consolidated by the party who is exposed to a majority of the VIE’s expected losses and/or residual returns (i.e., the primary beneficiary). 

Transferors of assets to qualifying special purpose entities meeting the requirements of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” are exempt from Interpretation No. 46. As a result, substantially all of Key’s securitization trusts are exempt from consolidation. Interests in securitization trusts formed by Key that do not qualify for this scope exception are insignificant. 

Key adopted Interpretation No. 46 effective July 1, 2003. The resulting consolidation or de-consolidation of VIEs increased both Key’s assets and liabilities by approximately $847 million at the date of adoption and $987 million at December 31, 2003, and had no material effect on Key’s results of operations in 2003. As required, assets, liabilities and noncontrolling interests of newly consolidated entities were initially recorded at their carrying amounts. 

Key’s involvement with VIEs, including those consolidated and de- consolidated and those in which Key holds a significant interest, is described below. Key defines a “significant interest” in a VIE as a subordinated interest that exposes Key to a significant portion, but not the majority, of the VIE’s expected losses or residual returns, if any. 

## Consolidated VIEs 

Commercial paper conduit. Key, among others, refers third-party assets and borrowers and provides liquidity and credit enhancement to an asset- backed commercial paper conduit. At December 31, 2003, the conduit had assets of $400 million, of which $342 million are recorded in “loans” and $57 million are recorded in “securities available for sale” on the balance sheet. These assets serve as collateral for the conduit’s obligations to commercial paper holders. The commercial paper holders have no recourse to Key’s general credit other than through Key’s committed credit enhancement facility of $60 million. 

Additional information pertaining to Key’s involvement with the conduit is included in Note 18 (“Commitments, Contingent Liabilities and Guarantees”) under the heading “Guarantees” on page 78 and under the heading “Other Off-Balance Sheet Risk” on page 79. 

Low-Income Housing Tax Credit (“LIHTC”) guaranteed funds. Key Affordable Housing Corporation (“KAHC”) formed limited partnerships (funds) that invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. Key also earned syndication fees from these funds and continues to earn asset management fees. The funds’ assets are primarily investments in LIHTC operating partnerships, which totaled $470 million at December 31, 2003. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations. In October 2003, management elected to discontinue this program. No new funds or LIHTC investments have been added since that date; however, Key continues to act as asset manager, including providing occasional funding, for existing funds. Additional information on return guaranty agreements with LIHTC investors is summarized in Note 18 under the heading “Guarantees.” 

The partnership agreement for each guaranteed fund requires the fund to be dissolved by a certain date. Therefore, in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Assets and Liabilities,” the noncontrolling interests associated with these funds are mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. In November 2003, the FASB indefinitely deferred the measurement and recognition provisions of SFAS No. 150 for mandatorily redeemable noncontrolling interests associated with finite-lived subsidiaries. Key currently accounts for these noncontrolling interests as minority interests, and adjusts the financial statements each period for the investors’ share of fund profits and losses. At December 31, 2003, the settlement value of these noncontrolling interests was estimated to be between $609 million and $756 million, while the recorded value, including reserves, totaled $455 million. Additional information on SFAS No. 150 is included in Note 1 under the heading “Accounting Pronouncements Adopted in 2003.” 

LIHTC nonguaranteed multiple investor funds. KAHC also sold investments in certain LIHTC funds without guaranteeing a return to the investors and earned syndication and asset management fees for services provided to these nonguaranteed funds. Key determined that it is the primary beneficiary of those multiple investor nonguaranteed funds that do not have a majority investor. The funds’ assets are primarily investments in LIHTC operating partnerships, which totaled $78 million at December 31, 2003. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the funds’ limited obligations. The investors have no recourse to Key’s general credit. In October 2003, management elected to discontinue this program. 

## Unconsolidated VIEs 

Other LIHTC nonguaranteed funds. Key has determined that it is not the primary beneficiary of certain other nonguaranteed funds in which it has invested, although it continues to hold significant interests in those funds. At December 31, 2003, assets of these unconsolidated nonguaranteed funds were estimated to be $255 million. Key’s maximum exposure to loss from its involvement with these funds is minimal. In October 2003, management elected to discontinue this program. 

Business trusts issuing mandatorily redeemable preferred capital securities. Key owns the common stock of business trusts that have issued corporation-obligated mandatorily redeemable preferred capital securities to third-party investors. The trusts’ only assets, which totaled $1.4 billion at December 31, 2003, are debentures issued by Key that the trusts acquired using proceeds from the issuance of preferred securities and common stock. When Key adopted Interpretation No. 46 effective July 1, 2003, it de-consolidated the trusts and began recording the debentures in “long-term debt” and its equity interest in the business trusts in “accrued income and other assets” on the balance sheet. Although the trusts have been de-consolidated, the Federal Reserve Board has advised that such preferred securities will continue to constitute Tier 1 capital until further notice. Additional information on the trusts is included in Note 13 (“Capital Securities Issued by Unconsolidated Subsidiaries”), which begins on page 69. 

