EXHIBIT
99.2
FINANCIAL
STATEMENTS OF MERRILL LYNCH & CO., INC.
(Note:
The page numbers in this Exhibit 99.2 correspond to Merrill
Lynchs 2008 Third Quarter Form 10-Q)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
Sept. 26,
|
|
Sept. 28,
|
(In millions, except per share amounts)
|
|
2008
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
(6,573
|
)
|
|
$
|
(5,761
|
)
|
Commissions
|
|
|
1,745
|
|
|
|
1,860
|
|
Managed accounts and other fee-based revenues
|
|
|
1,395
|
|
|
|
1,392
|
|
Investment banking
|
|
|
845
|
|
|
|
1,277
|
|
Earnings from equity method investments
|
|
|
4,401
|
|
|
|
412
|
|
Other
|
|
|
(2,986
|
)
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(1,173
|
)
|
|
|
(1,934
|
)
|
Interest and dividend revenues
|
|
|
9,019
|
|
|
|
15,636
|
|
Less interest expense
|
|
|
7,830
|
|
|
|
13,322
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
1,189
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
16
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
3,483
|
|
|
|
1,979
|
|
Communications and technology
|
|
|
546
|
|
|
|
499
|
|
Brokerage, clearing, and exchange fees
|
|
|
348
|
|
|
|
364
|
|
Occupancy and related depreciation
|
|
|
314
|
|
|
|
295
|
|
Professional fees
|
|
|
242
|
|
|
|
245
|
|
Advertising and market development
|
|
|
159
|
|
|
|
181
|
|
Office supplies and postage
|
|
|
48
|
|
|
|
54
|
|
Other
|
|
|
588
|
|
|
|
401
|
|
Payment related to price reset on common stock offering
|
|
|
2,500
|
|
|
|
-
|
|
Restructuring charge
|
|
|
39
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
8,267
|
|
|
|
4,018
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from continuing operations
|
|
|
(8,251
|
)
|
|
|
(3,638
|
)
|
Income tax benefit
|
|
|
(3,131
|
)
|
|
|
(1,258
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(5,120
|
)
|
|
|
(2,380
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from discontinued operations
|
|
|
(53
|
)
|
|
|
211
|
|
Income tax (benefit)/expense
|
|
|
(21
|
)
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from discontinued operations
|
|
|
(32
|
)
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,152
|
)
|
|
$
|
(2,241
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
2,319
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(7,471
|
)
|
|
$
|
(2,314
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per common share from continuing operations
|
|
$
|
(5.56
|
)
|
|
$
|
(2.99
|
)
|
Basic (loss)/earnings per common share from discontinued
operations
|
|
|
(0.02
|
)
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(5.58
|
)
|
|
$
|
(2.82
|
)
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share from continuing operations
|
|
$
|
(5.56
|
)
|
|
$
|
(2.99
|
)
|
Diluted (loss)/earnings per common share from discontinued
operations
|
|
|
(0.02
|
)
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(5.58
|
)
|
|
$
|
(2.82
|
)
|
|
|
|
|
|
|
|
|
|
Dividend paid per common share
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Average shares used in computing earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,339.0
|
|
|
|
821.6
|
|
Diluted
|
|
|
1,339.0
|
|
|
|
821.6
|
|
See Notes to Condensed
Consolidated Financial Statements
4
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of (Loss)/Earnings
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
Sept. 26,
|
|
Sept. 28,
|
(In millions, except per share amounts)
|
|
2008
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
(13,074
|
)
|
|
$
|
529
|
|
Commissions
|
|
|
5,445
|
|
|
|
5,360
|
|
Managed accounts and other fee-based revenues
|
|
|
4,249
|
|
|
|
4,025
|
|
Investment banking
|
|
|
2,920
|
|
|
|
4,315
|
|
Earnings from equity method investments
|
|
|
4,943
|
|
|
|
1,096
|
|
Other
|
|
|
(6,310
|
)
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(1,827
|
)
|
|
|
15,439
|
|
Interest and dividend revenues
|
|
|
28,415
|
|
|
|
42,804
|
|
Less interest expense
|
|
|
25,754
|
|
|
|
38,801
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
2,661
|
|
|
|
4,003
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
834
|
|
|
|
19,442
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
11,170
|
|
|
|
11,564
|
|
Communications and technology
|
|
|
1,667
|
|
|
|
1,460
|
|
Brokerage, clearing, and exchange fees
|
|
|
1,105
|
|
|
|
1,020
|
|
Occupancy and related depreciation
|
|
|
951
|
|
|
|
833
|
|
Professional fees
|
|
|
747
|
|
|
|
716
|
|
Advertising and market development
|
|
|
501
|
|
|
|
536
|
|
Office supplies and postage
|
|
|
160
|
|
|
|
169
|
|
Other
|
|
|
1,212
|
|
|
|
1,055
|
|
Payment related to price reset on common stock offering
|
|
|
2,500
|
|
|
|
-
|
|
Restructuring charge
|
|
|
484
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
20,497
|
|
|
|
17,353
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from continuing operations
|
|
|
(19,663
|
)
|
|
|
2,089
|
|
Income tax (benefit)/expense
|
|
|
(7,940
|
)
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from continuing operations
|
|
|
(11,723
|
)
|
|
|
1,660
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from discontinued operations
|
|
|
(110
|
)
|
|
|
602
|
|
Income tax (benefit)/expense
|
|
|
(65
|
)
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from discontinued operations
|
|
|
(45
|
)
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings
|
|
$
|
(11,768
|
)
|
|
$
|
2,056
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
2,730
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings applicable to common stockholders
|
|
$
|
(14,498
|
)
|
|
$
|
1,859
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per common share from continuing operations
|
|
$
|
(13.16
|
)
|
|
$
|
1.75
|
|
Basic (loss)/earnings per common share from discontinued
operations
|
|
|
(0.04
|
)
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per common share
|
|
$
|
(13.20
|
)
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per common share from continuing
operations
|
|
$
|
(13.16
|
)
|
|
$
|
1.60
|
|
Diluted (loss)/earnings per common share from discontinued
operations
|
|
|
(0.04
|
)
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per common share
|
|
$
|
(13.20
|
)
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
Dividend paid per common share
|
|
$
|
1.05
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
Average shares used in computing earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,098.6
|
|
|
|
832.2
|
|
Diluted
|
|
|
1,098.6
|
|
|
|
916.3
|
|
See Notes to Condensed
Consolidated Financial Statements
5
|
|
|
|
|
|
|
|
|
|
|
Sept. 26,
|
|
Dec. 28,
|
(dollars in millions, except per
share amounts)
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,406
|
|
|
$
|
41,346
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
22,801
|
|
|
|
22,999
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
Receivables under resale agreements (includes $104,315 in 2008
and $100,214 in 2007 measured at fair value in accordance with
SFAS No. 159)
|
|
|
164,466
|
|
|
|
221,617
|
|
Receivables under securities borrowed transactions (includes
$271 in 2008 measured at fair value in accordance with SFAS
No. 159)
|
|
|
99,596
|
|
|
|
133,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264,062
|
|
|
|
354,757
|
|
Trading assets, at fair value (includes securities
pledged as collateral that can be sold or repledged of $27,074
in 2008 and $45,177 in 2007)
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
74,106
|
|
|
|
72,689
|
|
Equities and convertible debentures
|
|
|
34,311
|
|
|
|
60,681
|
|
Corporate debt and preferred stock
|
|
|
38,998
|
|
|
|
37,849
|
|
Mortgages, mortgage-backed, and asset-backed
|
|
|
19,130
|
|
|
|
28,013
|
|
Non-U.S.
governments and agencies
|
|
|
8,998
|
|
|
|
15,082
|
|
U.S. Government and agencies
|
|
|
6,903
|
|
|
|
11,219
|
|
Municipals, money markets and physical commodities
|
|
|
6,912
|
|
|
|
9,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,358
|
|
|
|
234,669
|
|
|
|
|
|
|
|
|
|
|
Investment securities (includes $4,045 in 2008 and $4,685
in 2007 measured at fair value in accordance with
SFAS No. 159) (includes securities pledged as
collateral that can be sold or repledged of $7,152 in 2008 and
$16,124 in 2007)
|
|
|
72,182
|
|
|
|
82,532
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral, at fair value
|
|
|
47,654
|
|
|
|
45,245
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
|
|
|
|
|
|
Customers (net of allowance for doubtful accounts of $97 in 2008
and $24 in 2007)
|
|
|
84,077
|
|
|
|
70,719
|
|
Brokers and dealers
|
|
|
33,552
|
|
|
|
22,643
|
|
Interest and other
|
|
|
35,894
|
|
|
|
33,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,523
|
|
|
|
126,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes, and mortgages (net of allowances for loan
losses of $852 in 2008 and $533 in 2007) (includes $1,237 in
2008 and $1,149 in 2007 measured at fair value in accordance
with SFAS No. 159)
|
|
|
75,737
|
|
|
|
94,992
|
|
|
|
|
|
|
|
|
|
|
Equipment and facilities (net of accumulated depreciation
and amortization of $5,882 in 2008 and $5,518 in 2007)
|
|
|
3,082
|
|
|
|
3,127
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
4,989
|
|
|
|
5,091
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
5,986
|
|
|
|
8,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
875,780
|
|
|
$
|
1,020,050
|
|
|
|
|
|
|
|
|
|
|
6
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Sept. 26,
|
|
Dec. 28,
|
(dollars in millions, except per
share amount)
|
|
2008
|
|
2007
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements (includes $72,962 in 2008
and $89,733 in 2007 measured at fair value in accordance with
SFAS No. 159)
|
|
$
|
172,023
|
|
|
$
|
235,725
|
|
Payables under securities loaned transactions
|
|
|
45,220
|
|
|
|
55,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,243
|
|
|
|
291,631
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (includes $3,079 in 2008 measured
at fair value in accordance with SFAS No. 159)
|
|
|
25,693
|
|
|
|
24,914
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
90,001
|
|
|
|
103,987
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, at fair value
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
55,613
|
|
|
|
73,294
|
|
Equities and convertible debentures
|
|
|
19,302
|
|
|
|
29,652
|
|
Non-U.S.
governments and agencies
|
|
|
5,595
|
|
|
|
9,407
|
|
U.S. Government and agencies
|
|
|
3,828
|
|
|
|
6,135
|
|
Corporate debt and preferred stock
|
|
|
1,577
|
|
|
|
4,549
|
|
Municipals, money markets and other
|
|
|
830
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,745
|
|
|
|
123,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation to return securities received as collateral, at
fair value
|
|
|
47,654
|
|
|
|
45,245
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
|
|
|
|
|
|
|
Customers
|
|
|
69,387
|
|
|
|
63,582
|
|
Brokers and dealers
|
|
|
27,897
|
|
|
|
24,499
|
|
Interest and other
|
|
|
40,277
|
|
|
|
44,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,561
|
|
|
|
132,626
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings (includes $71,886 in 2008 and
$76,334 in 2007 measured at fair value in accordance with
SFAS No. 159)
|
|
|
227,326
|
|
|
|
260,973
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes (related to trust preferred
securities)
|
|
|
5,202
|
|
|
|
5,154
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
837,425
|
|
|
|
988,118
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stockholders Equity (liquidation
preference of $30,000 per share; issued: 2008
244,100 shares; 2007 155,000 shares;
liquidation preference of $1,000 per share; issued: 2008 and
2007 115,000 shares; liquidation preference of
$100,000 per share; issued: 2008 17,000 shares)
|
|
|
8,605
|
|
|
|
4,383
|
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
Shares exchangeable into common stock
|
|
|
39
|
|
|
|
39
|
|
Common stock (par value
$1.331/3
per share; authorized: 3,000,000,000 shares; issued:
2008 2,030,675,842 shares; 2007
1,354,309,819 shares)
|
|
|
2,707
|
|
|
|
1,805
|
|
Paid-in capital
|
|
|
47,754
|
|
|
|
27,163
|
|
Accumulated other comprehensive loss (net of tax)
|
|
|
(4,334
|
)
|
|
|
(1,791
|
)
|
Retained earnings
|
|
|
7,960
|
|
|
|
23,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,126
|
|
|
|
50,953
|
|
|
|
|
|
|
|
|
|
|
Less: Treasury stock, at cost (2008
432,167,085 shares; 2007
418,270,289 shares)
|
|
|
24,376
|
|
|
|
23,404
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
|
29,750
|
|
|
|
27,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
38,355
|
|
|
|
31,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
875,780
|
|
|
$
|
1,020,050
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements
7
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
Sept. 28,
|
|
|
|
|
2007
|
|
|
Sept. 26,
|
|
As Restated
|
(dollars in millions)
|
|
2008
|
|
See Note 16
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss)/earnings
|
|
$
|
(11,768
|
)
|
|
$
|
2,056
|
|
Adjustments to reconcile net (loss)/earnings to cash provided by
(used for) operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
671
|
|
|
|
633
|
|
Share-based compensation expense
|
|
|
1,787
|
|
|
|
1,220
|
|
Payment related to price reset on common stock offering
|
|
|
2,500
|
|
|
|
-
|
|
Deferred taxes
|
|
|
(5,571
|
)
|
|
|
(1,380
|
)
|
Gain on sale of Bloomberg L.P.
