayment
assumptions and default rates. The firm determines the fair
value of mortgage servicing rights by using valuation models
that incorporate these variables in quantifying anticipated cash
flows related to servicing activities.
Variable Interest Entities (VIEs)
The firm, in the ordinary course of business, retains interests
in VIEs in connection with its securitization activities. The firm
also purchases and sells variable interests in VIEs, which primarily
issue mortgage-backed and other asset-backed securities, CDOs
and CLOs, in connection with its market-making activities and
makes investments in and loans to VIEs that hold performing
and nonperforming debt, equity, real estate, power-related
and other assets. In addition, the firm utilizes VIEs to provide
investors with principal-protected notes, credit-linked notes
and asset-repackaged notes designed to meet their objectives.
106 Goldman Sachs 2007 Annual Report