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BlackRock 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to             .

Commission file number 001-33099

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(Zip Code)

(212) 810-5300

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or, a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

As of October 31, 2011, there were 139,050,009 shares of the registrant’s common stock outstanding.


Table of Contents

BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

             

Page

Item 1.   Financial Statements (unaudited)   
     Condensed Consolidated Statements of Financial Condition    1
     Condensed Consolidated Statements of Income    3
     Condensed Consolidated Statements of Comprehensive Income    4
     Condensed Consolidated Statements of Changes in Equity    5
     Condensed Consolidated Statements of Cash Flows    7
     Notes to Condensed Consolidated Financial Statements    9
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    45
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    95
Item 4.   Controls and Procedures    97

PART II

 

OTHER INFORMATION

Item 1.   Legal Proceedings    98
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    98
Item 6.   Exhibits    99

 

- ii -


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(Dollar amounts in millions, except share data)

(unaudited)

 

     September 30,
2011
     December 31,
2010
 

Assets

     

Cash and cash equivalents

   $ 2,983       $ 3,367   

Accounts receivable

     2,073         2,095   

Due from related parties

     145         150   

Investments

     1,525         1,540   

Assets of consolidated variable interest entities

     

Cash and cash equivalents

     70         93   

Bank loans and other investments

     1,638         1,312   

Separate account assets

     115,265         121,137   

Collateral held under securities lending agreements

     19,317         17,638   

Deferred sales commissions, net

     45         66   

Property and equipment (net of accumulated depreciation of $518 and $426 at September 30, 2011 and December 31, 2010, respectively)

     545         428   

Intangible assets (net of accumulated amortization of $712 and $615 at September 30, 2011 and December 31, 2010, respectively)

     17,395         17,512   

Goodwill

     12,797         12,805   

Other assets

     484         316   
  

 

 

    

 

 

 

Total assets

   $ 174,282       $ 178,459   
  

 

 

    

 

 

 

Liabilities

     

Accrued compensation and benefits

   $ 1,105       $ 1,520   

Accounts payable and accrued liabilities

     1,171         1,068   

Due to related parties

     23         57   

Short-term borrowings

     100         100   

Liabilities of consolidated variable interest entities

     

Borrowings

     1,586         1,278   

Other liabilities

     7         7   

Convertible debentures

     —           67   

Long-term borrowings

     4,690         3,192   

Separate account liabilities

     115,265         121,137   

Collateral liabilities under securities lending agreements

     19,317         17,638   

Deferred income tax liabilities

     5,366         5,477   

Other liabilities

     713         584   
  

 

 

    

 

 

 

Total liabilities

     149,343         152,125   
  

 

 

    

 

 

 

Commitments and contingencies (Note 11)

     

Temporary equity

     

Redeemable non-controlling interests

     1         6   

 

1


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition (continued)

(Dollar amounts in millions, except share data)

(unaudited)

 

     September 30,
2011
    December 31,
2010
 

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     1        1   

Shares authorized: 500,000,000 at September 30, 2011 and December 31, 2010;

    

Shares issued: 139,880,380 and 131,923,624 at September 30, 2011 and December 31, 2010, respectively;

    

Shares outstanding: 139,015,436 and 131,216,561 at September 30, 2011 and December 31, 2010, respectively

    

Preferred stock (Note 14)

     —          1   

Additional paid-in capital

     20,150        22,502   

Retained earnings

     4,736        3,723   

Appropriated retained earnings

     79        75   

Accumulated other comprehensive loss

     (110     (96

Escrow shares, common, at cost (3,603 shares held at September 30, 2011 and December 31, 2010)

     (1     (1

Treasury stock, common, at cost (861,341 and 703,460 shares held at September 30, 2011 and December 31, 2010, respectively)

     (128     (111
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     24,727        26,094   

Nonredeemable non-controlling interests

     175        189   

Nonredeemable non-controlling interests of consolidated variable interest entities

     36        45   
  

 

 

   

 

 

 

Total permanent equity

     24,938        26,328   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

   $ 174,282      $ 178,459   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Income

(Dollar amounts in millions, except per share data)

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenue

        

Investment advisory, administration fees and securities lending revenue

        

Related parties

   $ 1,320      $ 1,217      $ 4,075      $ 3,529   

Other third parties

     629        577        1,958        1,810   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment advisory, administration fees and securities lending revenue

     1,949        1,794        6,033        5,339   

Investment advisory performance fees

     91        114        224        214   

BlackRock Solutions and advisory

     117        101        361        328   

Distribution fees

     23        29        78        89   

Other revenue

     45        54        158        149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     2,225        2,092        6,854        6,119   

Expenses

        

Employee compensation and benefits

     771        774        2,425        2,256   

Distribution and servicing costs

        