|
|
|
(4,296
|
)
|
|
|
-
|
|
Earnings from equity method investments
|
|
|
(146
|
)
|
|
|
(814
|
)
|
Other
|
|
|
6,140
|
|
|
|
1,920
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
45,311
|
|
|
|
(54,449
|
)
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
658
|
|
|
|
(6,500
|
)
|
Receivables under resale agreements
|
|
|
57,151
|
|
|
|
(41,479
|
)
|
Receivables under securities borrowed transactions
|
|
|
33,544
|
|
|
|
(53,869
|
)
|
Customer receivables
|
|
|
(13,359
|
)
|
|
|
(11,977
|
)
|
Brokers and dealers receivables
|
|
|
(10,905
|
)
|
|
|
(7,574
|
)
|
Proceeds from loans, notes, and mortgages held for sale
|
|
|
18,550
|
|
|
|
57,797
|
|
Other changes in loans, notes, and mortgages held for sale
|
|
|
(1,264
|
)
|
|
|
(71,534
|
)
|
Trading liabilities
|
|
|
(37,082
|
)
|
|
|
27,949
|
|
Payables under repurchase agreements
|
|
|
(63,702
|
)
|
|
|
75,961
|
|
Payables under securities loaned transactions
|
|
|
(10,686
|
)
|
|
|
3,469
|
|
Customer payables
|
|
|
5,805
|
|
|
|
13,495
|
|
Brokers and dealers payables
|
|
|
3,398
|
|
|
|
744
|
|
Trading investment securities
|
|
|
942
|
|
|
|
3,339
|
|
Other, net
|
|
|
(14,708
|
)
|
|
|
3,961
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) operating activities
|
|
|
2,970
|
|
|
|
(57,032
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
Maturities of available-for-sale securities
|
|
|
5,978
|
|
|
|
10,511
|
|
Sales of available-for-sale securities
|
|
|
27,218
|
|
|
|
25,830
|
|
Purchases of available-for-sale securities
|
|
|
(29,121
|
)
|
|
|
(43,633
|
)
|
Proceeds from the sale of discontinued operations
|
|
|
12,576
|
|
|
|
-
|
|
Equipment and facilities, net
|
|
|
(593
|
)
|
|
|
(364
|
)
|
Loans, notes, and mortgages held for investment
|
|
|
(11,240
|
)
|
|
|
4,830
|
|
Other investments
|
|
|
1,909
|
|
|
|
(6,711
|
)
|
Acquisitions, net of cash
|
|
|
-
|
|
|
|
(1,826
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) investing activities
|
|
|
6,727
|
|
|
|
(11,363
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
Commercial paper and short-term borrowings
|
|
|
779
|
|
|
|
8,480
|
|
Issuance and resale of long-term borrowings
|
|
|
64,851
|
|
|
|
137,235
|
|
Settlement and repurchases of long-term borrowings
|
|
|
(83,353
|
)
|
|
|
(60,620
|
)
|
Deposits
|
|
|
(13,986
|
)
|
|
|
874
|
|
Derivative financing transactions
|
|
|
554
|
|
|
|
(4
|
)
|
Issuance of common stock
|
|
|
9,885
|
|
|
|
760
|
|
Issuance of preferred stock, net
|
|
|
9,281
|
|
|
|
1,494
|
|
Common stock repurchases
|
|
|
-
|
|
|
|
(5,272
|
)
|
Other common stock transactions
|
|
|
(822
|
)
|
|
|
670
|
|
Excess tax benefits related to share-based compensation
|
|
|
39
|
|
|
|
643
|
|
Dividends
|
|
|
(1,865
|
)
|
|
|
(1,124
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used for) provided by financing activities
|
|
|
(14,637
|
)
|
|
|
83,136
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(4,940
|
)
|
|
|
14,741
|
|
Cash and cash equivalents, beginning of period
|
|
|
41,346
|
|
|
|
32,109
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
36,406
|
|
|
$
|
46,850
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
422
|
|
|
$
|
1,391
|
|
Interest paid
|
|
|
26,529
|
|
|
|
38,078
|
|
Non-cash investing and financing activities:
As a result of the conversion of $6.6 billion of Merrill
Lynchs mandatory convertible preferred stock,
series 1, the Company recorded additional preferred
dividends of $2.1 billion in the third quarter of 2008. The
preferred dividends were paid in additional shares of
common and preferred stock.
In satisfaction of Merrill Lynchs obligations under the
reset provisions contained in the investment agreement with
Temasek, Merrill Lynch agreed to pay Temasek $2.5 billion,
all of which was paid through the issuance of common stock.
As a result of the completed sale of Merrill Lynchs 20%
ownership stake in Bloomberg, L.P., Merrill Lynch recorded a
$4.3 billion pre-tax gain. In connection with this sale,
Merrill Lynch received notes totaling approximately
$4.3 billion that have been recorded as held-to-maturity
investment securities on the Condensed Consolidated Balance
Sheets.
See Notes to Condensed
Consolidated Financial Statements
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
Sept. 26,
|
|
Sept. 28,
|
|
Sept. 26,
|
|
Sept. 28,
|
(dollars in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net (loss)/earnings
|
|
$
|
(5,152
|
)
|
|
$
|
(2,241
|
)
|
|
$
|
(11,768
|
)
|
|
$
|
2,056
|
|
Other comprehensive income/(loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(141
|
)
|
|
|
(9
|
)
|
|
|
(189
|
)
|
|
|
15
|
|
Net unrealized loss on investment securities available-for-sale
|
|
|
(544
|
)
|
|
|
(741
|
)
|
|
|
(2,358
|
)
|
|
|
(765
|
)
|
Net deferred gain/(loss) on cash flow hedges
|
|
|
37
|
|
|
|
46
|
|
|
|
(3
|
)
|
|
|
19
|
|
Defined benefit pension and postretirement plans
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
5
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss, net of tax
|
|
|
(649
|
)
|
|
|
(700
|
)
|
|
|
(2,545
|
)
|
|
|
(718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)/income
|
|
$
|
(5,801
|
)
|
|
$
|
(2,941
|
)
|
|
$
|
(14,313
|
)
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements
9
For a complete discussion of significant accounting policies,
refer to the Audited Consolidated Financial Statements included
in Merrill Lynch & Co. Inc.s
(ML&Co.) Annual Report on
Form 10-K
for the year-ended December 28, 2007 (2007 Annual
Report).
On September 15, 2008, ML&Co. entered into an
Agreement and Plan of Merger (the Merger Agreement)
with Bank of America Corporation (Bank of America).
The Merger Agreement provides that, upon the terms and subject
to the conditions set forth in the Merger Agreement, a wholly
owned subsidiary of Bank of America will merge with and into
ML&Co. with ML&Co. continuing as the surviving
corporation and as a wholly owned subsidiary of Bank of America.
The merger has been approved by the board of directors of each
of ML&Co. and Bank of America and is subject to shareholder
votes at both companies.
Upon completion of the merger, each outstanding share of
ML&Co. common stock will be converted into the right to
receive 0.8595 shares of Bank of America common stock, and the
Bank of America board of directors will be expanded to include
three existing directors of ML&Co. The Merger Agreement
contains certain termination rights for both ML&Co. and
Bank of America and is subject to customary closing conditions,
including standard regulatory approvals. The transaction is
expected to close on December 31, 2008 or earlier subject
to shareholder approval, customary closing conditions and
regulatory approvals. In light of the pending transaction with
Bank of America, ML&Co. is no longer pursuing the
previously announced proposed sale of Financial Data Services,
Inc. (FDS).
Basis of
Presentation
The Condensed Consolidated Financial Statements include the
accounts of ML&Co. and subsidiaries (collectively,
Merrill Lynch or the Company). The
Condensed Consolidated Financial Statements are presented in
accordance with U.S. Generally Accepted Accounting
Principles, which include industry practices. Intercompany
transactions and balances have been eliminated. The interim
Condensed Consolidated Financial Statements for the three and
nine month periods are unaudited; however, in the opinion of
Merrill Lynch management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the
Condensed Consolidated Financial Statements have been included.
These unaudited Condensed Consolidated Financial Statements
should be read in conjunction with the audited Consolidated
Financial Statements included in the 2007 Annual Report. The
nature of Merrill Lynchs business is such that the results
of any interim period are not necessarily indicative of results
for a full year. Certain reclassifications have been made to the
prior period financial statements to conform to the current
period presentation.
Merrill Lynch offers a broad array of products and services to
its diverse client base of individuals, small to mid-size
businesses, employee benefit plans, corporations, financial
institutions, and governments around the world. These products
and services are offered from a number of locations globally. In
some cases, the same or similar products and services may be
offered to both individual and institutional clients, utilizing
the same infrastructure. In other cases, a single infrastructure
may be used to support multiple products and services offered to
clients. When Merrill Lynch analyzes its profitability, it does
not focus on the profitability of a single product or service.
Instead, Merrill Lynch
10
views the profitability of businesses offering an array of
products and services to various types of clients. The
profitability of the products and services offered to
individuals, small to mid-size businesses, and employee benefit
plans is analyzed separately from the profitability of products
and services offered to corporations, financial institutions,
and governments, regardless of whether there is commonality in
products and services infrastructure. As such, Merrill Lynch
does not separately disclose the costs associated with the
products and services sold or general and administrative costs
either in total or by product.
When determining the prices for products and services, Merrill
Lynch considers multiple factors, including prices being offered
in the market for similar products and services, the
competitiveness of its pricing compared to competitors, the
profitability of its businesses and its overall profitability,
as well as the profitability, creditworthiness, and importance
of the overall client relationships.
Shared expenses that are incurred to support products and
services and infrastructures are allocated to the businesses
based on various methodologies, which may include headcount,
square footage, and certain other criteria. Similarly, certain
revenues may be shared based upon agreed methodologies. When
looking at the profitability of various businesses, Merrill
Lynch considers all expenses incurred, including overhead and
the costs of shared services, as all are considered integral to
the operation of the businesses.
Discontinued
Operations
On August 13, 2007, Merrill Lynch announced a strategic
business relationship with AEGON, N.V. (AEGON) in
the areas of insurance and investment products. As part of this
relationship, Merrill Lynch sold Merrill Lynch Life Insurance
Company and ML Life Insurance Company of New York (together
Merrill Lynch Insurance Group or MLIG)
to AEGON for $1.3 billion in the fourth quarter of 2007,
which resulted in an after-tax gain of approximately
$316 million. The gain along with the financial results of
MLIG, have been reported within discontinued operations for all
periods presented. Merrill Lynch previously reported the results
of MLIG in the Global Wealth Management (GWM)
business segment. Refer to Note 15 for additional
information.
On December 24, 2007 Merrill Lynch announced that it had
reached an agreement with GE Capital to sell Merrill Lynch
Capital, a wholly-owned middle-market commercial finance
business. The sale included substantially all of Merrill Lynch
Capitals operations, including its commercial real estate
division. This transaction closed on February 4, 2008.
Merrill Lynch has included results of Merrill Lynch Capital
within discontinued operations for all periods presented.
Merrill Lynch previously reported results of Merrill Lynch
Capital in the Global Markets and Investment Banking
(GMI) business segment. Refer to Note 15 for
additional information.
Consolidation
Accounting Policies
The Condensed Consolidated Financial Statements include the
accounts of Merrill Lynch, whose subsidiaries are generally
controlled through a majority voting interest. In certain cases,
Merrill Lynch subsidiaries may also be consolidated based on a
risks and rewards approach. Merrill Lynch does not consolidate
those special purpose entities that meet the criteria of a
qualified special purpose entity (QSPE).
Merrill Lynch determines whether it is required to consolidate
an entity by first evaluating whether the entity qualifies as a
voting rights entity (VRE), a variable interest
entity (VIE), or a QSPE.
VREs are defined to include entities that have both equity at
risk that is sufficient to fund future operations and have
equity investors with decision making ability that absorb the
majority of the
11
expected losses and expected returns of the entity. In
accordance with SFAS No. 94, Consolidation of All
Majority-Owned Subsidiaries, Merrill Lynch generally
consolidates those VREs where it holds a controlling financial
interest. For investments in limited partnerships and certain
limited liability corporations that Merrill Lynch does not
control, Merrill Lynch applies Emerging Issues Task Force
(EITF) Topic D-46, Accounting for Limited
Partnership Investments, which requires use of the equity
method of accounting for investors that have more than a minor
influence, which is typically defined as an investment of
greater than 3% of the outstanding equity in the entity. For
more traditional corporate structures, in accordance with
Accounting Principles Board Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock,
Merrill Lynch applies the equity method of accounting where it
has significant influence over the investee. Significant
influence can be evidenced by a significant ownership interest
(which is generally defined as a voting interest of 20% to 50%),
significant board of director representation, or other contracts
and arrangements.
VIEs Those entities that do not meet the VRE
criteria are generally analyzed for consolidation as either VIEs
or QSPEs. Merrill Lynch consolidates those VIEs in which it
absorbs the majority of the variability in expected losses
and/or the
variability in expected returns of the entity as required by
FIN 46(R), Consolidation of Variable Interest
Entities (FIN 46(R)). Merrill Lynch relies
on a qualitative
and/or
quantitative analysis, including an analysis of the design of
the entity, to determine if it is the primary beneficiary of the
VIE and therefore must consolidate the VIE. Merrill Lynch
reassesses whether it is the primary beneficiary of a VIE upon
the occurrence of a reconsideration event.
QSPEs QSPEs are passive entities with significantly
limited permitted activities. QSPEs are generally used as
securitization vehicles and are limited in the type of assets
they may hold, the derivatives that they can enter into and the
level of discretion they may exercise through servicing
activities. In accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities
(SFAS No. 140), and FIN 46R,
Merrill Lynch does not consolidate QSPEs.
Securitization
Activities
In the normal course of business, Merrill Lynch securitizes
commercial and residential mortgage loans; municipal,
government, and corporate bonds; and other types of financial
assets. Merrill Lynch may retain interests in the securitized
financial assets through holding tranches of the securitization.
In accordance with SFAS No. 140, Merrill Lynch
recognizes transfers of financial assets that relinquish control
as sales to the extent of cash and any proceeds received.
