Goldman Sachs 2015 Annual Report Download - page 177

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below presents the weighted average key
economic assumptions used in measuring the fair value of
mortgage-backed retained interests and the sensitivity of
this fair value to immediate adverse changes of 10% and
20% in those assumptions.
As of December
$ in millions 2015 2014
Fair value of retained interests $ 1,115 $ 2,370
Weighted average life (years) 7.5 7.6
Constant prepayment rate 10.4% 13.2%
Impact of 10% adverse change $ (22) $ (33)
Impact of 20% adverse change (43) (66)
Discount rate 5.5% 4.1%
Impact of 10% adverse change $ (28) $ (50)
Impact of 20% adverse change (55) (97)
In the table above:
‰Amounts do not reflect the benefit of other financial
instruments that are held to mitigate risks inherent in
these retained interests.
‰Changes in fair value based on an adverse variation in
assumptions generally cannot be extrapolated because the
relationship of the change in assumptions to the change in
fair value is not usually linear.
‰The impact of a change in a particular assumption is
calculated independently of changes in any other
assumption. In practice, simultaneous changes in
assumptions might magnify or counteract the sensitivities
disclosed above.
‰The constant prepayment rate is included only for
positions for which it is a key assumption in the
determination of fair value.
‰The discount rate for retained interests that relate to U.S.
government agency-issued collateralized mortgage
obligations does not include any credit loss.
‰Expected credit loss assumptions are reflected in the
discount rate for the remainder of retained interests.
The firm has other retained interests not reflected in the
table above with a fair value of $44 million and a weighted
average life of 3.5 years as of December 2015, and a fair
value of $59 million and a weighted average life of 3.6 years
as of December 2014. Due to the nature and current fair
value of certain of these retained interests, the weighted
average assumptions for constant prepayment and discount
rates and the related sensitivity to adverse changes are not
meaningful as of December 2015 and December 2014. The
firm’s maximum exposure to adverse changes in the value
of these interests is the carrying value of $44 million and
$59 million as of December 2015 and December 2014,
respectively.
Note 12.
Variable Interest Entities
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 11, and investments in and loans to other types of
VIEs, as described below. See Note 11 for additional
information about securitization activities, including the
definition of beneficial interests. See Note 3 for the firm’s
consolidation policies, including the definition of a VIE.
The firm is principally involved with VIEs through the
following business activities:
Mortgage-Backed VIEs and Corporate CDO and CLO
VIEs. The firm sells residential and commercial mortgage
loans and securities to mortgage-backed VIEs and
corporate bonds and loans to corporate CDO and CLO
VIEs and may retain beneficial interests in the assets sold to
these VIEs. The firm purchases and sells beneficial interests
issued by mortgage-backed and corporate CDO and CLO
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 from derivatives with these VIEs.
Certain mortgage-backed and corporate CDO and CLO
VIEs, usually referred to as synthetic CDOs or credit-linked
note VIEs, synthetically create the exposure for the
beneficial interests they issue by entering into credit
derivatives, rather than purchasing the underlying assets.
These credit derivatives may reference a single asset, an
index, or a portfolio/basket of assets or indices. See Note 7
for further information about credit derivatives. These VIEs
use the funds from the sale of beneficial interests and the
premiums received from credit derivative counterparties to
purchase securities which serve to collateralize the
beneficial interest holders and/or the credit derivative
counterparty. These VIEs may enter into other derivatives,
primarily interest rate swaps, which are typically not
variable interests. The firm may be a counterparty to
derivatives with these VIEs and generally enters into
derivatives with other counterparties to mitigate its risk.
Goldman Sachs 2015 Form 10-K 165