Related parties

     1        67        3        194   

Other third parties

     89        38        296        108   

Amortization of deferred sales commissions

     20        26        63        79   

Direct fund expenses

     139        124        435        359   

General and administration

     389        316        1,074        945   

Amortization of intangible assets

     39        40        117        120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,448        1,385        4,413        4,061   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     777        707        2,441        2,058   

Non-operating income (expense)

        

Net gain (loss) on investments

     (59     93        18        117   

Net gain (loss) on consolidated variable interest entities

     (16     12        (36     (16

Interest and dividend income

     12        10        25        19   

Interest expense

     (49     (37     (128     (115
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income (expense)

     (112     78        (121     5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     665        785        2,320        2,063   

Income tax expense

     95        201        564        662   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     570        584        1,756        1,401   

Less:

        

Net income (loss) attributable to redeemable non-controlling interests

     —          —          —          2   

Net income (loss) attributable to nonredeemable non-controlling interests

     (25     33        (26     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

   $ 595      $ 551      $ 1,782      $ 1,406   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to BlackRock, Inc. common stockholders:

        

Basic

   $ 3.28      $ 2.85      $ 9.46      $ 7.28   

Diluted

   $ 3.23      $ 2.83      $ 9.33      $ 7.21   

Cash dividends declared and paid per share

   $ 1.375      $ 1.00      $ 4.125      $ 3.00   

Weighted-average common shares outstanding:

        

Basic

     179,034,837        190,494,905        186,187,318        190,385,046   

Diluted

     181,825,329        192,326,841        188,792,952        192,280,679   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollar amounts in millions)

(unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  

Net income

   $ 570      $ 584       $ 1,756      $ 1,401   

Other comprehensive income:

         

Change in net unrealized gains (losses) from available-for-sale investments, net of tax:

         

Unrealized holding gains (losses), net of tax

     (5     1         (6     4   

Less: reclassification adjustment included in net income

     (2     —           —          2   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net change from available-for-sale investments, net of tax(1)

     (3     1         (6     2   

Minimum pension liability adjustment

     —          1         —          —     

Foreign currency translation adjustments

     (67     89         (8     (1
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

     (70     91         (14     1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     500        675         1,742        1,402   

Less: Comprehensive income (loss) attributable to non-controlling interests

     (25     33         (26     (5
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to BlackRock, Inc.

   $ 525      $ 642       $ 1,768      $ 1,407   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

The tax benefit (expense) on unrealized holding gains (losses) was $2 million and ($1) million during the three months ended September 30, 2011 and 2010, respectively, and $3 million and ($2) million during the nine months ended September 30, 2011 and 2010, respectively.

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(Dollar amounts in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
Held in
Escrow
    Treasury
Stock
Common
    Total
Stockholders’
Equity
    Nonredeemable
Non-controlling
Interests
    Nonredeemable
Non-controlling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-controlling
Interests /
Temporary
Equity
 

December 31, 2010

  $ 22,504      $ 3,723      $ 75      ($ 96   ($ 1   ($ 111   $ 26,094      $ 189      $ 45      $ 26,328      $ 6   

Net income

    —          1,782        —          —          —          —          1,782        10        (36     1,756        —     

Consolidation of a collateralized loan obligation(2)

    —          —          41        —          —          —          41        —          —          41        —     

Allocation of losses of consolidated collateralized loan obligations

    —          —          (37     —          —          —          (37     —          37        —          —     

Dividends paid, net of dividend expense for unvested RSUs

    —          (769     —          —          —          —          (769     —          —          (769     —     

Stock-based compensation

    373        —          —          —          —          2        375        —          —          375        —     

PNC preferred stock capital contribution

    200        —          —          —          —          —          200        —          —          200        —     

Retirement of preferred stock

    (200     —          —          —          —          —          (200     —          —          (200     —     

Merrill Lynch cash capital contribution

    8        —          —          —          —          —          8        —          —          8        —     

Issuance of common shares related to employee stock transactions

    (202     —          —          —          —          217        15        —          —          15        —     

Employee tax withholdings related to employee stock transactions

    —          —          —          —          —          (237     (237     —          —          (237     —     

Shares repurchased

    (2,545     —          —          —          —          —          (2,545     —          —          (2,545     —     

Convertible debt conversions

    4        —          —          —          —          1        5        —          —          5     

Net tax benefit (shortfall) from stock-based compensation

    9        —          —          —          —          —          9        —          —          9        —     

Subscriptions (redemptions/
distributions)-
non-controlling interest holders

    —          —          —          —          —          —          —          (24     (10     (34     7   

Net consolidations (deconsolidations) of sponsored investment funds

    —          —          —          —          —          —          —          —          —          —          (12

Foreign currency translation adjustments

    —          —          —          (8     —          —          (8     —          —          (8     —     

Change in net unrealized gain (loss) from available-for-sale investments, net of tax

    —          —          —          (6     —          —          (6     —          —          (6     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2011

  $ 20,151      $ 4,736      $ 79      ($ 110   ($ 1   ($ 128   $ 24,727      $ 175      $ 36      $ 24,938      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $1 million of common stock at both September 30, 2011 and December 31, 2010 and $1 million of preferred stock at December 31, 2010.