Control is considered to be relinquished when all of the
following conditions have been met:
|
|
|
|
|
The transferred assets have been legally isolated from the
transferor even in bankruptcy or other receivership;
|
|
|
The transferee has the right to pledge or exchange the assets it
received, or if the entity is a QSPE the beneficial interest
holders have the right to pledge or exchange their beneficial
interests; and
|
|
|
The transferor does not maintain effective control over the
transferred assets (e.g. the ability to unilaterally cause the
holder to return specific transferred assets).
|
Revenue
Recognition
Principal transactions revenues include both realized and
unrealized gains and losses on trading assets and trading
liabilities, investment securities classified as trading
investments and fair value changes associated with structured
debt. These instruments are recorded at fair value. Fair value
is the price that
12
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between marketplace
participants. Gains and losses are recognized on a trade date
basis.
Commissions revenues include commissions, mutual fund
distribution fees and contingent deferred sales charge revenue,
which are all accrued as earned. Commissions revenues also
include mutual fund redemption fees, which are recognized at the
time of redemption. Commissions revenues earned from certain
customer equity transactions are recorded net of related
brokerage, clearing and exchange fees.
Managed accounts and other fee-based revenues primarily consist
of asset-priced portfolio service fees earned from the
administration of separately managed accounts and other
investment accounts for retail investors, annual account fees,
and certain other account-related fees.
Investment banking revenues include underwriting revenues and
fees for merger and acquisition advisory services, which are
accrued when services for the transactions are substantially
completed. Underwriting revenues are presented net of
transaction-related expenses. Transaction-related expenses,
primarily legal, travel and other costs directly associated with
the transaction, are deferred and recognized in the same period
as the related revenue from the investment banking transaction
to match revenue recognition.
Earnings from equity method investments include Merrill
Lynchs pro rata share of income and losses associated with
investments accounted for under the equity method. In addition,
earnings from equity method investments for the quarter and nine
month period ended September 26, 2008 included a gain of
$4.3 billion associated with the sale of Bloomberg, L.P.
(see Note 5).
Other revenues include gains/(losses) on investment securities,
including sales and other-than-temporary-impairment losses
associated with certain available-for-sale securities,
gains/(losses) on private equity investments that are held for
capital appreciation
and/or
current income, and gains/(losses) on loans and other
miscellaneous items.
Contractual interest and dividends received and paid on trading
assets and trading liabilities, excluding derivatives, are
recognized on an accrual basis as a component of interest and
dividend revenues and interest expense. Interest and dividends
on investment securities are recognized on an accrual basis as a
component of interest and dividend revenues. Interest related to
loans, notes, and mortgages, securities financing activities and
certain short- and long-term borrowings are recorded on an
accrual basis with related interest recorded as interest revenue
or interest expense, as applicable. Contractual interest on
structured notes, if any, is recorded as a component of interest
expense.
Use of
Estimates
In presenting the Condensed Consolidated Financial Statements,
management makes estimates regarding:
|
|
|
|
|
Valuations of assets and liabilities requiring fair value
estimates;
|
|
|
Determination of other-than-temporary impairments for
available-for-sale investment securities;
|
|
|
The outcome of litigation;
|
|
|
Assumptions and cash flow projections used in determining
whether VIEs should be consolidated and the determination of the
qualifying status of QSPEs;
|
|
|
The realization of deferred taxes and the recognition and
measurement of uncertain tax positions;
|
|
|
The carrying amount of goodwill and other intangible assets;
|
|
|
The amortization period of intangible assets with definite lives;
|
|
|
Incentive-based compensation accruals and valuation of
share-based payment compensation arrangements; and
|
13
|
|
|
|
|
Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements.
|
Estimates, by their nature, are based on judgment and available
information. Therefore, actual results could differ from those
estimates and could have a material impact on the Condensed
Consolidated Financial Statements, and it is possible that such
changes could occur in the near term. A discussion of certain
areas in which estimates are a significant component of the
amounts reported in the Condensed Consolidated Financial
Statements follows:
Fair
Value Measurement
Merrill Lynch accounts for a significant portion of its
financial instruments at fair value or considers fair value in
their measurement. Merrill Lynch accounts for certain financial
assets and liabilities at fair value under various accounting
literature, including SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities
(SFAS No. 115),
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133),
and SFAS No. 159, Fair Value Option for Certain
Financial Assets and Liabilities
(SFAS No. 159). Merrill Lynch also
accounts for certain assets at fair value under applicable
industry guidance, namely broker-dealer and investment company
accounting guidance.
Merrill Lynch early adopted the provisions of
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), in the first quarter
of 2007. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value, establishes a fair value
hierarchy based on the quality of inputs used to measure fair
value and enhances disclosure requirements for fair value
measurements. SFAS No. 157 nullifies the guidance
provided by EITF Issue
No. 02-3,
Issues Involved in Accounting for Derivative Contracts Held
for Trading Purposes and Contracts Involved in Energy Trading
and Risk Management Activities
(EITF 02-3),
which prohibited recognition of day one gains or losses on
derivative transactions where model inputs that significantly
impact valuation are not observable.
Fair values for over-the-counter (OTC) derivative
financial instruments, principally forwards, options, and swaps,
represent the present value of amounts estimated to be received
from or paid to a marketplace participant in settlement of these
instruments (i.e., the amount Merrill Lynch would expect to
receive in a derivative asset assignment or would expect to pay
to have a derivative liability assumed). These derivatives are
valued using pricing models based on the net present value of
estimated future cash flows and directly observed prices from
exchange-traded derivatives, other OTC trades, or external
pricing services, while taking into account the
counterpartys creditworthiness, or Merrill Lynchs
own creditworthiness, as appropriate. Determining the fair value
for OTC derivative contracts can require a significant level of
estimation and management judgment.
New and/or
complex instruments may have immature or limited markets. As a
result, the pricing models used for valuation often incorporate
significant estimates and assumptions that market participants
would use in pricing the instrument, which may impact the
results of operations reported in the Condensed Consolidated
Financial Statements. For instance, on long-dated and illiquid
contracts extrapolation methods are applied to observed market
data in order to estimate inputs and assumptions that are not
directly observable. This enables Merrill Lynch to mark to fair
value all positions consistently when only a subset of prices
are directly observable. Values for OTC derivatives are verified
using observed information about the costs of hedging the risk
and other trades in the market. As the markets for these
products develop, Merrill Lynch continually refines its pricing
models to correlate more closely to the market price of these
instruments.
Prior to adoption of SFAS No. 157, Merrill Lynch
followed the provisions of
EITF 02-3.
Under
EITF 02-3,
recognition of day one gains and losses on derivative
transactions where model inputs that
14
significantly impact valuation are not observable were
prohibited. Day one gains and losses deferred at inception under
EITF 02-3
were recognized at the earlier of when the valuation of such
derivative became observable or at the termination of the
contract. Although the guidance in
EITF 02-3
has been nullified, the recognition of significant inception
gains and losses that incorporate unobservable inputs is
reviewed by management to ensure such gains and losses are
derived from observable inputs
and/or
incorporate reasonable assumptions about the unobservable
component, such as implied bid-offer adjustments.
Certain financial instruments recorded at fair value are
initially measured using mid-market prices which results in
gross long and short positions marked-to-market at the same
pricing level prior to the application of position netting. The
resulting net positions are then adjusted to fair value
representing the exit price as defined in
SFAS No. 157. The significant adjustments include
liquidity and counterparty credit risk.
Liquidity
Merrill Lynch makes adjustments to bring a position from a
mid-market to a bid or offer price, depending upon the net open
position. Merrill Lynch values net long positions at bid prices
and net short positions at offer prices. These adjustments are
based upon either observable or implied bid-offer prices.
Counterparty
Credit Risk
In determining fair value, Merrill Lynch considers both the
credit risk of its counterparties, as well as its own
creditworthiness. Merrill Lynch attempts to mitigate credit risk
to third parties by entering into netting and collateral
arrangements. Net counterparty exposure (counterparty positions
netted by offsetting transactions and both cash and securities
collateral) is then valued for counterparty creditworthiness and
this resultant value is incorporated into the fair value of the
respective instruments. Merrill Lynch generally calculates the
credit risk adjustment for derivatives on observable market
credit spreads.
SFAS No. 157 also requires that Merrill Lynch consider
its own creditworthiness when determining the fair value of an
instrument, including OTC derivative instruments. The approach
to measuring the impact of Merrill Lynchs credit risk on
an instrument is done in the same manner as for third party
credit risk. The impact of Merrill Lynchs credit risk is
incorporated into the fair value, even when credit risk is not
readily observable, of an instrument such as in OTC derivatives
contracts. OTC derivative liabilities are valued based on the
net counterparty exposure as described above.
Legal
Reserves
Merrill Lynch is a party in various actions, some of which
involve claims for substantial amounts. Amounts are accrued for
the financial resolution of claims that have either been
asserted or are deemed probable of assertion if, in the opinion
of management, it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
In many cases, it is not possible to determine whether a
liability has been incurred or to estimate the ultimate or
minimum amount of that liability until the case is close to
resolution, in which case no accrual is made until that time.
Accruals are subject to significant estimation by management
with input from outside counsel.
15
Income
Taxes
Merrill Lynch provides for income taxes on all transactions that
have been recognized in the Condensed Consolidated Financial
Statements in accordance with SFAS No. 109,
Accounting for Income Taxes
(SFAS No. 109). Accordingly, deferred
taxes are adjusted to reflect the tax rates at which future
taxable amounts will likely be settled or realized. The effects
of tax rate changes on future deferred tax liabilities and
deferred tax assets, as well as other changes in income tax
laws, are recognized in net earnings in the period during which
such changes are enacted. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts
expected to be realized. Merrill Lynch assesses its ability to
realize deferred tax assets primarily based on the earnings
history and other factors of the legal entities through which
the deferred tax assets will be realized as discussed in
SFAS No. 109. See Note 13 for further discussion
of income taxes.
Merrill Lynch recognizes and measures its unrecognized tax
benefits in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). Merrill Lynch estimates the
likelihood, based on their technical merits, that tax positions
will be sustained upon examination based on the facts and
circumstances and information available at the end of each
period. Merrill Lynch adjusts the level of unrecognized tax
benefits when there is more information available, or when an
event occurs requiring a change. The reassessment of
unrecognized tax benefits could have a material impact on
Merrill Lynchs effective tax rate in the period in which
it occurs.
ML & Co. and certain of its wholly-owned subsidiaries
file a consolidated U.S. federal income tax return. Certain
other Merrill Lynch entities file tax returns in their local
jurisdictions.
Securities
Financing Transactions
Merrill Lynch enters into repurchase and resale agreements and
securities borrowed and loaned transactions to accommodate
customers and earn interest rate spreads (also referred to as
matched-book transactions), obtain securities for
settlement and finance inventory positions.
Resale and repurchase agreements are accounted for as
collateralized financing transactions and may be recorded at
their contractual amounts plus accrued interest or at fair value
under the fair value option election in SFAS No. 159.
Resale and repurchase agreements recorded at fair value are
generally valued based on pricing models that use inputs with
observable levels of price transparency.
Where the fair value option has been elected, changes in the
fair value of resale and repurchase agreements are reflected in
principal transactions revenues and the contractual interest
coupon is recorded as interest revenue or interest expense,
respectively. For further information refer to Note 3.
Resale and repurchase agreements recorded at their contractual
amounts plus accrued interest approximate fair value, as the
fair value of these items is not materially sensitive to shifts
in market interest rates because of the short-term nature of
these instruments or to credit risk because the resale and
repurchase agreements are fully collateralized.
Merrill Lynchs policy is to obtain possession of
collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. To ensure that
the market value of the underlying collateral remains
sufficient, collateral is generally valued daily and Merrill
Lynch may require counterparties to deposit additional
collateral or may return collateral pledged when appropriate.
Substantially all repurchase and resale activities are
transacted under master netting agreements that give Merrill
Lynch the right, in the event of default, to liquidate
collateral held and to offset receivables and payables with the
same counterparty. Merrill Lynch offsets certain repurchase and
resale agreement balances with the same counterparty on the
Condensed Consolidated Balance Sheets.
16
Merrill Lynch may use securities received as collateral for
resale agreements to satisfy regulatory requirements such as
Rule 15c3-3
of the SEC.
Securities borrowed and loaned transactions may be recorded at
the amount of cash collateral advanced or received plus accrued
interest or at fair value under the fair value option election
in SFAS No. 159. Securities borrowed transactions require
Merrill Lynch to provide the counterparty with collateral in the
form of cash, letters of credit, or other securities. Merrill
Lynch receives collateral in the form of cash or other
securities for securities loaned transactions. For these
transactions, the fees received or paid by Merrill Lynch are
recorded as interest revenue or expense. On a daily basis,
Merrill Lynch monitors the market value of securities borrowed
or loaned against the collateral value, and Merrill Lynch may
require counterparties to deposit additional collateral or may
return collateral pledged, when appropriate. The carrying value
of these instruments approximates fair value as these items are
not materially sensitive to shifts in market interest rates
because of their short-term nature
and/or their
variable interest rates.
All firm-owned securities pledged to counterparties where the
counterparty has the right, by contract or custom, to sell or
repledge the securities are disclosed parenthetically in trading
assets or, if applicable, in investment securities on the
Condensed Consolidated Balance Sheets.
In transactions where Merrill Lynch acts as the lender in a
securities lending agreement and receives securities that can be
pledged or sold as collateral, it recognizes an asset on the
Condensed Consolidated Balance Sheets carried at fair value,
representing the securities received (securities received as
collateral), and a liability for the same amount, representing
the obligation to return those securities (obligation to return
securities received as collateral). The amounts on the Condensed
Consolidated Balance Sheets result from non-cash transactions.
Trading
Assets and Liabilities
Merrill Lynchs trading activities consist primarily of
securities brokerage and trading; derivatives dealing and
brokerage; commodities trading and futures brokerage; and
securities financing transactions. Trading assets and trading
liabilities consist of cash instruments (e.g., securities and
loans) and derivative instruments used for trading purposes or
for managing risk exposures in other trading inventory. See the
Derivatives section of this Note for additional information on
the accounting policy for derivatives. Trading assets and
trading liabilities also include commodities inventory.
