Goldman Sachs 2015 Annual Report Download - page 178

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Real Estate, Credit-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 and equity securities.
The firm typically does not sell assets to, or enter into
derivatives with, these VIEs.
Other Asset-Backed VIEs. The firm structures VIEs that
issue notes to clients, and purchases and sells beneficial
interests issued by other asset-backed VIEs in connection
with market-making activities. In addition, the firm may
enter into derivatives with certain other asset-backed VIEs,
primarily total return swaps on the collateral assets held by
these VIEs under which the firm pays the VIE the return due
to the note holders and receives the return on the collateral
assets owned by the VIE. The firm generally can be
removed as the total return swap counterparty. The firm
generally enters into derivatives with other counterparties
to mitigate its risk from derivatives with these VIEs. The
firm typically does not sell assets to the 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 the risk it
has from the derivatives it enters into with these VIEs. The
firm also obtains funding through these VIEs.
Other VIEs. Other primarily includes nonconsolidated
power-related and investment fund VIEs. The firm
purchases debt and equity securities issued by VIEs that
hold power-related assets, and may provide commitments
to these VIEs. The firm also makes equity investments in
certain of the investment fund VIEs it manages, and is
entitled to receive fees from these VIEs. The firm typically
does not sell assets to, or enter into derivatives with, these
VIEs.
VIE Consolidation Analysis
A variable interest in a VIE is an investment (e.g., debt or
equity securities) or other interest (e.g., derivatives or loans
and lending commitments) in a VIE 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 in residential and commercial mortgage-
backed and other asset-backed securitization entities,
CDOs and CLOs; 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.
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:
‰Which variable interest holder has the power to direct the
activities of the VIE that most significantly impact the
VIE’s economic performance;
‰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;
‰The VIE’s purpose and design, including the risks the VIE
was designed to create and pass through to its variable
interest holders;
‰The VIE’s capital structure;
‰The terms between the VIE and its variable interest
holders and other parties involved with the VIE; and
‰Related-party relationships.
The firm reassesses its initial 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.
166 Goldman Sachs 2015 Form 10-K