(2) 

Consolidated during the three months ended September 30, 2011.

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(Dollar amounts in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
Held in
Escrow
    Treasury
Stock
Common
    Total
Stockholders’
Equity
    Nonredeemable
Non-controlling
Interests
    Nonredeemable
Non-controlling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-controlling
Interests /
Temporary
Equity
 

December 31, 2009

  $ 22,129      $ 2,436      $ —        ($ 96   ($ 137   ($ 3   $ 24,329      $ 224      $ —        $ 24,553      $ 49   

January 1, 2010 initial recognition of ASU 2009-17

    —          —          114        —          —          —          114        (49     49        114        —     

Net income

    —          1,406        —          —          —          —          1,406        11        (18     1,399        2   

Allocation of losses of consolidated collateralized loan obligations

    —          —          (20     —          —          —          (20     —          20        —          —     

Dividends paid, net of dividend expense for unvested RSUs

    —          (582     —          —          —          —          (582     —          —          (582     —     

Stock-based compensation

    334        —          —          —          —          1        335        —          —          335        —     

PNC preferred stock capital contribution

    5        —          —          —          —          —          5        —          —          5        —     

Merrill Lynch cash capital contribution

    10        —          —          —          —          —          10        —          —          10        —     

Exchange of common stock for preferred shares series B

    128        —          —          —          —          (128     —          —          —          —          —     

Net issuance of common shares related to employee stock transactions

    (194     —          —          —          —          (60     (254     —          —          (254     —     

Convertible debt conversions, net of tax

    (53     —          —          —          —          66        13        —          —          13        —     

Net tax benefit (shortfall) from stock-based compensation

    43        —          —          —          —          —          43        —          —          43        —     

Subscriptions/ (redemptions/
distributions) - non-controlling interest holders

    —          —          —          —          —          —          —          (4     (5     (9     97   

Net consolidations (deconsolidations) of sponsored investment funds

    —          —          —          —          —          —          —          —          —          —          (94

Other changes in non-controlling interests

    —          —          —          —          —          —          —          (2     —          (2     —     

Foreign currency translation adjustments

    —          —          —          (1     —          —          (1     —          —          (1     —     

Change in net unrealized gains (losses) from available-for-sale investments, net of tax

    —          —          —          2        —          —          2        —          —          2        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2010

  $ 22,402      $ 3,260      $ 94      ($ 95   ($ 137   ($ 124   $ 25,400      $ 180      $ 46      $ 25,626      $ 54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $1 million of common stock and $1 million of preferred stock at both September 30, 2010 and December 31, 2009.

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in millions)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities

    

Net income

   $ 1,756      $ 1,401   

Adjustments to reconcile net income to cash flows from operating activities:

    

Depreciation and amortization

     222        231   

Amortization of deferred sales commissions

     63        79   

Stock-based compensation

     375        335   

Deferred income tax expense (benefit)

     (108     42   

Net (gains) losses on non-trading investments

     (17     (34

Purchases of investments within consolidated funds

     (8     (13

Proceeds from sales and maturities of investments within consolidated funds

     41        23   

Assets and liabilities of consolidated VIEs:

    

Change in cash and cash equivalents

     38        (43

Net (gains) losses within consolidated VIEs

     36        16   

Net (purchases) proceeds within consolidated VIEs

     44        41   

(Earnings) losses from equity method investees

     (13     (104

Distributions of earnings from equity method investees

     26        11   

Changes in operating assets and liabilities:

    

Accounts receivable

     6        (334

Due from related parties

     (9     13   

Deferred sales commissions

     (42     (51

Investments, trading

     (31     (139

Other assets

     (156     162   

Accrued compensation and benefits

     (420     (329

Accounts payable and accrued liabilities

     90        391   

Due to related parties

     (34     (339

Other liabilities

     94        56   
  

 

 

   

 

 

 

Cash flows from operating activities

     1,953        1,415   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investments

     (142     (522

Proceeds from sales and maturities of investments

     142        131   

Distributions of capital from equity method investees

     32        39   

Net consolidations (deconsolidations) of sponsored investment funds

     —          (17

Acquisitions, net of cash acquired

     —          (16

Purchases of property and equipment

     (218     (96

Other

     —          1   
  

 

 

   

 

 

 

Cash flows from investing activities

     (186     (480
  

 

 

   

 

 

 

 

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Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Dollar amounts in millions)

(unaudited)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from financing activities

    