Trading assets and liabilities are generally recorded on a trade
date basis at fair value. Included in trading liabilities are
securities that Merrill Lynch has sold but did not own and will
therefore be obligated to purchase at a future date (short
sales). Commodities inventory is recorded at the lower of
cost or market value. Changes in fair value of trading assets
and liabilities (i.e., unrealized gains and losses) are
recognized as principal transactions revenues in the current
period. Realized gains and losses and any related interest
amounts are included in principal transactions revenues and
interest revenues and expenses, depending on the nature of the
instrument.
Derivatives
A derivative is an instrument whose value is derived from an
underlying instrument or index, such as interest rates, equity
securities, currencies, commodities or credit spreads.
Derivatives include futures, forwards, swaps, option contracts
and other financial instruments with similar characteristics.
Derivative contracts often involve future commitments to
exchange interest payment streams or currencies based on a
notional or contractual amount (e.g., interest rate swaps or
currency forwards) or to purchase or sell other financial
instruments at specified terms on a specified date (e.g.,
options to
17
buy or sell securities or currencies). Derivative activity is
subject to Merrill Lynchs overall risk management policies
and procedures.
SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts
(embedded derivatives) and for hedging activities.
SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the Condensed
Consolidated Balance Sheets and measure those instruments at
fair value. The fair value of derivatives is recorded on a
net-by-counterparty
basis on the Condensed Consolidated Balance Sheets where
management believes a legal right of setoff exists under an
enforceable netting agreement.
The accounting for changes in fair value of a derivative
instrument depends on its intended use and if it is designated
and qualifies as an accounting hedging instrument under
SFAS No. 133.
Merrill Lynch enters into derivatives to facilitate client
transactions, for proprietary trading and financing purposes,
and to manage risk exposures arising from trading assets and
liabilities. Derivatives entered into for these purposes are
recognized at fair value on the Condensed Consolidated Balance
Sheets as trading assets and liabilities, and changes in fair
value are reported in current period earnings as principal
transactions revenues.
Merrill Lynch also enters into derivatives in order to manage
risk exposures arising from assets and liabilities not carried
at fair value as follows:
|
|
1. |
Merrill Lynch routinely issues debt in a variety of maturities
and currencies to achieve the lowest cost financing possible. In
addition, Merrill Lynchs regulated bank entities accept
time deposits of varying rates and maturities. Merrill Lynch
enters into derivative transactions to hedge these liabilities.
Derivatives used most frequently include swap agreements that:
|
|
|
|
|
|
Convert fixed-rate interest payments into variable-rate interest
payments;
|
|
|
Change the underlying interest rate basis or reset
frequency; and
|
|
|
Change the settlement currency of a debt instrument.
|
|
|
2.
|
Merrill Lynch enters into hedges on marketable investment
securities to manage the interest rate risk, currency risk, and
net duration of its investment portfolios.
|
|
3.
|
Merrill Lynch has fair value hedges of long-term fixed rate
resale and repurchase agreements to manage the interest rate
risk of these assets and liabilities. Subsequent to the adoption
of SFAS No. 159, Merrill Lynch elects to account for
these instruments on a fair value basis rather than apply hedge
accounting.
|
|
4.
|
Merrill Lynch uses foreign-exchange forward contracts,
foreign-exchange options, currency swaps, and
foreign-currency-denominated debt to hedge its net investments
in foreign operations. These derivatives and cash instruments
are used to mitigate the impact of changes in exchange rates.
|
|
5.
|
Merrill Lynch enters into futures, swaps, options and forward
contracts to manage the price risk of certain commodity
inventory.
|
Derivatives entered into by Merrill Lynch to hedge its funding,
marketable investment securities and net investments in foreign
subsidiaries are reported at fair value in other assets or
interest and other payables on the Condensed Consolidated
Balance Sheets. Derivatives used to hedge commodity inventory
are included in trading assets and trading liabilities on the
Condensed Consolidated Balance Sheets.
18
Derivatives that qualify as accounting hedges under the guidance
in SFAS No. 133 are designated as one of the following:
|
|
1.
|
A hedge of the fair value of a recognized asset or liability
(fair value hedge). Changes in the fair value of
derivatives that are designated and qualify as fair value hedges
of interest rate risk, along with the gain or loss on the hedged
asset or liability that is attributable to the hedged risk, are
recorded in current period earnings as interest revenue or
expense. Changes in the fair value of derivatives that are
designated and qualify as fair value hedges of commodity price
risk, along with the gain or loss on the hedged asset or
liability that is attributable to the hedged risk, are recorded
in current period earnings in principal transactions.
|
|
2.
|
A hedge of the variability of cash flows to be received or paid
related to a recognized asset or liability (cash
flow hedge). Changes in the fair value of derivatives that
are designated and qualify as effective cash flow hedges are
recorded in accumulated other comprehensive loss until earnings
are affected by the variability of cash flows of the hedged
asset or liability (e.g., when periodic interest accruals on a
variable-rate asset or liability are recorded in earnings).
|
|
3.
|
A hedge of a net investment in a foreign operation. Changes in
the fair value of derivatives that are designated and qualify as
hedges of a net investment in a foreign operation are recorded
in the foreign currency translation adjustment account within
accumulated other comprehensive loss.
|
Changes in the fair value of the hedge instruments that are
associated with the difference between the spot translation rate
and the forward translation rate are recorded in current period
earnings in other revenues.
Merrill Lynch formally assesses, both at the inception of the
hedge and on an ongoing basis, whether the hedging derivatives
are highly effective in offsetting changes in fair value or cash
flows of hedged items. When it is determined that a derivative
is not highly effective as a hedge, Merrill Lynch discontinues
hedge accounting. Under the provisions of
SFAS No. 133, 100% hedge effectiveness is assumed for
those derivatives whose terms meet the conditions of the
SFAS No. 133 short-cut method.
As noted above, Merrill Lynch enters into fair value and cash
flow hedges of interest rate exposure associated with certain
investment securities and debt issuances. Merrill Lynch uses
interest rate swaps to hedge this exposure. Hedge effectiveness
testing is required for certain of these hedging relationships
on a quarterly basis. For fair value hedges, Merrill Lynch
assesses effectiveness on a prospective basis by comparing the
expected change in the price of the hedge instrument to the
expected change in the value of the hedged item under various
interest rate shock scenarios. For cash flow hedges, Merrill
Lynch assesses effectiveness on a prospective basis by comparing
the present value of the projected cash flows on the variable
leg of the hedge instrument against the present value of the
projected cash flows of the hedged item (the change in
variable cash flows method) under various interest rate,
prepayment and credit shock scenarios. In addition, Merrill
Lynch assesses effectiveness on a retrospective basis using the
dollar-offset ratio approach. When assessing hedge
effectiveness, there are no attributes of the derivatives used
to hedge the fair value exposure that are excluded from the
assessment. Ineffectiveness associated with these hedges was
immaterial for all periods presented.
Merrill Lynch also enters into fair value hedges of commodity
price risk associated with certain commodity inventory. For
these hedges, Merrill Lynch assesses effectiveness on a
prospective and retrospective basis using regression techniques.
The difference between the spot rate and the contracted forward
rate which represents the time value of money is excluded from
the assessment of hedge effectiveness and is recorded in
principal transactions revenues. The amount of ineffectiveness
related to these hedges reported in earnings was not material
for all periods presented.
19
Netting
of Derivative Contracts
Where Merrill Lynch has entered into a legally enforceable
netting agreement with counterparties, it reports derivative
assets and liabilities, and any related cash collateral, net in
the Condensed Consolidated Balance Sheets in accordance with
FIN No. 39, Offsetting Amounts Related to Certain
Contracts (FIN No. 39). Derivative
assets and liabilities are presented net of cash collateral of
approximately $24.0 billion and $43.7 billion,
respectively, at September 26, 2008 and $13.5 billion
and $39.7 billion, respectively, at December 28, 2007.
Derivatives
that Contain a Significant Financing Element
In the ordinary course of trading activities, Merrill Lynch
enters into certain transactions that are documented as
derivatives where a significant cash investment is made by one
party. Certain derivative instruments that contain a significant
financing element at inception and where Merrill Lynch is deemed
to be the borrower are included in financing activities in the
Condensed Consolidated Statements of Cash Flows. The cash flows
from all other derivative transactions that do not contain a
significant financing element at inception are included in
operating activities.
Investment
Securities
Investment securities consist of marketable investment
securities and non-qualifying investments. Refer to Note 5
for further information.
Marketable
Investments
ML & Co. and certain of its non-broker-dealer
subsidiaries, including Merrill Lynch banks, follow the guidance
in SFAS No. 115 when accounting for investments in
debt and publicly traded equity securities. Merrill Lynch
classifies those debt securities that it has the intent and
ability to hold to maturity as held-to-maturity securities.
Held-to-maturity securities are carried at cost unless a decline
in value is deemed other-than-temporary, in which case the
carrying value is reduced. For Merrill Lynch, the trading
classification under SFAS No. 115 generally includes
those securities that are bought and held principally for the
purpose of selling them in the near term, securities that are
economically hedged, or securities that may contain a
bifurcatable embedded derivative as defined in
SFAS No. 133. Securities classified as trading are
marked to fair value through earnings. All other qualifying
securities are classified as available-for-sale and held at fair
value with unrealized gains and losses reported in accumulated
other comprehensive loss. Any unrealized losses that are deemed
other-than-temporary are included in current period earnings and
removed from accumulated other comprehensive loss.
Realized gains and losses on investment securities are included
in current period earnings. For purposes of computing realized
gains and losses, the cost basis of each investment sold is
generally based on the average cost method.
Merrill Lynch regularly (at least quarterly) evaluates each
available-for-sale security whose value has declined below
amortized cost to assess whether the decline in fair value is
other-than-temporary. A decline in a debt securitys fair
value is considered to be other-than-temporary if it is probable
that all amounts contractually due will not be collected or
management determines that it does not have the intent and
ability to hold the security for a period of time sufficient for
a forecasted market price recovery up to or beyond the amortized
cost of the security.
20
Merrill Lynchs impairment review generally includes:
|
|
|
Identifying securities with indicators of possible impairment;
|
|
Analyzing individual securities with fair value less than
amortized cost for specific factors including:
|
|
|
|
|
|
An adverse change in cash flows
|
|
|
The estimated length of time to recover from fair value to
amortized cost
|
|
|
The severity and duration of the fair value decline from
amortized cost
|
|
|
Evaluating the financial condition of the issuer;
|
|
|
|
Discussing evidential matter, including an evaluation of the
factors that could cause individual securities to qualify as
having other-than-temporary impairment;
|
|
Determining whether management intends to hold the security
through to recovery. Absent other indicators of possible
impairment, to the extent that Merrill Lynch has the ability and
intent to hold the securities, no impairment charge will be
recognized; and
|
|
Documenting the analysis and conclusions.
|
Non-Qualifying
Investments
Non-qualifying investments are those investments that are not
within the scope of SFAS No. 115 and primarily include
private equity investments accounted for at fair value and
securities carried at cost or under the equity method of
accounting.
Private equity investments that are held for capital
appreciation
and/or
current income are accounted for under the AICPA Accounting and
Auditing Guide, Investment Companies (the
Investment Company Guide) and carried at fair value.
Additionally, certain private equity investments that are not
accounted for under the Investment Company Guide may be carried
at fair value under the fair value option election in
SFAS No. 159. The carrying value of private equity
investments reflects expected exit values based upon market
prices or other valuation methodologies including expected cash
flows and market comparables of similar companies.
Merrill Lynch has minority investments in the common shares of
corporations and in partnerships that do not fall within the
scope of SFAS No. 115 or the Investment Company Guide.
Merrill Lynch accounts for these investments using either the
cost or the equity method of accounting based on
managements ability to influence the investees. See the
Consolidation Accounting Policies section of this Note for more
information.
For investments accounted for using the equity method, income is
recognized based on Merrill Lynchs share of the earnings
or losses of the investee. Dividend distributions are generally
recorded as reductions in the investment balance. Impairment
testing is based on the guidance provided in APB Opinion
No. 18, The Equity Method of Accounting for Investments
in Common Stock, and the investment is reduced when an
impairment is deemed other-than-temporary.
For investments accounted for at cost, income is recognized as
dividends are received. Impairment testing is based on the
guidance provided in FASB Staff Position Nos.
SFAS 115-1
and
SFAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, and the cost basis is
reduced when an impairment is deemed other-than-temporary.
Loans,
Notes, and Mortgages, Net
Merrill Lynchs lending and related activities include loan
originations, syndications and securitizations. Loan
originations include corporate and institutional loans,
residential and commercial mortgages, asset-based loans, and
other loans to individuals and businesses. Merrill Lynch also
engages in
21
secondary market loan trading (see Trading Assets and
Liabilities section) and margin lending. Loans included in
loans, notes, and mortgages are classified for accounting
purposes as loans held for investment and loans held for sale.
Loans held for investment are carried at amortized cost, less an
allowance for loan losses. The provision for loan losses is
based on managements estimate of the amount necessary to
maintain the allowance for loan losses at a level adequate to
absorb probable incurred loan losses and is included in interest
revenue in the Condensed Consolidated Statements of
(Loss)/Earnings. Managements estimate of loan losses is
influenced by many factors, including adverse situations that
may affect the borrowers ability to repay, current
economic conditions, prior loan loss experience, and the
estimated fair value of any underlying collateral. The fair
value of collateral is generally determined by third-party
appraisals in the case of residential mortgages, quoted market
prices for securities, or other types of estimates for other
assets.
Managements estimate of loan losses includes judgment
about collectibility based on available information at the
balance sheet date, and the uncertainties inherent in those
underlying assumptions.
While management has based its estimates on the best information
available, future adjustments to the allowance for loan losses
may be necessary as a result of changes in the economic
environment or variances between actual results and the original
assumptions.
