Consolidated Investment Entities

9 Months Ended

Sep. 30, 2011

Consolidated Investment Entities.

Consolidated Investment Entities

3.  Consolidated Investment Entities

The Company provides asset management services to various CDOs and other investment products (collectively, “investment entities”), which are sponsored by the Company for the investment of client assets in the normal course of business. Certain of these investment entities are considered to be VIEs while others are considered to be voting rights entities (“VREs”). The Company consolidates certain of these investment entities.

The CDOs managed by the Company are considered VIEs. These CDOs are asset backed financing entities collateralized by a pool of assets, primarily syndicated loans and, to a lesser extent, high-yield bonds. Multiple tranches of debt securities are issued by a CDO, offering investors various maturity and credit risk characteristics. The debt securities issued by the CDOs are non-recourse to the Company. The CDO’s debt holders have recourse only to the assets of the CDO. The assets of the CDOs cannot be used by the Company. Scheduled debt payments are based on the performance of the CDO’s collateral pool. The Company generally earns management fees from the CDOs based on the par value of outstanding debt and, in certain instances, may also receive performance-based fees. In the normal course of business, the Company has invested in certain CDOs, generally an insignificant portion of the unrated, junior subordinated debt.

For certain of the CDOs, the Company has determined that consolidation is required as it has power over the CDOs and holds a variable interest in the CDOs for which the Company has the potential to receive significant benefits or the potential obligation to absorb significant losses. For other CDOs managed by the Company, the Company has determined that consolidation is not required as the Company does not hold a variable interest in the CDOs.

The Company provides investment advice and related services to private, pooled investment vehicles organized as limited partnerships, limited liability companies or foreign (non-U.S.) entities. Certain of these pooled investment vehicles are considered VIEs while others are VREs. For investment management services, the Company generally earns management fees based on the market value of assets under management, and in certain instances may also receive performance-based fees. The Company provides seed money occasionally to certain of these funds. For certain of the pooled investment vehicles, the Company has determined that consolidation is required as the Company stands to absorb a majority of the entity’s expected losses or receive a majority of the entity’s expected residual returns. For other VIE pooled investment vehicles, the Company has determined that consolidation is not required because the Company is not expected to absorb the majority of the expected losses or receive the majority of the expected residual returns. For the pooled investment vehicles which are VREs, the Company consolidates the structure when it has a controlling financial interest.

The Company also provides investment advisory, distribution and other services to the Columbia and Threadneedle mutual fund families. The Company has determined that consolidation is not required for these mutual funds.

In addition, the Company may invest in structured investments including VIEs for which it is not the sponsor. These structured investments typically invest in fixed income instruments and are managed by third parties and include asset backed securities, commercial mortgage backed securities, and residential mortgage backed securities. The Company includes these investments in Available-for-Sale securities. The Company has determined that it is not the primary beneficiary of these structures due to its relative size, position in the capital structure of these entities, and the Company’s lack of power over the structures. The Company’s maximum exposure to loss as a result of its investment in structured investments that it does not consolidate is limited to its carrying value. The Company has no obligation to provide further financial or other support to these structured investments nor has the Company provided any support to these structured investments. See Note 4 for additional information about these structured investments.

The following tables present the balances of assets and liabilities held by consolidated investment entities measured at fair value on a recurring basis:

	September 30, 2011
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Investments:
Corporate debt securities	$	—	$	347	$	7	$	354
Common stocks	33		83		9		125
Other structured investments	—		59		—		59
Syndicated loans	—		4,187		435		4,622
Total investments	33		4,676		451		5,160
Receivables	—		24		—		24
Other assets	—		8		1,163		1,171
Total assets at fair value	$	33	$	4,708	$	1,614	$	6,355
Liabilities
Debt	$	—	$	—	$	5,035	$	5,035
Other liabilities	—		146		—		146
Total liabilities at fair value	$	—	$	146	$	5,035	$	5,181

	December 31, 2010
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Investments:
Corporate debt securities	$	—	$	418	$	6	$	424
Common stocks	26		53		11		90
Other structured investments	—		39		22		61
Syndicated loans	—		4,867		—		4,867
Trading securities	—		2		—		2
Total investments	26		5,379		39		5,444
Receivables	—		33		—		33
Other assets	—		8		887		895
Total assets at fair value	$	26	$	5,420	$	926	$	6,372
Liabilities
Debt	$	—	$	—	$	5,171	$	5,171
Other liabilities	—		154		—		154
Total liabilities at fair value	$	—	$	154	$	5,171	$	5,325