Repayments of short-term borrowings

     (600     (2,134

Proceeds from short-term borrowings

     600        —     

Repayments of convertible debt

     (67     (176

Proceeds from long-term borrowings

     1,496        —     

Cash dividends paid

     (769     (582

Proceeds from stock options exercised

     13        7   

Proceeds from issuance of common stock

     3        4   

Repurchases of common stock

     (2,783     (264

Merrill Lynch cash capital contribution

     8        10   

Repayments of borrowings by consolidated VIEs

     (72     —     

Net (redemptions/distributions paid) subscriptions received from non-controlling interests holders

     (27     88   

Excess tax benefit from stock-based compensation

     23        43   
  

 

 

   

 

 

 

Cash flows from financing activities

     (2,175     (3,004
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     24        (3
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (384     (2,072

Cash and cash equivalents, beginning of period

     3,367        4,708   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 2,983      $ 2,636   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for:

    

Interest

   $ 98      $ 98   

Interest on borrowings of consolidated VIEs

   $ 43      $ 38   

Income taxes

   $ 819      $ 355   

Supplemental schedule of non-cash investing and financing transactions:

    

Issuance of common stock

   $ 207      $ 257   

Increase (decrease) in borrowings due to consolidation of VIEs

   $ 390      $ 1,157   

PNC preferred stock capital contribution

   $ 200      $ 5   

See accompanying notes to condensed consolidated financial statements.

 

8


Table of Contents

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business Overview

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversified investment management services to institutional clients, intermediary and individual investors through various investment vehicles. Investment management services primarily consist of the management of equity, fixed income, multi-asset class, alternative investment and cash management products. BlackRock offers its investment products in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”), collective investment trusts and separate accounts. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

On June 1, 2011, BlackRock completed its repurchase of Bank of America Corporation’s (“Bank of America”) remaining ownership interest of 13,562,878 Series B Convertible Preferred Shares for $2.545 billion, or $187.65 per share.

On September 30, 2011, equity ownership of BlackRock was as follows:

 

     Voting
Common Stock
    Capital
Stock(1)
 

The PNC Financial Services Group, Inc. (“PNC”)

     23.9     21.0

Barclays Bank PLC (“Barclays”)

     2.2     19.7

Other

     73.9     59.3
  

 

 

   

 

 

 
     100.0     100.0
  

 

 

   

 

 

 

 

(1) 

Includes outstanding common and non-voting preferred stock.

 

9


Table of Contents

2. Significant Accounting Policies

Basis of Presentation. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Non-controlling interests on the condensed consolidated statements of financial condition include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accounts and transactions between consolidated entities have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2011.

The interim financial information at September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Reclassifications. Certain items previously reported have been reclassified to conform to the current period presentation.

Fair Value Measurements. Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), requires among other things, disclosures about assets and liabilities that are measured and reported at fair value.

Hierarchy of Fair Value Inputs. The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major class of assets and liabilities and disclosures with regards to significant transfers into and out of Levels 1 and 2.

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 Inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.

 

   

Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”) which, in accordance with GAAP, are calculated under fair value measures and the changes are equal to the earnings of such funds), ETFs, equities and certain exchange-traded derivatives.

 

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Table of Contents

2. Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

Level 2 Inputs:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company relies on the NAV (or its equivalent) of certain investments as their fair value.

 

   

Level 2 assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, securities held within consolidated hedge funds and certain equity method limited partnership interests in hedge funds valued based on NAV where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data.

Level 3 Inputs:

Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.

 

   

Level 3 assets in this category may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds and bank loans.

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals, from third party sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third party source or fund management may conclude that the valuations that are available from third party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

 

   

Level 3 liabilities included in this category include borrowings of consolidated collateralized loan obligations valued based upon non-binding single broker quotes.

Significance of Inputs. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Fair Value Option. ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis, must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method.

 

11


Table of Contents

2. Significant Accounting Policies (continued)

 

Disclosure of Fair Value. The disclosure requirements within ASC 825-10 require disclosure of estimated fair values of certain financial instruments, both on and off the consolidated statements of financial condition. For financial instruments recognized at fair value in the statement of consolidated financial condition, the disclosure requirements of ASC 820-10 also apply.

The methods and assumptions for assets and liabilities measured at fair value, including those on a non-recurring basis, are set forth below:

 

   

Cash and cash equivalents are carried at either cost or amortized cost which approximates fair value due to their short term maturities. Money market funds are valued through the use of quoted market prices, or $1.00, which generally is the NAV.

 

   

The carrying amounts of receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.

 

   

The fair value of marketable investments is based on quoted market prices or broker quotes. If investments are not readily marketable, fair values primarily are determined based on NAVs (or capital accounts) of investments in limited partnerships/limited liability companies or by the Company based on management’s assumptions or estimates, taking into consideration financial information of the investment, the industry of the investment, market indices or valuation services from third party service providers. At September 30, 2011, with the exception of certain equity and cost method investments and carried interest investments that are not accounted for under a fair value measure, the carrying value of investments approximated fair value. See Note 5, Fair Value Disclosures, for further discussion.