In general, loans are evaluated for impairment when they are
greater than 90 days past due or exhibit credit quality
weakness. Loans are considered impaired when it is probable that
Merrill Lynch will not be able to collect the contractual
principal and interest due from the borrower. All payments
received on impaired loans are applied to principal until the
principal balance has been reduced to a level where collection
of the remaining recorded investment is not in doubt. Typically,
when collection of principal on an impaired loan is not in
doubt, contractual interest will be credited to interest income
when received.
Loans held for sale are carried at lower of cost or fair value.
The fair value option in SFAS No. 159 has been elected
for certain held for sale loans, notes and mortgages. Estimation
is required in determining these fair values. The fair value of
loans made in connection with commercial lending activity,
consisting mainly of senior debt, is primarily estimated using
the market value of publicly issued debt instruments or
discounted cash flows. Merrill Lynchs estimate of fair
value for other loans, notes, and mortgages is determined based
on the individual loan characteristics. For certain homogeneous
categories of loans, including residential mortgages, automobile
loans, and home equity loans, fair value is estimated using a
whole loan valuation or an as-if securitized price
based on market conditions. An as-if securitized
price is based on estimated performance of the underlying asset
pool collateral, rating agency credit structure assumptions and
market pricing for similar securitizations previously executed.
Declines in the carrying value of loans held for sale and loans
accounted for at fair value under the fair value option are
included in other revenues in the Condensed Consolidated
Statements of (Loss)/Earnings.
Nonrefundable loan origination fees, loan commitment fees, and
draw down fees received in conjunction with held for
investment loans are generally deferred and recognized over the
contractual life of the loan as an adjustment to the yield. If,
at the outset, or any time during the term of the loan, it
becomes probable that the repayment period will be extended, the
amortization is recalculated using the expected remaining life
of the loan. When the loan contract does not provide for a
specific maturity date, managements best estimate of the
repayment period is used. At repayment of the loan, any
unrecognized deferred fee is immediately recognized in earnings.
If the loan is accounted for as held for sale, the fees received
are deferred and recognized as part of the gain or loss on sale
in other revenues. If the loan is accounted for under the fair
value option, the fees are included in the determination of the
fair value and included in other revenue.
22
New
Accounting Pronouncements
In September 2008, the FASB issued FSP
FAS 133-1
and
FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees:
An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective
Date of FASB Statement No. 161 (FSP
FAS 133-1
and
FIN 45-4),
which amends SFAS No. 133 to require expanded
disclosures regarding the potential effect of credit derivative
instruments on an entitys financial position, financial
performance and cash flows. FSP
FAS 133-1
and
FIN 45-4
applies to credit derivative instruments where Merrill Lynch is
the seller of protection. This includes freestanding credit
derivative instruments as well as credit derivatives that are
embedded in hybrid instruments. FSP
FAS 133-1
and
FIN 45-4
additionally amends FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45) to require an additional
disclosure about the current status of the payment/performance
risk of guarantees. FSP
FAS 133-1
and
FIN 45-4
is effective prospectively for financial statements issued for
fiscal years and interim periods ending after November 15,
2008.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP
EITF 03-6-1),
which addresses whether instruments granted in share-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the computation
of earnings per share under the two-class method described in
SFAS No. 128, Earnings per Share. FSP
EITF 03-6-1,
which will apply to Merrill Lynch because it grants instruments
to employees in share-based payment transactions that meet the
definition of participating securities, is effective
retrospectively for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008.
Merrill Lynch is currently evaluating the impact of FSP
EITF 03-6-1
on the Condensed Consolidated Financial Statements.
In May 2008, the FASB issued FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1),
which clarifies that convertible instruments that may be settled
in cash upon conversion (including partial cash settlement) are
not addressed by APB Opinion No. 14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase
Warrants. Additionally, FSP APB
14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entitys nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1
which will apply to Merrill Lynch due to the issuance of
contingently convertible liquid yield option notes
(LYONs®
) is effective for financial statements issued for fiscal
years and interim periods beginning after December 15,
2008, and is to be applied retrospectively for all periods that
are presented in the annual financial statements for the period
of adoption. Merrill Lynch is currently evaluating the impact of
FSP APB 14-1
on the Condensed Consolidated Financial Statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosure about Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 is
intended to improve transparency in financial reporting by
requiring enhanced disclosures of an entitys derivative
instruments and hedging activities and their effects on the
entitys financial position, financial performance, and
cash flows. SFAS No. 161 applies to all derivative
instruments within the scope of SFAS No. 133. It also
applies to non-derivative hedging instruments and all hedged
items designated and qualifying as hedges under
SFAS No. 133. SFAS No. 161 amends the
current qualitative and quantitative disclosure requirements for
derivative instruments and hedging activities set forth in
SFAS No. 133 and generally increases the level of
disaggregation that will be required in an entitys
financial statements. SFAS No. 161 requires
qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments, and
disclosures about credit-risk related contingent features in
derivative agreements.
23
SFAS No. 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008.
In February 2008, the FASB issued FSP
FAS 140-3,
Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions. Under the guidance in FSP
FAS 140-3,
there is a presumption that the initial transfer of a financial
asset and subsequent repurchase financing involving the same
asset are considered part of the same arrangement (i.e. a linked
transaction) under SFAS No. 140. However, if certain
criteria are met, the initial transfer and repurchase financing
will be evaluated as two separate transactions under
SFAS No. 140. FSP
FAS 140-3
is effective for new transactions entered into in fiscal years
beginning after November 15, 2008. Early adoption is
prohibited. Merrill Lynch is currently evaluating the impact of
FSP
FAS 140-3
on the Condensed Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
requires noncontrolling interests in subsidiaries (formerly
known as minority interests) initially to be
measured at fair value and classified as a separate component of
equity. Under SFAS No. 160, gains or losses on sales
of noncontrolling interests in subsidiaries are not recognized,
instead sales of noncontrolling interests are accounted for as
equity transactions. However, in a sale of a subsidiarys
shares that results in the deconsolidation of the subsidiary, a
gain or loss is recognized for the difference between the
proceeds of that sale and the carrying amount of the interest
sold and a new fair value basis is established for any remaining
ownership interest. SFAS No. 160 is effective for
Merrill Lynch beginning in 2009; earlier application is
prohibited. SFAS No. 160 is required to be adopted
prospectively, with the exception of certain presentation and
disclosure requirements (e.g., reclassifying noncontrolling
interests to appear in equity), which are required to be adopted
retrospectively. Merrill Lynch is currently evaluating the
impact of SFAS No. 160 on the Condensed Consolidated
Financial Statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
(SFAS No. 141R), which significantly
changes the financial accounting and reporting for business
combinations. SFAS No. 141R will require:
|
|
|
More assets and liabilities to be measured at fair value as of
the acquisition date,
|
|
Liabilities related to contingent consideration to be remeasured
at fair value in each subsequent reporting period with changes
reflected in earnings and not goodwill, and
|
|
All acquisition-related costs to be expensed as incurred by the
acquirer.
|
SFAS No. 141R is required to be adopted on a
prospective basis concurrently with SFAS No. 160 and
is effective for business combinations beginning in fiscal 2009.
Early adoption is prohibited. Merrill Lynch is currently
evaluating the impact of SFAS No. 141R on the
Condensed Consolidated Financial Statements.
In June 2007, the Accounting Standards Executive Committee of
the AICPA issued Statement of Position
07-1,
Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and
Equity Method Investors for Investments in Investment Companies
(SOP 07-
1). The intent of
SOP 07-1
is to clarify which entities are within the scope of the AICPA
Audit and Accounting Guide, Investment Companies (the
Guide). For those entities that are investment
companies under
SOP 07-1,
the SOP also addresses whether the specialized industry
accounting principles of the Guide (referred to as
investment company accounting) should be retained by
the parent company in consolidation or by an investor that
accounts for the investment under the equity method because it
has significant influence over the investee. On October 17,
2007, the FASB proposed an indefinite delay of the effective
dates of
SOP 07-1
to allow the Board to address certain implementation issues that
have arisen and possibly revise
SOP 07-1.
24
In April 2007, the FASB issued FSP
No. FIN 39-1,
Amendment of FASB Interpretation No. 39 (FSP
FIN 39-1).
FSP
FIN 39-1
modifies FIN No. 39 and permits companies to offset
cash collateral receivables or payables with net derivative
positions. FSP
FIN 39-1
is effective for fiscal years beginning after November 15,
2007 with early adoption permitted. Merrill Lynch adopted FSP
FIN 39-1
in the first quarter of 2008. FSP
FIN 39-1
did not have a material effect on the Condensed Consolidated
Financial Statements as it clarified the acceptability of
existing market practice, which Merrill Lynch applied, for
netting of cash collateral against net derivative assets and
liabilities.
In February 2007, the FASB issued SFAS No. 159, which
provides a fair value option election that allows companies to
irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and
liabilities. Changes in fair value for assets and liabilities
for which the election is made will be recognized in earnings as
they occur. SFAS No. 159 permits the fair value option
election on an
instrument-by-instrument
basis at initial recognition of an asset or liability or upon an
event that gives rise to a new basis of accounting for that
instrument. SFAS No. 159 is effective as of the
beginning of an entitys first fiscal year that begins
after November 15, 2007. Early adoption is permitted.
Merrill Lynch early adopted SFAS No. 159 in the first
quarter of 2007. In connection with this adoption management
reviewed its treasury liquidity portfolio and determined that
Merrill Lynch should decrease its economic exposure to interest
rate risk by eliminating long-term fixed rate assets from the
portfolio and replacing them with floating rate assets. The
fixed rate assets had been classified as available-for-sale and
the unrealized losses related to such assets had been recorded
in accumulated other comprehensive loss. As a result of the
adoption of SFAS No. 159, the loss related to these
assets was removed from accumulated other comprehensive loss and
a loss of approximately $185 million, net of tax, primarily
related to these assets, was recorded as a cumulative-effect
adjustment to beginning retained earnings, with no material
impact to total stockholders equity. Refer to Note 3
to the 2007 Annual Report for additional information.
In September 2006, the FASB issued SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, establishes a fair value
hierarchy based on the quality of inputs used to measure fair
value and enhances disclosure about fair value measurements.
SFAS No. 157 nullifies the guidance provided by
EITF 02-3
that prohibits recognition of day one gains or losses on
derivative transactions where model inputs that significantly
impact valuation are not observable. In addition,
SFAS No. 157 prohibits the use of block discounts for
large positions of unrestricted financial instruments that trade
in an active market and requires an issuer to incorporate
changes in its own credit spreads when determining the fair
value of its liabilities. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007 with
early adoption permitted provided that the entity has not yet
issued financial statements for that fiscal year, including any
interim periods. The provisions of SFAS No. 157 are to
be applied prospectively, except that the provisions related to
block discounts and existing derivative financial instruments
measured under
EITF 02-3
are to be applied as a one-time cumulative effect adjustment to
opening retained earnings in the year of adoption. Merrill Lynch
early adopted SFAS No. 157 in the first quarter of
2007. The cumulative-effect adjustment to beginning retained
earnings was an increase of approximately $53 million, net
of tax, primarily representing the difference between the
carrying amounts and fair value of derivative contracts valued
using the guidance in
EITF 02-3.
The impact of adopting SFAS No. 157 was not material
to the Condensed Consolidated Statement of (Loss)/Earnings.
Refer to Note 3 to the 2007 Annual Report for additional
information.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132R
(SFAS No. 158). SFAS No. 158
requires an employer to recognize the overfunded or underfunded
status of its defined benefit pension and other postretirement
plans, measured as the difference between the fair value of plan
assets and the benefit obligation as an asset or liability in
its statement of financial condition. Upon adoption,
SFAS No. 158 requires an entity to recognize
previously unrecognized actuarial gains and losses and prior
service costs within accumulated other
25
comprehensive loss, net of tax. In accordance with the guidance
in SFAS No. 158, Merrill Lynch adopted this provision
of the standard for year-end 2006. The adoption of
SFAS No. 158 resulted in a net credit of
$65 million to accumulated other comprehensive loss
recorded on the Consolidated Financial Statements at
December 29, 2006. SFAS No. 158 also requires
defined benefit plan assets and benefit obligations to be
measured as of the date of the companys fiscal year-end.
Merrill Lynch has historically used a September 30 measurement
date. As of the beginning of fiscal year 2008, Merrill Lynch
changed its measurement date to coincide with its fiscal year
end. The impact of adopting the measurement date provision of
SFAS No. 158 was not material to the Condensed
Consolidated Financial Statements.
In June 2006, the FASB issued FIN 48. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in a
companys financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Merrill Lynch adopted FIN 48 in the first quarter of 2007.
The impact of the adoption of FIN 48 resulted in a decrease
to beginning retained earnings and an increase to the liability
for unrecognized tax benefits of approximately $66 million.
See Note 14 to the 2007 Annual Report for further
information.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets
(SFAS No. 156). SFAS No. 156
amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, to require all separately recognized servicing
assets and servicing liabilities to be initially measured at
fair value, if practicable. SFAS No. 156 also permits
servicers to subsequently measure each separate class of
servicing assets and liabilities at fair value rather than at
the lower of amortized cost or market. For those companies that
elect to measure their servicing assets and liabilities at fair
value, SFAS No. 156 requires the difference between
the carrying value and fair value at the date of adoption to be
recognized as a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year in which the
election is made. Prior to adoption of SFAS No. 156
Merrill Lynch accounted for servicing assets and servicing
liabilities at the lower of amortized cost or market. Merrill
Lynch adopted SFAS No. 156 on December 30, 2006.