The following tables provide a summary of changes in Level 3 assets and liabilities held by consolidated investment entities measured at fair value on a recurring basis:

	Corporate						Other
	Debt			Common			Structured			Syndicated			Other
	Securities			Stocks			Investments			Loans			Assets			Debt
	(in millions)
Balance, July 1, 2011	$	6		$	23		$	3		$	246		$	1,097		$	(5,234	)
Total gains (losses) included in:
Net income	—			(1		)(1)	—			(27		)(1)	—			157		(1)
Other comprehensive income	—			—			—			—			(32		)	—
Purchases	2			—			—			90			101			—
Sales	—			—			—			(2		)	(3		)	—
Issues	—			—			—			—			—			—
Settlements	(1		)	—			—			(57		)	—			42
Transfers into Level 3	—			5			—			250			—			—
Transfers out of Level 3	—			(18		)	(3		)	(65		)	—			—
Balance, September 30, 2011	$	7		$	9		$	—		$	435		$	1,163		$	(5,035	)
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at September 30, 2011	$	—		$	(1	)(1)	$	—		$	(26	)(1)	$	5	(2)	$	156	(1)

(1) Included in net investment income in the Consolidated Statements of Operations.

(2) Included in other revenues in the Consolidated Statements of Operations.

	Corporate					Other
	Debt		Common			Structured			Other
	Securities		Stocks			Investments			Assets			Debt
	(in millions)
Balance, July 1, 2010	$	6	$	4		$	10		$	682		$	(5,048	)
Total gains (losses) included in:
Net income	—		2		(1)	(1		)(1)	(3		)(2)	(51		)(1)
Other comprehensive income	—		—			—			35			—
Purchases, sales, issues and settlements, net	—		3			4			164			2
Balance, September 30, 2010	$	6	$	9		$	13		$	878		$	(5,097	)
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at September 30, 2010	$	—	$	2	(1)	$	(1	)(1)	$	(7	)(2)	$	(51	)(1)

(1) Included in net investment income in the Consolidated Statements of Operations.

(2) Included in other revenues in the Consolidated Statements of Operations.

	Corporate						Other
	Debt			Common			Structured			Syndicated			Other
	Securities			Stocks			Investments			Loans			Assets			Debt
	(in millions)
Balance, January 1, 2011	$	6		$	11		$	22		$	—		$	887		$	(5,171	)
Total gains (losses) included in:
Net income	—			4		(1)	(1		)(1)	(23		)(1)	5		(2)	(59		)(1)
Other comprehensive income	—			—			—			—			(7		)	—
Purchases	2			—			3			183			296			—
Sales	(1		)	—			—			(8		)	(18		)	—
Issues	—			—			—			—			—			(27		)
Settlements	(1		)	—			—			(113		)	1			222
Transfers into Level 3	1			19			—			507			7			—
Transfers out of Level 3	—			(25		)	(24		)	(111		)	(8		)	—
Balance, September 30, 2011	$	7		$	9		$	—		$	435		$	1,163		$	(5,035	)
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at September 30, 2011	$	—		$	1	(1)	$	—		$	(22	)(1)	$	17	(2)	$	(55	)(1)

(1)	Included in net investment income in the Consolidated Statements of Operations.
(2)	Included in other revenues in the Consolidated Statements of Operations.

	Corporate						Other
	Debt			Common			Structured		Other
	Securities			Stocks			Investments		Assets			Debt
	(in millions)
Balance, January 1, 2010	$	—		$	—		$	—	$	831		$	—
Cumulative effect of accounting change	15			—			5		—			(4,962		)
Total gains (losses) included in:
Net income	(1		)(1)	2		(1)	—		68		(2)	(157		)(1)
Other comprehensive income	—			—			—		(29		)	—
Purchases, sales, issues and settlements, net	(8		)	7			8		8			22
Balance, September 30, 2010	$	6		$	9		$	13	$	878		$	(5,097	)
Changes in unrealized gains (losses) included in income relating to assets and liabilities held at September 30, 2010	$	—		$	2	(1)	$	—	$	35	(3)	$	(157	)(1)

(1)	Included in net investment income in the Consolidated Statements of Operations.
(2)	Represents a $69 million gain included in other revenues and a $1 million loss included in net investment income in the Consolidated Statements of Operations.
(3)	Represents a $36 million gain included in other revenues and a $1 million loss included in net investment income in the Consolidated Statements of Operations.