 

   

Long-term borrowings are recorded at amortized amounts. See Note 10, Borrowings, for the fair value of the Company’s long-term borrowings.

Collateral Assets Held and Liabilities Under Securities Lending Agreements. The Company facilitates securities lending arrangements whereby securities held as separate account assets maintained by BlackRock’s registered life insurance companies are lent to third parties. In exchange, the Company receives collateral, principally cash and securities, with minimums generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. Under the Company’s securities lending arrangements, the Company can resell or re-pledge the collateral and the borrower can re-sell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales under ASC 860, Transfers and Servicing.

As a result of the Company’s ability to resell or re-pledge the collateral, the Company records on its condensed consolidated statements of financial condition the collateral received under these arrangements (both cash and non-cash) as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. At September 30, 2011, the fair value of loaned securities held as separate account assets was approximately $18.3 billion and the collateral held under these securities lending agreements was approximately $19.3 billion. During the nine months ended September 30, 2011 and 2010, the Company had not sold or repledged any of the collateral received under these arrangements.

Appropriated Retained Earnings. Upon adoption of Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), on January 1, 2010, BlackRock consolidated three collateralized loan obligations (“CLOs”) and recorded a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statement of financial condition equal to the difference between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. The net change in the fair value of the CLOs’ assets and liabilities has been recorded as net income (loss) attributable to nonredeemable non-controlling interests and as an adjustment to appropriated retained earnings. In addition, as of September 30, 2011 BlackRock consolidated one additional CLO, resulting in $41 million of additional appropriated retained earnings.

 

12


Table of Contents

3. Investments

A summary of the carrying value of total investments is as follows:

 

(Dollar amounts in millions)    September 30,
2011
     December 31,
2010
 

Available-for-sale investments

   $ 48       $ 45   

Held-to-maturity investments

     94         100   

Trading investments:

     

Consolidated sponsored investment funds

     92         60   

Other equity securities

     3         22   

Deferred compensation plan mutual funds

     46         49   
  

 

 

    

 

 

 

Total trading investments

     141         131   

Other investments:

     

Consolidated sponsored investment funds

     347         337   

Equity method investments

     492         556   

Deferred compensation plan hedge fund equity method investments

     22         27   

Carried interest

     44         13   

Cost method investments

     337         331   
  

 

 

    

 

 

 

Total other investments

     1,242         1,264   
  

 

 

    

 

 

 

Total investments

   $ 1,525       $ 1,540   
  

 

 

    

 

 

 

At September 30, 2011, the Company consolidated $439 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $92 million and $347 million were classified as trading investments and other investments, respectively.

At December 31, 2010, the Company consolidated $397 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $60 million and $337 million were classified as trading investments and other investments, respectively.

 

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Table of Contents

3. Investments (continued)

 

Available-for-Sale Investments

A summary of the cost and carrying value of available-for-sale investments is as follows:

 

(Dollar amounts in millions)                           
            Gross Unrealized     Carrying
Value
 

September 30, 2011

   Cost      Gains      Losses    

Available-for-sale investments:

          

Equity securities:

          

Sponsored investment funds

   $ 51       $ 1       ($ 6   $ 46   

Collateralized debt obligations (“CDOs”)

     1         —           —          1   

Debt securities:

          

Asset-backed debt

     1         —           —          1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

   $ 53       $ 1       ($ 6   $ 48   
  

 

 

    

 

 

    

 

 

   

 

 

 
            Gross Unrealized     Carrying
Value
 

December 31, 2010

   Cost      Gains      Losses    

Available-for-sale investments:

          

Equity securities:

          

Sponsored investment funds

   $ 33       $ 4       ($ 1   $ 36   

CDOs

     2         —           —          2   

Debt securities:

          

Mortgage debt

     4         2         —          6   

Asset-backed debt

     1         —           —          1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale investments

   $ 40       $ 6       ($ 1   $ 45   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale investments include seed investments in BlackRock sponsored investment funds and debt securities received upon closure of certain funds in lieu of the Company’s remaining investment in the funds.

Held-to-Maturity Investments

A summary of the carrying value of held-to-maturity investments is as follows:

 

     Carrying Value  
(Dollar amounts in millions)    September 30,
2011
     December 31,
2010
 

Foreign government debt

   $ 94       $ 100   

Held-to-maturity investments include debt instruments held for regulatory purposes. The amortized cost (the carrying value) of these investments approximates fair value.