Merrill Lynch has not elected to subsequently fair value those
mortgage servicing rights (MSR) held as of the date
of adoption or those MSRs acquired or retained after
December 30, 2006. The adoption of SFAS No. 156
did not have a material impact on the Condensed Consolidated
Financial Statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments an
amendment of FASB Statements No. 133 and 140
(SFAS No. 155). SFAS No. 155
clarifies the bifurcation requirements for certain financial
instruments and permits hybrid financial instruments that
contain a bifurcatable embedded derivative to be accounted for
as a single financial instrument at fair value with changes in
fair value recognized in earnings. This election is permitted on
an
instrument-by-instrument
basis for all hybrid financial instruments held, obtained, or
issued as of the adoption date. At adoption, any difference
between the total carrying amount of the individual components
of the existing bifurcated hybrid financial instruments and the
fair value of the combined hybrid financial instruments is
recognized as a cumulative-effect adjustment to beginning
retained earnings. Merrill Lynch adopted SFAS No. 155
on a prospective basis beginning in the first quarter of 2007.
Since SFAS No. 159 incorporates accounting and
disclosure requirements that are similar to
SFAS No. 155, Merrill Lynch applies
SFAS No. 159, rather than SFAS No. 155, to
its fair value elections for hybrid financial instruments.
26
Note 2. Segment and Geographic
Information
Segment
Information
Merrill Lynchs operations are organized into two business
segments: Global Markets and Investment Banking
(GMI) and Global Wealth Management
(GWM). GMI provides full service global markets and
origination products and services to corporate, institutional,
and government clients around the world. GWM creates and
distributes investment products and services for individuals,
small- to mid-size businesses, and employee benefit plans.
Merrill Lynch also records revenues and expenses within a
Corporate category. Corporate results primarily
include gains and losses related to ineffective interest rate
hedges on certain qualifying debt and the impact of certain
hybrid financing instruments accounted for under
SFAS No. 159. In addition, Corporate results for the
three and nine month periods ended September 26, 2008
included expenses of $2.5 billion related to the payment to
affiliates and transferees of Temasek Holdings (Private) Limited
(Temasek) (refer to Note 10 for further
information) and $425 million (which includes a fine of
$125 million) associated with the auction rate securities
(ARS) repurchase program and the associated
settlement with regulators (refer to Note 11 for further
information). Net revenues and pre-tax losses recorded within
Corporate for the third quarter of 2008 were negative
$56 million and $3.0 billion, respectively as compared
with net revenues and pre-tax earnings of $20 million and
$21 million, respectively, in the prior year period.
Net revenues and pre-tax losses recorded within Corporate for
the nine months ended September 26, 2008 were negative
$187 million and $3.1 billion, as compared with
negative net revenues of $149 million and pre-tax losses of
$159 million in the prior year period.
The following segment results represent the information that is
relied upon by management in its decision-making processes.
Management believes that the following information by business
segment provides a reasonable representation of each
segments contribution to Merrill Lynchs consolidated
net revenues and pre-tax earnings or loss from continuing
operations.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
GMI
|
|
GWM
|
|
Corporate
|
|
Total
|
|
|
|
|
Three months Ended Sept. 26, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$
|
(3,382
|
)
|
|
$
|
2,666
|
|
|
$
|
(457
|
)
|
|
$
|
(1,173
|
)
|
Net interest
profit(1)
|
|
|
219
|
|
|
|
569
|
|
|
|
401
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
(3,163
|
)
|
|
|
3,235
|
|
|
|
(56
|
)
|
|
|
16
|
|
Non-interest
expenses(2)
|
|
|
2,851
|
|
|
|
2,482
|
|
|
|
2,934
|
|
|
|
8,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from continuing
operations(3)
|
|
$
|
(6,014
|
)
|
|
$
|
753
|
|
|
$
|
(2,990
|
)
|
|
$
|
(8,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-end total assets
|
|
$
|
777,994
|
|
|
$
|
97,360
|
|
|
$
|
426
|
|
|
$
|
875,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended Sept. 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$
|
(4,311
|
)
|
|
$
|
2,965
|
|
|
$
|
(588
|
)
|
|
$
|
(1,934
|
)
|
Net interest
profit(1)
|
|
|
1,133
|
|
|
|
573
|
|
|
|
608
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
(3,178
|
)
|
|
|
3,538
|
|
|
|
20
|
|
|
|
380
|
|
Non-interest expenses
|
|
|
1,434
|
|
|
|
2,585
|
|
|
|
(1
|
)
|
|
|
4,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings/(loss) from continuing
operations(3)
|
|
$
|
(4,612
|
)
|
|
$
|
953
|
|
|
$
|
21
|
|
|
$
|
(3,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-end total
assets(4)
|
|
$
|
990,518
|
|
|
$
|
106,243
|
|
|
$
|
427
|
|
|
$
|
1,097,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended Sept. 26, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$
|
(8,897
|
)
|
|
$
|
8,375
|
|
|
$
|
(1,305
|
)
|
|
$
|
(1,827
|
)
|
Net interest
(loss)/profit(1)
|
|
|
(275
|
)
|
|
|
1,818
|
|
|
|
1,118
|
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
(9,172
|
)
|
|
|
10,193
|
|
|
|
(187
|
)
|
|
|
834
|
|
Non-interest
expenses(2)
|
|
|
9,448
|
|
|
|
8,116
|
|
|
|
2,933
|
|
|
|
20,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from continuing
operations(3)
|
|
$
|
(18,620
|
)
|
|
$
|
2,077
|
|
|
$
|
(3,120
|
)
|
|
$
|
(19,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended Sept. 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest revenues
|
|
$
|
7,411
|
|
|
$
|
8,680
|
|
|
$
|
(652
|
)
|
|
$
|
15,439
|
|
Net interest
profit(1)
|
|
|
1,754
|
|
|
|
1,746
|
|
|
|
503
|
|
|
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
9,165
|
|
|
|
10,426
|
|
|
|
(149
|
)
|
|
|
19,442
|
|
Non-interest expenses
|
|
|
9,633
|
|
|
|
7,710
|
|
|
|
10
|
|
|
|
17,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from continuing
operations(3)
|
|
$
|
(468
|
)
|
|
$
|
2,716
|
|
|
$
|
(159
|
)
|
|
$
|
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Management views interest and
dividend income net of interest expense in evaluating
results. |
|
|
|
(2) |
|
Includes restructuring charges
recorded in the three and nine month periods ended September 26,
2008 of $18 million and $329 million for GMI,
respectively, and $21 million and $155 million for
GWM, respectively. See Note 17 for further
information. |
(3) |
|
See Note 15 to the
Condensed Consolidated Financial Statements for further
information on discontinued operations. |
(4) |
|
Amounts have been restated to
reflect goodwill balances in the respective business segments.
Such amounts ($4,516 million in GMI and $375 million
in GWM) were previously included in Corporate. |
Geographic
Information
Merrill Lynch conducts its business activities through offices
in the following five regions:
|
|
|
|
|
United States;
|
|
|
Europe, Middle East, and Africa;
|
|
|
Pacific Rim;
|
|
|
Latin America; and
|
|
|
Canada.
|
28
The principal methodologies used in preparing the geographic
information below are as follows:
|
|
|
|
|
Revenues and expenses are generally recorded based on the
location of the employee generating the revenue or incurring the
expense without regard to legal entity;
|
|
|
Pre-tax earnings or loss from continuing operations include the
allocation of certain shared expenses among regions; and
|
|
|
Intercompany transfers are based primarily on service agreements.
|
The information that follows, in managements judgment,
provides a reasonable representation of each regions
contribution to the consolidated net revenues and pre-tax loss
or earnings from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
|
|
|
Sept. 26, 2008
|
|
Sept. 28, 2007
|
|
Sept. 26, 2008
|
|
Sept. 28, 2007
|
|
|
Revenues, net of interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East, and Africa
|
|
$
|
(1,339
|
)
|
|
$
|
1,233
|
|
|
$
|
1,061
|
|
|
$
|
5,454
|
|
Pacific Rim
|
|
|
311
|
|
|
|
1,481
|
|
|
|
1,858
|
|
|
|
4,160
|
|
Latin America
|
|
|
325
|
|
|
|
378
|
|
|
|
1,191
|
|
|
|
1,128
|
|
Canada
|
|
|
22
|
|
|
|
77
|
|
|
|
155
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-U.S
|
|
|
(681
|
)
|
|
|
3,169
|
|
|
|
4,265
|
|
|
|
11,111
|
|
United
States(1)(2)(3)
|
|
|
697
|
|
|
|
(2,789
|
)
|
|
|
(3,431
|
)
|
|
|
8,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net of interest expense
|
|
$
|
16
|
|
|
$
|
380
|
|
|
$
|
834
|
|
|
$
|
19,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East, and Africa
|
|
$
|
(2,410
|
)
|
|
$
|
144
|
|
|
$
|
(2,583
|
)
|
|
$
|
1,631
|
|
Pacific Rim
|
|
|
(275
|
)
|
|
|
783
|
|
|
|
46
|
|
|
|
2,073
|
|
Latin America
|
|
|
104
|
|
|
|
189
|
|
|
|
473
|
|
|
|
553
|
|
Canada
|
|
|
(12
|
)
|
|
|
37
|
|
|
|
16
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-U.S
|
|
|
(2,593
|
)
|
|
|
1,153
|
|
|
|
(2,048
|
)
|
|
|
4,470
|
|
United
States(1)(2)(3)
|
|
|
(5,658
|
)
|
|
|
(4,791
|
)
|
|
|
(17,615
|
)
|
|
|
(2,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax (loss) earnings from continuing
operations(4)
|
|
$
|
(8,251
|
)
|
|
$
|
(3,638
|
)
|
|
$
|
(19,663
|
)
|
|
$
|
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Corporate net revenues and
adjustments are reflected in the U.S. region. |
|
|
|
(2) |
|
U.S. net revenues for the three
and nine months ended September 26, 2008 include net losses
of $10.2 billion and $26.1 billion, respectively,
related to U.S. ABS CDOs, credit valuation adjustments related
to hedges with financial guarantors, losses in the investment
portfolio of Merrill Lynchs U.S. banks, losses from other
residential mortgage exposures, and losses from commercial real
estate exposures. Losses for the three and nine months ended
September 26, 2008 were partially offset by gains of $2.8
and $5.0 billion, respectively, that resulted from the
widening of Merrill Lynchs credit spreads on the carrying
value of certain of our long-term liabilities, and a
$4.3 billion net gain related to the sale of Merrill
Lynchs ownership stake in Bloomberg L.P. (see
Note 5). |
(3) |
|
U.S. net revenues for the three
and nine months ended September 28, 2007 include net losses
of $7.9 billion related to sub-prime residential
mortgage-related securities and U.S. ABS CDOs. |
(4) |
|
See Note 15 for further
information on discontinued operations. |
29
Fair
Value Measurements
Fair
Value Hierarchy
In accordance with SFAS No. 157, Merrill Lynch has
categorized its financial instruments, based on the priority of
the inputs to the valuation technique, into a three-level fair
value hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to
measure the financial instruments fall within different levels
of the hierarchy, the categorization is based on the lowest
level input that is significant to the fair value measurement of
the instrument.
Financial assets and liabilities recorded on the Condensed
Consolidated Balance Sheets are categorized based on the inputs
to the valuation techniques as follows:
|
|
Level 1.
|
Financial assets and liabilities whose values are based on
unadjusted quoted prices for identical assets or liabilities in
an active market that Merrill Lynch has the ability to access
(examples include active exchange-traded equity securities,
exchange-traded derivatives, most U.S. Government and
agency securities, and certain other sovereign government
obligations).
|
|
Level 2.
|
Financial assets and liabilities whose values are based on
quoted prices in markets that are not active or model inputs
that are observable either directly or indirectly for
substantially the full term of the asset or liability.
Level 2 inputs include the following:
|
|
|
|
|
a)
|
Quoted prices for similar assets or liabilities in active
markets (for example, restricted stock);
|
|
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in
non-active markets (examples include corporate and municipal
bonds, which trade infrequently);
|
|
|
|
|
c)
|
Pricing models whose inputs are observable for substantially the
full term of the asset or liability (examples include most
over-the-counter derivatives, including interest rate and
currency swaps); and
|
|
|
|
|
d)
|
Pricing models whose inputs are derived principally from or
corroborated by observable market data through correlation or
other means for substantially the full term of the asset or
liability (examples include certain residential and commercial
mortgage-related assets, including loans, securities and
derivatives).
|
|
|
Level 3. |
Financial assets and liabilities whose values are based on
prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value
measurement. These inputs reflect managements own
assumptions about the assumptions a market participant would use
in pricing the asset or liability (examples include certain
private equity investments, certain residential and commercial
mortgage-related assets (including loans, securities and
derivatives), and long-dated or complex derivatives (including
certain equity and currency derivatives and long-dated options
on gas and power)).
|
As required by SFAS No. 157, when the inputs used to
measure fair value fall within different levels of the
hierarchy, the level within which the fair value measurement is
categorized is based on the lowest level input that is
significant to the fair value measurement in its entirety. For
example, a Level 3 fair value measurement may include
inputs that are observable (Levels 1 and 2) and
unobservable (Level 3). Therefore gains and losses for such
assets and liabilities categorized within the Level 3 table
below may include changes in fair value that are attributable to
both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3). Further, it should be noted
that the following tables do not take
30
into consideration the effect of offsetting Level 1 and 2
financial instruments entered into by Merrill Lynch that
economically hedge certain exposures to the Level 3
positions.
A review of fair value hierarchy classifications is conducted on
a quarterly basis. Changes in the observability of valuation
inputs may result in a reclassification for certain financial
assets or liabilities. Reclassifications impacting Level 3
of the fair value hierarchy are reported as transfers in/out of
the Level 3 category as of the beginning of the quarter in
which the reclassifications occur. Refer to the recurring and
non-recurring sections within this Note for further information
on the net transfers in and out during the quarter.