Securities transferred from Level 2 to Level 3 represent securities with fair values that are now based on a single broker quote. Securities transferred from Level 3 to Level 2 represent securities with fair values that are now obtained from a nationally-recognized pricing service with observable inputs.

The Company has elected the fair value option for the financial assets and liabilities of the consolidated CDOs. Management believes that the use of the fair value option better matches the changes in fair value of assets and liabilities related to the CDOs.

For receivables, certain other assets and other liabilities of the consolidated CDOs, the carrying value approximates fair value as the nature of these assets and liabilities has historically been short term and the receivables have been collectible. The fair value of these assets and liabilities is classified as Level 2. Other liabilities consist primarily of securities purchased but not yet settled held by consolidated CDOs. The fair value of syndicated loans obtained from nationally-recognized pricing services is classified as Level 2. The fair value of syndicated loans obtained from a single broker quote is classified as Level 3. Other assets consist primarily of properties held in consolidated pooled investment vehicles managed by Threadneedle. The fair value of these properties is determined using discounted cash flows and market comparables. Inputs into the valuation of these properties include: rental cash flows, current occupancy, historical vacancy rates, tenant history and assumptions regarding how quickly the property can be occupied and at what rental rates. Given the significance of the unobservable inputs to these measurements, these assets are classified as Level 3. The fair value of the CDO’s debt is valued using a discounted cash flow methodology. Inputs used to determine the expected cash flows include assumptions about default and recovery rates of the CDO’s underlying assets. Given the significance of the unobservable inputs to this fair value measurement, the CDO debt is classified as Level 3. See Note 10 for a description of the Company’s determination of the fair value of investments.

The following table presents the fair value and unpaid principal balance of loans and debt for which the fair value option has been elected:

	September 30, 2011			December 31, 2010
	(in millions)
Syndicated loans
Unpaid principal balance	$	4,984		$	5,107
Excess estimated unpaid principal over fair value	(362		)	(240		)
Fair value	$	4,622		$	4,867
Fair value of loans more than 90 days past due	$	23		$	71
Fair value of loans in non-accrual status	23			71
Difference between fair value and unpaid principal of loans more than 90 days past due, loans in non-accrual status or both	20			62
Debt
Unpaid principal balance	$	5,698		$	5,893
Excess estimated unpaid principal over fair value	(663		)	(722		)
Fair value	$	5,035		$	5,171

Interest income from syndicated loans, bonds and structured investments is recorded based on contractual rates in net investment income. Gains and losses related to changes in the fair value of investments and gains and losses on sales of investments are recorded in net investment income. Interest expense on debt is recorded in interest and debt expense with gains and losses related to changes in the fair value of debt recorded in net investment income.

Total net gains (losses) recognized in net investment income related to changes in the fair value of financial assets and liabilities for which the fair value option was elected were $(120) million and $(32) million for the three months ended September 30, 2011 and 2010, respectively. Total net gains (losses) recognized in net investment income related to changes in the fair value of financial assets and liabilities for which the fair value option was elected were $(186) million and $96 million for the nine months ended September 30, 2011 and 2010, respectively. The majority of the syndicated loans and debt have floating rates; as such, changes in their fair values are primarily attributable to changes in credit spreads.

Debt of the consolidated investment entities and the stated interest rates were as follows:

	Carrying Value				Weighted Average Interest Rate
	September 30,  2011		December 31,  2010		September 30, 2011		December 31,  2010
	(in millions)
Debt of consolidated CDOs due 2012-2021	$	5,035	$	5,171	0.8	%	1.0	%
Floating rate revolving credit borrowings due 2014	406		329		5.4		5.6
Floating rate revolving credit borrowings due 2015	88		35		4.4		5.2
Total	$	5,529	$	5,535

The debt of the consolidated CDOs has both fixed and floating interest rates, which range from 0% to 13.3%. The interest rates on the debt of consolidated investment entities are weighted average rates based on the outstanding principal and contractual interest rates. The carrying value of the debt of the consolidated CDOs represents the fair value of the aggregate debt as of September 30, 2011 and December 31, 2010. The carrying value of the floating rate revolving credit borrowings represents the outstanding principal amount of debt of certain consolidated pooled investment vehicles managed by Threadneedle. The fair value of this debt was $494 million and $364 million as of September 30, 2011 and December 31, 2010, respectively.