 

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Table of Contents

3. Investments (continued)

 

Held-to-Maturity Investments (continued)

 

The fair values of debt securities classified as held-to-maturity at September 30, 2011 by maturity date were as follows:

 

(Dollar amounts in millions)    1 Year
or less
     After 1
Year
through 5
Years
     After 5
Years
through 10
Years
     After 10
Years
     Total  
   $ 88       $ —         $ —         $ 6       $ 94   

Trading Investments

A summary of the cost and carrying value of trading investments is as follows:

 

     September 30, 2011      December 31, 2010  
(Dollar amounts in millions)    Cost      Carrying
Value
     Cost      Carrying
Value
 

Deferred compensation plan mutual funds

   $ 45       $ 46       $ 45       $ 49   

Equity securities

     77         65         37         45   

Debt securities:

           

Municipal debt

     —           1         10         10   

Corporate debt

     38         29         25         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading investments

   $ 160       $ 141       $ 117       $ 131   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2011, trading investments included $62 million of equity securities and $30 million of debt securities held by consolidated sponsored investment funds, $46 million of certain deferred compensation plan mutual fund investments and $3 million of equity securities held in separate investment accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.

Other Investments

A summary of the cost and carrying value of other investments is as follows:

 

     September 30, 2011      December 31, 2010  
(Dollar amounts in millions)    Cost      Carrying
Value
     Cost      Carrying
Value
 

Consolidated sponsored investment funds

   $ 334       $ 347       $ 319       $ 337   

Equity method

     520         492         569         556   

Deferred compensation plan hedge fund equity method investments

     17         22         20         27   

Carried interest

     —           44         —           13   

Cost method investments:

           

Federal Reserve Bank stock

     327         327         325         325   

Other

     10         10         6         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost method investments

     337         337         331         331   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other investments

   $ 1,208       $ 1,242       $ 1,239       $ 1,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

3. Investments (continued)

 

Other Investments (continued)

 

Consolidated sponsored investment funds include investments in third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.

Equity method investments include BlackRock’s direct investments in BlackRock sponsored investment products.

Carried interest represents allocations to BlackRock general partner capital accounts for certain funds. These balances are subject to change upon cash distributions, additional allocations, or reallocations back to limited partners within the respective funds.

Cost method investments include non-marketable securities, including $327 million of Federal Reserve Bank stock at September 30, 2011, which is held for regulatory purposes and is restricted from sale. As of September 30, 2011, there were no indicators of impairments on these investments.

4. Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds in accordance with GAAP. The investments owned by these consolidated sponsored investment funds are classified as other investments or trading investments. The following table presents the balances related to these consolidated funds that were included on the condensed consolidated statements of financial condition as well as BlackRock’s net interest in these funds:

 

(Dollar amounts in millions)    September 30,
2011
    December 31,
2010
 

Cash and cash equivalents

   $ 67      $ 65   

Investments:

    

Trading investments

     92        60   

Other investments

     347        337   

Other assets

     12        3   

Other liabilities

     (24     (10

Non-controlling interests

     (176     (195
  

 

 

   

 

 

 

BlackRock’s net interests in consolidated investment funds

   $ 318      $ 260   
  

 

 

   

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds of $318 million and $260 million at September 30, 2011 and December 31, 2010, respectively, represents the value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income (expense) and partially offset in net income (loss) attributable to non-controlling interests for the portion not attributable to BlackRock.

In addition, at September 30, 2011 and December 31, 2010, four and three consolidated CLOs, respectively, and one other consolidated sponsored investment fund which were deemed to be variable interest entities (“VIEs”), were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion on these consolidated products.

The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in its operations.

 

16


Table of Contents

5. Fair Value Disclosures

Fair Value Hierarchy

Total assets measured at fair value on a recurring basis of $136.6 billion at September 30, 2011 were as follows:

 

     Assets measured at fair value                
(Dollar amounts in millions)    Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable

Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Other
Assets
Not Held
at Fair
Value(1)
     September 30,
2011
 

Assets:

              

Investments

              

Available-for-sale:

              

Equity securities (funds and CDOs)

   $ 46       $ —         $ 1       $ —         $ 47   

Debt securities

     —           1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     46         1         1         —           48   

Held-to-maturity:

              

Debt securities

     —           —           —           94         94   

Trading:

              

Deferred compensation plan mutual funds

     46         —           —           —           46   

Equity securities

     62         3         —           —           65   

Debt securities

     —           30         —           —           30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading

     108         33         —           —           141   

Other investments:

              

Consolidated sponsored investment funds:

              

Hedge funds / Funds of hedge funds

     —           25         14         —           39   

Private / public equity

     14         —           294         —           308   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated sponsored investment funds

     14         25         308         —           347   

Equity method:

              

Hedge funds / Funds of hedge funds

     —           39         192         20         251   

Private equity investments

     —           —           81         20         101   

Real estate funds

     —           19         55         19         93   

Fixed income mutual funds

     41         —           —           —           41   

Equity / Multi-asset class mutual funds

     6         —           —           —           6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity method

     47         58         328         59         492   

Deferred compensation plan hedge fund equity method investments

     —           22         —           —           22   

Carried interest

     —           —           —           44         44   

Cost method investments

     —           —           —           337         337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     215         139         637         534         1,525   