Recurring
Fair Value
The following tables present Merrill Lynchs fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis as of September 26, 2008 and
December 28, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of Sept. 26, 2008
|
|
|
|
|
|
|
|
|
Netting
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
2,216
|
|
|
$
|
6,001
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,217
|
|
Receivables under resale agreements
|
|
|
-
|
|
|
|
104,315
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,315
|
|
Receivables under securities borrowed transactions
|
|
|
-
|
|
|
|
271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271
|
|
Trading assets, excluding derivative contracts
|
|
|
42,472
|
|
|
|
54,957
|
|
|
|
17,823
|
|
|
|
-
|
|
|
|
115,252
|
|
Derivative contracts
|
|
|
6,249
|
|
|
|
637,168
|
|
|
|
32,535
|
|
|
|
(601,846
|
)
|
|
|
74,106
|
|
Investment securities
|
|
|
3,166
|
|
|
|
41,396
|
|
|
|
4,202
|
|
|
|
-
|
|
|
|
48,764
|
|
Securities received as collateral
|
|
|
42,572
|
|
|
|
5,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,654
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
682
|
|
|
|
721
|
|
|
|
-
|
|
|
|
1,403
|
|
Other
assets(2)
|
|
|
22
|
|
|
|
1,910
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,932
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
$
|
-
|
|
|
$
|
72,962
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72,962
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
3,064
|
|
|
|
15
|
|
|
|
-
|
|
|
|
3,079
|
|
Trading liabilities, excluding derivative contracts
|
|
|
27,673
|
|
|
|
3,431
|
|
|
|
28
|
|
|
|
-
|
|
|
|
31,132
|
|
Derivative contracts
|
|
|
5,507
|
|
|
|
642,533
|
|
|
|
28,835
|
|
|
|
(621,262
|
)
|
|
|
55,613
|
|
Obligation to return securities received as collateral
|
|
|
42,572
|
|
|
|
5,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,654
|
|
Long-term
borrowings(3)
|
|
|
-
|
|
|
|
60,855
|
|
|
|
11,535
|
|
|
|
-
|
|
|
|
72,390
|
|
Other payables interest and
other(2)
|
|
|
-
|
|
|
|
570
|
|
|
|
-
|
|
|
|
(82
|
)
|
|
|
488
|
|
|
|
|
|
|
(1) |
|
Represents counterparty and
cash collateral netting. |
|
|
|
(2) |
|
Primarily represents certain
derivatives used for non-trading purposes. |
(3) |
|
Includes bifurcated embedded
derivatives carried at fair value. |
Level 3 trading assets primarily include U.S. ABS CDOs of
$4.0 billion, corporate bonds and loans of
$10.8 billion and auction rate securities of
$1.0 billion.
Level 3 derivative contracts (assets) primarily relate to
derivative positions on U.S. ABS CDOs of $7.5 billion,
$17.6 billion of other credit derivatives that incorporate
unobservable correlation, and $7.4 billion of equity,
currency, interest rate and commodity derivatives that are
long-dated
and/or have
unobservable correlation.
31
Level 3 investment securities relate to certain private
equity and principal investment positions of $4.2 billion.
Level 3 derivative contracts (liabilities) primarily relate
to derivative positions on U.S. ABS CDOs of
$8.5 billion, $13.1 billion of other credit
derivatives that incorporate unobservable correlation, and
$7.2 billion of equity and currency derivatives that are
long-dated
and/or have
unobservable correlation.
Level 3 long-term borrowings primarily relate to structured
notes with embedded equity and commodity derivatives of $8.8
billion that are long-dated and/or have unobservable correlation
and $1.1 billion related to certain long-term borrowings
issued by consolidated special purpose entities
(SPEs).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of December 28, 2007
|
|
|
|
|
|
|
|
|
Netting
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
1,478
|
|
|
$
|
5,595
|
|
|
$
|
84
|
|
|
$
|
-
|
|
|
$
|
7,157
|
|
Receivables under resale agreements
|
|
|
-
|
|
|
|
100,214
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,214
|
|
Trading assets, excluding derivative contracts
|
|
|
71,038
|
|
|
|
81,169
|
|
|
|
9,773
|
|
|
|
-
|
|
|
|
161,980
|
|
Derivative contracts
|
|
|
4,916
|
|
|
|
522,014
|
|
|
|
26,038
|
|
|
|
(480,279
|
)
|
|
|
72,689
|
|
Investment securities
|
|
|
2,240
|
|
|
|
53,403
|
|
|
|
5,491
|
|
|
|
-
|
|
|
|
61,134
|
|
Securities received as collateral
|
|
|
42,451
|
|
|
|
2,794
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,245
|
|
Loans, notes, and mortgages
|
|
|
-
|
|
|
|
1,145
|
|
|
|
63
|
|
|
|
-
|
|
|
|
1,208
|
|
Other
assets(2)
|
|
|
7
|
|
|
|
1,739
|
|
|
|
-
|
|
|
|
(24
|
)
|
|
|
1,722
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
-
|
|
|
|
89,733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89,733
|
|
Trading liabilities, excluding derivative contracts
|
|
|
43,609
|
|
|
|
6,685
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,294
|
|
Derivative contracts
|
|
|
5,562
|
|
|
|
526,780
|
|
|
|
35,107
|
|
|
|
(494,155
|
)
|
|
|
73,294
|
|
Obligation to return securities received as collateral
|
|
|
42,451
|
|
|
|
2,794
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,245
|
|
Long-term
borrowings(3)
|
|
|
-
|
|
|
|
75,984
|
|
|
|
4,765
|
|
|
|
-
|
|
|
|
80,749
|
|
Other payables interest and
other(2)
|
|
|
2
|
|
|
|
287
|
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
276
|
|
|
|
|
|
|
(1) |
|
Represents counterparty and
cash collateral netting. |
|
|
|
(2) |
|
Primarily represents certain
derivatives used for non-trading purposes. |
(3) |
|
Includes bifurcated embedded
derivatives carried at fair value. |
Level 3 Assets and Liabilities as of
December 28, 2007
Level 3 trading assets primarily include corporate bonds
and loans of $5.4 billion and U.S. ABS CDOs of
$2.4 billion, of which $1.0 billion was sub-prime
related.
Level 3 derivative contracts (assets) primarily relate to
derivative positions on U.S. ABS CDOs of
$18.9 billion, of which $14.7 billion is sub-prime
related, and $5.1 billion of equity derivatives that are
long-dated
and/or have
unobservable correlation.
Level 3 investment securities primarily relate to certain
private equity and principal investment positions of
$4.0 billion, as well as U.S. ABS CDOs of
$834 million that are accounted for as trading securities
under SFAS No. 115.
32
Level 3 derivative contracts (liabilities) primarily relate
to derivative positions on U.S. ABS CDOs of
$25.1 billion, of which $23.9 billion relates to
sub-prime, and $8.3 billion of equity derivatives that are
long-dated
and/or have
unobservable correlation.
Level 3 long-term borrowings primarily relate to structured
notes with embedded long-dated equity and currency derivatives.
The following tables provide a summary of changes in fair value
of Merrill Lynchs Level 3 financial assets and
liabilities for the three and nine months ended
September 26, 2008 and September 28, 2007,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Three Months Ended Sept. 26, 2008
|
|
|
|
|
Total Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains or (Losses)
|
|
Total Realized and
|
|
Purchases,
|
|
|
|
|
|
|
|
|
included in Income
|
|
Unrealized Gains
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Trading assets
|
|
|
20,190
|
|
|
|
303
|
|
|
|
-
|
|
|
|
5
|
|
|
|
308
|
|
|
|
(3,374
|
)
|
|
|
699
|
|
|
|
17,823
|
|
Derivative contracts, net
|
|
|
(1,292
|
)
|
|
|
(8,792
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,792
|
)
|
|
|
13,348
|
|
|
|
436
|
|
|
|
3,700
|
|
Investment securities
|
|
|
4,589
|
|
|
|
(147
|
)
|
|
|
(304
|
)
|
|
|
-
|
|
|
|
(451
|
)
|
|
|
61
|
|
|
|
3
|
|
|
|
4,202
|
|
Loans, notes and mortgages
|
|
|
172
|
|
|
|
(6
|
)
|
|
|
(18
|
)
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
557
|
|
|
|
15
|
|
|
|
721
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
29
|
|
|
|
28
|
|
Short-term borrowings
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
15
|
|
Long-term borrowings
|
|
|
12,749
|
|
|
|
3,788
|
|
|
|
271
|
|
|
|
-
|
|
|
|
4,059
|
|
|
|
(30
|
)
|
|
|
2,875
|
|
|
|
11,535
|
|
|
|
Net losses in principal transactions during the quarter ended
September 26, 2008 were due primarily to losses of
$5.7 billion related to U.S. ABS CDOs and the
termination and potential settlement of related hedges with
monoline guarantor counterparties, of which $4.9 billion
was realized due to the sale of these assets to an affiliate of
Lone Star Funds (Lone Star). In addition, principal
transactions also included $2.3 billion of losses related
to net commodity derivative contracts. These losses were
partially offset by $2.2 billion of gains related to long
term borrowings with commodity related embedded derivatives.
The decrease in Level 3 trading assets due to purchases,
issuances and settlements primarily resulted from the sale of
U.S. ABS CDO sub-prime related assets to Lone Star. The
majority of the decrease was offset by a loan to Lone Star,
which is classified as trading assets, that financed
approximately 75% of the U.S. ABS CDO assets purchased by
Lone Star. In addition, the deconsolidation of certain
Level 3 trading assets that were initially recognized as a
result of consolidating certain SPEs contributed to the decrease
in trading assets. As a result of the Lone Star transaction,
certain total return swaps that were in liability positions at
the beginning of the quarter were terminated, resulting in an
increase in purchases, issuances and settlements for derivative
contracts, net.
33
The Level 3 net transfers in for long-term borrowings
were primarily due to decreased observability of inputs on
certain long-dated equity-linked notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Nine Months Ended Sept. 26, 2008
|
|
|
|
|
Total Realized and Unrealized Gains
|
|
Total Realized and
|
|
Purchases,
|
|
|
|
|
|
|
|
|
or (Losses) included in Income
|
|
Unrealized Gains
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
84
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(79
|
)
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
Trading assets
|
|
|
9,773
|
|
|
|
(2,744
|
)
|
|
|
-
|
|
|
|
86
|
|
|
|
(2,658
|
)
|
|
|
7,025
|
|
|
|
3,683
|
|
|
|
17,823
|
|
Derivative contracts, net
|
|
|
(9,069
|
)
|
|
|
(9,849
|
)
|
|
|
-
|
|
|
|
5
|
|
|
|
(9,844
|
)
|
|
|
25,467
|
|
|
|
(2,854
|
)
|
|
|
3,700
|
|
Investment securities
|
|
|
5,491
|
|
|
|
(895
|
)
|
|
|
(291
|
)
|
|
|
-
|
|
|
|
(1,186
|
)
|
|
|
159
|
|
|
|
(262
|
)
|
|
|
4,202
|
|
Loans, notes and mortgages
|
|
|
63
|
|
|
|
(6
|
)
|
|
|
(19
|
)
|
|
|
(2
|
)
|
|
|
(27
|
)
|
|
|
676
|
|
|
|
9
|
|
|
|
721
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
29
|
|
|
$
|
28
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Long-term borrowings
|
|
|
4,765
|
|
|
|
2,171
|
|
|
|
285
|
|
|
|
-
|
|
|
|
2,456
|
|
|
|
1,435
|
|
|
|
7,791
|
|
|
|
11,535
|
|
|
|
Net losses in principal transactions for the nine months ended
September 26, 2008 were due primarily to losses of
$14.7 billion related to U.S. ABS CDOs and the
termination and potential settlement of related hedges with
monoline guarantor counterparties, of which $4.9 billion
was related to the sale of these assets to Lone Star. These
losses were partially offset by $3.1 billion in gains on
other credit derivatives that incorporate unobservable
correlation.
The increase in Level 3 trading assets and net derivative
contracts for the nine months ended September 26, 2008 due
to purchases, issuances and settlements is primarily
attributable to the recording of assets for which the exposure
was previously recognized as derivative liabilities (total
return swaps) at December 28, 2007. The increase in trading
assets was partially offset by the sale of U.S. ABS CDO
assets to Lone Star during the third quarter of 2008. As a
result of the Lone Star transaction, certain total return swaps
that were in a liability position were terminated, resulting in
an increase in purchases, issuances and settlements for
derivative contracts, net.