Separate account assets:

              

Equity securities

     70,348         —           1         —           70,349   

Debt securities

     —           39,415         8         —           39,423   

Derivatives

     —           2,440         —           —           2,440   

Money market funds

     2,478         —           —           —           2,478   

Other

     —           —           —           575         575   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total separate account assets

     72,826         41,855         9         575         115,265   

Collateral held under securities lending agreements:

              

Equity securities

     10,105         —           —           —           10,105   

Debt securities

     —           9,212         —           —           9,212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateral held under securities lending agreements

     10,105         9,212         —           —           19,317   

Other assets(2)

     —           11         —           —           11   

Assets of consolidated VIEs:

              

Bank loans

     —           1,395         72         —           1,467   

Bonds

     —           135         —           —           135   

Private / public equity

     3         4         29         —           36   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets of consolidated VIEs

     3         1,534         101         —           1,638   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 83,149       $ 52,751       $ 747       $ 1,109       $ 137,756   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amount comprised of investments held at cost, amortized cost, carried interest and equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

(2)

Amount includes company-owned and split-dollar life insurance policies.

 

17


Table of Contents

5. Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at September 30, 2011 were as follows:

 

(Dollar amounts in millions)    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     September 30,
2011
 

Liabilities:

           

Borrowings of consolidated VIEs

   $ —         $ —         $ 1,586       $ 1,586   

Collateral liabilities under securities lending agreements

     10,105         9,212         —           19,317   

Other liabilities(1)

     —           3         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ 10,105       $ 9,215       $ 1,586       $ 20,906   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amount includes credit default swap (Pillars) recorded within other liabilities on the condensed consolidated statement of financial condition. See Note 7, Derivatives and Hedging, for more information.

 

18


Table of Contents

5. Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Total assets measured at fair value on a recurring basis of $140.5 billion at December 31, 2010 were as follows:

 

     Assets measured at fair value                
(Dollar amounts in millions)    Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Other
Assets
Not  Held

at Fair
Value(1)
     December 31,
2010
 

Assets:

              

Investments

              

Available-for-sale:

              

Equity securities (funds and CDOs)

   $ 36       $ —         $ 2       $ —         $ 38   

Debt securities

     —           7         —           —           7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     36         7         2         —           45   

Held-to-maturity:

              

Debt securities

     —           —           —           100         100   

Trading:

              

Deferred compensation plan mutual funds

     49         —           —           —           49   

Equity securities

     36         9         —           —           45   

Debt securities

     —           37         —           —           37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading

     85         46         —           —           131   

Other investments:

              

Consolidated sponsored investment funds:

              

Hedge funds / Funds of funds

     —           1         19         —           20   

Private / public equity

     18         —           299         —           317   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated sponsored investment funds

     18         1         318         —           337   

Equity method:

              

Hedge funds / Funds of hedge funds

     —           44         226         34         304   

Private equity investments

     —           —           68         20         88   

Real estate funds

     —           8         36         10         54   

Fixed income mutual funds

     103         —           —           —           103   

Equity / Multi-asset class mutual funds

     7         —           —           —           7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity method

     110         52         330         64         556   

Deferred compensation plan hedge fund equity method investments

     —           27         —           —           27   

Carried interest

     —           —           —           13         13   

Cost method investments

     —           —           —           331         331   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     249         133         650         508         1,540   

Separate account assets:

              

Equity securities

     79,727         3         4         —           79,734   

Debt securities

     —           36,415         170         —           36,585   

Derivatives

     1         1,598         —           —           1,599   

Money market funds

     2,549         —           —           —           2,549   

Other

     —           —           —           670         670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total separate account assets

     82,277         38,016         174         670         121,137   

Collateral held under securities lending agreements:

              

Equity securities

     15,237         —           —           —           15,237   

Debt securities

     —           2,401         —           —           2,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateral held under securities lending agreements

     15,237         2,401         —           —           17,638   

Other assets(2)

     —           11         —           —           11   

Assets of consolidated VIEs:

              

Bank loans

     —           1,130         32         —           1,162   

Bonds

     —           113         —           —           113   

Private / public equity

     4         3         30         —           37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets of consolidated VIEs

     4         1,246         62         —           1,312   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 97,767       $ 41,807       $ 886       $ 1,178       $ 141,638   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amount comprised of investments held at cost, amortized cost, carried interest and equity method investments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

(2) 

Amount includes company-owned and split-dollar life insurance policies.

 

19


Table of Contents

5. Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at December 31, 2010 were as follows:

 

(Dollar amounts in millions)    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     December 31,
2010
 

Liabilities:

           

Borrowings of consolidated VIEs

   $ —         $ —         $ 1,278       $ 1,278   

Collateral liabilities under securities lending agreements

     15,237         2,401         —           17,638   

Other liabilities(1)

     —           3         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ 15,237       $ 2,404       $ 1,278       $ 18,919   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amount includes credit default swap (Pillars) recorded within other liabilities on the condensed consolidated statement of financial condition.

Separate Account Assets. BlackRock Pensions Limited and BlackRock Asset Management Pensions Limited, both wholly owned subsidiaries of the Company, are registered life insurance companies in the United Kingdom that maintain separate account assets, representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account non-financial liabilities. The net investment income attributable to separate account assets accrue directly to the contract owners and are not reported on the Company’s condensed consolidated statements of income.

Money Market Funds within Cash and Cash Equivalents. At September 30, 2011 and December 31, 2010, approximately $79 million and $87 million, respectively, of money market funds were recorded within cash and cash equivalents on the Company’s condensed consolidated statements of financial condition. Money market funds are valued through the use of quoted market prices (a Level 1 input), or $1.00, which generally is the net asset value of the fund.

Level 3 Assets. Level 3 assets recorded within investments, which include equity method investments and consolidated investments of real estate funds, private equity funds and funds of private equity funds, are valued based upon valuations, including capital accounts, received from internal as well as third party fund managers. Fair valuations of the underlying funds are based on a combination of methods, which may include third-party independent appraisals and discounted cash flow techniques. Direct investments in private equity companies held by funds of private equity funds are valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third party financing, changes in valuations of comparable peer companies, the business environment of the companies and market indices, among other factors.

Level 3 assets recorded within separate account assets include single broker non-binding quotes for fixed income securities and equity securities which have unobservable inputs due to certain corporate actions.

Level 3 assets of consolidated VIEs include bank loans valued based on single broker non-binding quotes and direct private equity investments and private equity funds valued based upon valuations received from internal as well as third party fund managers, which may be adjusted by using the returns of certain market indices.

Level 3 Liabilities. Level 3 liabilities recorded as borrowings of consolidated VIEs include CLO borrowings valued based upon single broker non-binding quotes.

 

20


Table of Contents

5. Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2011

 

(Dollar amounts in millions)   June 30,
2011
    Realized and
unrealized
gains

(losses) in
earnings and
OCI
    Purchases     Sales and
maturities
    Issuances and
other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of

Level 3
    September 30,
2011
    Total  net
gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (CDOs)

  $ 2      ($ 1   $ —        $ —        $ —        $ —        $ —        $ 1      ($ 1

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    17        (2     —          —          (1     —          —          14        (1

Private equity

    312        (7     —          (10     (1     —          —          294        (10

Equity method:

                 

Hedge funds / Funds of hedge funds

    211        (19     —          —          —          —          —          192        (20

Private equity investments

    77        3        1        —          —          —          —          81        2   

Real estate funds

    48        3        5        —          (1     —          —          55        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 investments

    667        (23     6        (10     (3     —          —          637        (27

Separate account assets:

                 

Equity securities

    4        (1     1        (3     —          —          —          1     

Debt securities

    10        (1     —          (1     —          —          —          8     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 separate account assets

    14        (2     1        (4     —          —          —          9        n/a (3) 

Assets of consolidated VIEs:

                 

Bank loans

    41        (2     5        —          16        23        (11     72     

Private equity

    29        —          —          —          —          —          —          29     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets of consolidated VIEs

    70        (2     5        —          16        23        (11     101        n/a (4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total Level 3 assets

  $ 751      ($ 27   $ 12      ($ 14   $ 13      $ 23      ($ 11   $ 747     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities:

                 

Borrowings of consolidated VIEs

  $ 1,292      $ 38      $ —        $ —        $ 332      $ —        $ —        $ 1,586        n/a (4) 

 

n/a – not applicable

(1) 

Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

(2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

(3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and are not reported on the Company’s condensed consolidated statements of income.

(4) 

The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s condensed consolidated statements of income.

 

21


Table of Contents

5. Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2011

 

(Dollar amounts in millions)   December 31,
2010
    Realized and
unrealized
gains

(losses) in
earnings and
OCI
    Purchases     Sales and
maturities
    Issuances
and other
settlements(1)
    Transfers
into
Level 3
    Transfers
out of
Level 3
    September 30,
2011
    Total net
gains
(losses)
included in
earnings(2)
 

Assets:

                 

Investments

                 

Available-for-sale:

                 

Equity securities (funds and CDOs)

  $ 2      $ —        $ —        $ —        ($ 1   $ —        $ —        $ 1      $ —     

Consolidated sponsored investment funds:

                 

Hedge funds / Funds of funds

    19        (1     —          (2     (1     —          (1     14        —     

Private equity

    299        23        8        (38     —          2        —          294        20   

Equity method:

                 

Hedge funds / Funds of hedge funds

    226        (7     5        (1     (31     —          —          192        (7

Private equity investments

    68        10        4        —          (1     —          —          81        10   

Real estate funds

    36