The Level 3 net transfers in for trading assets
primarily relates to decreased observability of inputs on
certain corporate bonds and loans. The Level 3 net
transfers in for long-term borrowings were primarily due to
decreased observability of inputs on certain long-dated equity
linked notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Three Months Ended Sept. 28, 2007
|
|
|
|
|
Total Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains or (Losses)
|
|
Total Realized and
|
|
Purchases,
|
|
|
|
|
|
|
|
|
included in Income
|
|
Unrealized Gains
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
3,648
|
|
|
$
|
(1,938
|
)
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
(1,932
|
)
|
|
$
|
1,608
|
|
|
$
|
6,409
|
|
|
$
|
9,733
|
|
Derivative contracts, net
|
|
|
229
|
|
|
|
(4,032
|
)
|
|
|
(2
|
)
|
|
|
11
|
|
|
|
(4,023
|
)
|
|
|
139
|
|
|
|
81
|
|
|
|
(3,574
|
)
|
Investment securities
|
|
|
5,784
|
|
|
|
(974
|
)
|
|
|
4
|
|
|
|
-
|
|
|
|
(970
|
)
|
|
|
938
|
|
|
|
(99
|
)
|
|
|
5,653
|
|
Loans, notes and mortgages
|
|
|
4
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
9
|
|
|
|
7
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$
|
282
|
|
|
$
|
280
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
280
|
|
|
$
|
81
|
|
|
$
|
529
|
|
|
$
|
612
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Nine Months Ended Sept. 28, 2007
|
|
|
|
|
Total Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains or (Losses)
|
|
Total Realized and
|
|
Purchases,
|
|
|
|
|
|
|
|
|
included in Income
|
|
Unrealized Gains
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
2,021
|
|
|
$
|
(1,685
|
)
|
|
$
|
-
|
|
|
$
|
34
|
|
|
$
|
(1,651
|
)
|
|
$
|
2,111
|
|
|
$
|
7,252
|
|
|
$
|
9,733
|
|
Derivative contracts, net
|
|
|
(2,030
|
)
|
|
|
(3,461
|
)
|
|
|
3
|
|
|
|
17
|
|
|
|
(3,441
|
)
|
|
|
946
|
|
|
|
951
|
|
|
|
(3,574
|
)
|
Investment securities
|
|
|
5,117
|
|
|
|
(1,404
|
)
|
|
|
484
|
|
|
|
5
|
|
|
|
(915
|
)
|
|
|
2,142
|
|
|
|
(691
|
)
|
|
|
5,653
|
|
Loans, notes and mortgages
|
|
|
7
|
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(4
|
)
|
|
|
17
|
|
|
|
7
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$
|
-
|
|
|
$
|
280
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
280
|
|
|
$
|
81
|
|
|
$
|
811
|
|
|
$
|
612
|
|
|
|
The following tables provide the portion of gains or losses
included in income for the three and nine months ended
September 26, 2008 and September 28, 2007 attributable
to unrealized gains or losses relating to those Level 3
assets and liabilities still held at September 26, 2008 and
September 28, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Unrealized Gains or (Losses) for Level 3 Assets and
Liabilities Still Held at Sept. 26, 2008
|
|
|
Three Months Ended Sept. 26, 2008
|
|
Nine Months Ended Sept. 26, 2008
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Trading assets
|
|
|
293
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
264
|
|
|
|
(2,753
|
)
|
|
|
-
|
|
|
|
74
|
|
|
|
(2,679
|
)
|
Derivative contracts, net
|
|
|
(3,979
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,979
|
)
|
|
|
2,611
|
|
|
|
-
|
|
|
|
5
|
|
|
|
2,616
|
|
Investment securities
|
|
|
(102
|
)
|
|
|
(304
|
)
|
|
|
-
|
|
|
|
(406
|
)
|
|
|
(822
|
)
|
|
|
(295
|
)
|
|
|
-
|
|
|
|
(1,117
|
)
|
Loans, notes, and mortgages
|
|
|
(6
|
)
|
|
|
(15
|
)
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
(2
|
)
|
|
|
(17
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$
|
3,811
|
|
|
$
|
271
|
|
|
$
|
-
|
|
|
$
|
4,082
|
|
|
$
|
2,236
|
|
|
$
|
285
|
|
|
$
|
-
|
|
|
$
|
2,521
|
|
|
|
Net unrealized losses in principal transactions for the three
months ended September 26, 2008 were primarily due to
$2.3 billion of losses related to net commodity derivative
contracts and approximately $800 million of net losses on
U.S. ABS CDO related assets and liabilities. These losses
were partially offset by $2.2 billion of gains related to
long term borrowings with commodity related embedded derivatives.
For the nine months ended September 26, 2008, net
unrealized gains in principal transactions primarily relate to
certain equity-linked structured notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Unrealized Gains or (Losses) for Level 3 Assets and
Liabilities Still Held at Sept. 28, 2007
|
|
|
Three Months Ended Sept. 28, 2007
|
|
Nine Months Ended Sept. 28, 2007
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
(1,956
|
)
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
(1,950
|
)
|
|
$
|
(1,719
|
)
|
|
$
|
-
|
|
|
$
|
34
|
|
|
$
|
(1,685
|
)
|
Derivative contracts, net
|
|
|
(4,088
|
)
|
|
|
(2
|
)
|
|
|
11
|
|
|
|
(4,079
|
)
|
|
|
(3,589
|
)
|
|
|
(2
|
)
|
|
|
17
|
|
|
|
(3,574
|
)
|
Investment securities
|
|
|
(974
|
)
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
(980
|
)
|
|
|
(1,404
|
)
|
|
|
393
|
|
|
|
7
|
|
|
|
(1,004
|
)
|
Loans, notes, and mortgages
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$
|
280
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
280
|
|
|
$
|
280
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
280
|
|
|
|
35
Non-recurring
Fair Value
Certain assets and liabilities are measured at fair value on a
non-recurring basis and are not included in the tables above.
These assets and liabilities primarily include loans and loan
commitments held for sale and reported at lower of cost or fair
value and loans held for investment that were initially measured
at cost and have been written down to fair value as a result of
an impairment. The following table shows the fair value
hierarchy for those assets and liabilities measured at fair
value on a non-recurring basis as of September 26, 2008 and
December 28, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Gains / (Losses)
|
|
Gains / (Losses)
|
|
|
Non-Recurring Basis as of Sept.
26, 2008
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Sept. 26, 2008
|
|
Sept. 26, 2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes, and mortgages
|
|
$
|
-
|
|
|
$
|
11,297
|
|
|
$
|
5,750
|
|
|
$
|
17,047
|
|
|
$
|
(2,577
|
)
|
|
$
|
(3,645
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
-
|
|
|
$
|
705
|
|
|
$
|
14
|
|
|
$
|
719
|
|
|
$
|
(77
|
)
|
|
$
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Non-Recurring Basis
|
|
|
as of December 28, 2007
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes, and mortgages
|
|
$
|
-
|
|
|
$
|
32,594
|
|
|
$
|
7,157
|
|
|
$
|
39,751
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
-
|
|
|
$
|
666
|
|
|
$
|
-
|
|
|
$
|
666
|
|
|
|
Loans, notes, and mortgages include held for sale loans that are
carried at the lower of cost or fair value and for which the
fair value was below the cost basis at September 26, 2008
and/or
December 28, 2007. It also includes certain impaired held
for investment loans where an allowance for loan losses has been
calculated based upon the fair value of the loans or collateral.
Level 3 assets as of September 26, 2008 primarily
relate to United Kingdom (U.K.) residential and
commercial real estate loans of $4.3 billion that are
classified as held for sale where there continues to be
significant illiquidity in the securitization market. The losses
on the Level 3 loans were calculated primarily by a
fundamental cash flow valuation analysis. This cash flow
analysis includes cumulative loss and prepayment assumptions
derived from multiple inputs including mortgage remittance
reports, property prices and other market data. Level 3
assets as of December 28, 2007 primarily related to
residential and commercial real estate loans that are classified
as held for sale in the U.K. of $4.1 billion.
Other liabilities include amounts recorded for loan commitments
at lower of cost or fair value where the funded loan will be
held for sale, particularly leveraged loan commitments in the
U.S. The losses were calculated by models incorporating
significant observable market data.
Fair
Value Option
SFAS No. 159 provides a fair value option election
that allows companies to irrevocably elect fair value as the
initial and subsequent measurement attribute for certain
financial assets and liabilities. Changes in fair value for
assets and liabilities for which the election is made will be
recognized in earnings as they occur. SFAS No. 159
permits the fair value option election on an instrument by
instrument basis at initial recognition of an asset or liability
or upon an event that gives rise to a new basis of accounting
for that instrument. As discussed above, certain of Merrill
Lynchs financial instruments are required to be accounted
for at fair value under SFAS No. 115 and
SFAS No. 133, as well as industry level guidance. For
certain financial instruments that are not accounted for at fair
value under other applicable accounting guidance, the fair value
option has been elected.
36
The following tables provide information about where in the
Condensed Consolidated Statements of (Loss)/Earnings changes in
fair values of assets and liabilities, for which the fair value
option has been elected, are included for the three and nine
months ended September 26, 2008 and September 28,
2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Changes in Fair Value For the Three
|
|
Changes in Fair Value For the Nine
|
|
|
Months Ended Sept. 26,
|
|
Months Ended Sept. 26,
|
|
|
2008, for Items Measured at Fair Value
|
|
2008, for Items Measured at Fair Value
|
|
|
Pursuant to Fair Value Option
|
|
Pursuant to Fair Value Option
|
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
|
Principal
|
|
Other
|
|
in Fair
|
|
Principal
|
|
Other
|
|
in Fair
|
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
139
|
|
|
$
|
-
|
|
|
$
|
139
|
|
|
$
|
(70
|
)
|
|
$
|
-
|
|
|
$
|
(70
|
)
|
Investment securities
|
|
|
(588
|
)
|
|
|
(212
|
)
|
|
|
(800
|
)
|
|
|
(671
|
)
|
|
|
(251
|
)
|
|
|
(922
|
)
|
Loans, notes and mortgages
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
(37
|
)
|
|
|
12
|
|
|
|
(25
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
$
|
(100
|
)
|
|
$
|
-
|
|
|
$
|
(100
|
)
|
|
$
|
(52
|
)
|
|
$
|
-
|
|
|
$
|
(52
|
)
|
Short-term borrowings
|
|
|
(367
|
)
|
|
|
-
|
|
|
|
(367
|
)
|
|
|
(185
|
)
|
|
|
-
|
|
|
|
(185
|
)
|
Long-term
borrowings(1)
|
|
|
8,632
|
|
|
|
846
|
|
|
|
9,478
|
|
|
|
12,578
|
|
|
|
1,715
|
|
|
|
14,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other revenues primarily
represent fair value changes on non-recourse long-term
borrowings issued by consolidated SPEs. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Changes in Fair Value For the Three
|
|
Changes in Fair Value For the Nine
|
|
|
Months Ended Sept. 28,
|
|
Months Ended Sept. 28,
|
|
|
2007, for Items Measured at Fair
|
|
2007, for Items Measured at Fair
|
|
|
Value Pursuant to Fair Value Option
|
|
Value Pursuant to Fair Value Option
|
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
|
Principal
|
|
Other
|
|
in Fair
|
|
Principal
|
|
Other
|
|
in Fair
|
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
62
|
|
|
$
|
-
|
|
|
$
|
62
|
|
|
$
|
67
|
|
|
$
|
-
|
|
|
$
|
67
|
|
Investment securities
|
|
|
(68
|
)
|
|
|
(1
|
)
|
|
|
(69
|
)
|
|
|
142
|
|
|
|
20
|
|
|
|
162
|
|
Loans, notes and mortgages
|
|
|
(3
|
)
|
|
|
20
|
|
|
|
17
|
|
|
|
(1
|
)
|
|
|
60
|
|
|
|
59
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
|
$
|
(10
|
)
|
|
$
|
7
|
|
|
$
|
-
|
|
|
$
|
7
|
|
Long-term borrowings
|
|
|
576
|
|
|
|
-
|
|
|
|
576
|
|
|
|
1,417
|
|
|
|
-
|
|
|
|
1,417
|
|
|
|
The following describes the rationale for electing to account
for certain financial assets and liabilities at fair value, as
well as the impact of instrument-specific credit risk on the
fair value.
Resale
and repurchase agreements:
Merrill Lynch elected the fair value option on a prospective
basis for certain resale and repurchase agreements. The fair
value option election was made based on the tenor of the resale
and repurchase agreements, which reflects the magnitude of the
interest rate risk. The majority of resale and repurchase
agreements collateralized by U.S. government securities
were excluded from the fair value option election as these
contracts are generally short-dated and therefore the interest
rate risk is not considered significant. Amounts loaned under
resale agreements require collateral with a market value equal
to or in excess of the principal amount loaned resulting in
minimal credit risk for such transactions.
37
Securities
borrowed transactions:
Merrill Lynch elected the fair value option for certain Japanese
government bond borrowing transactions during the second quarter
of 2008. Fair value changes related to such transactions were
immaterial for the three and nine months ended
September 26, 2008.
Investment
securities:
At September 26, 2008, investment securities primarily
represented non-marketable convertible preferred shares for
which Merrill Lynch has economically hedged a majority of the
position with derivatives.
Loans,
notes, and mortgages:
Merrill Lynch elected the fair value option for automobile and
certain corporate loans because the loans are risk managed on a
fair value basis. The change in the fair value of loans, notes,
and mortgages for which the fair value option was elected that
was attributable to changes in borrower-specific credit risk was
not material for the three and nine months ended
September 26, 2008 and for the three and nine months ended
September 28, 2007.
For those loans, notes and mortgages for which the fair value
option has been elected, the aggregate fair value of loans that
are 90 days or more past due and in non-accrual status are
not material to the Condensed Consolidated Financial Statements.
Short-term and long-term borrowings:
Merrill Lynch elected the fair value option for certain
short-term and long-term borrowings that are risk managed on a
fair value basis, including structured notes, and for which
hedge accounting under SFAS No. 133 had been difficult
to obtain. The changes in the fair value of liabilities for
which the fair value option was elected that was attributable to
changes in Merrill Lynch credit spreads were estimated gains of
$2.8 billion and $5.0 billion for the three and nine
months ended September 26, 2008, respectively. The changes
in the fair value of liabilities for which the fair value option
was elected that were attributable to changes in Merrill Lynch
credit spreads were estimated gains of $609 million and
$628 million for the three and nine months ended
September 28, 2007. Changes in Merrill Lynch specific
credit risk are derived by isolating fair value changes due to
changes in Merrill Lynchs credit spreads as observed in
the secondary cash market.
The fair value option was also elected for certain non-recourse
long-term borrowings issued by consolidated SPEs. The fair value
of these long-term borrowings is unaffected by changes in
Merrill Lynchs creditworthiness.
The following tables present the difference between fair values
and the aggregate contractual principal amounts of receivables
under resale agreements, receivables under securities borrowed
transactions, loans, notes, and mortgages, payables under
repurchase agreements, short-term and long-term
38
borrowings for which the fair value option has been elected as
of September 26, 2008 and December 28, 2007,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Fair Value
|
|
Principal
|
|
|
|
|
at
|
|
Amount
|
|
|
|
|
September 26,
|
|
Due Upon
|
|
|
|
|
2008
|
|
Maturity
|
|
Difference
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
104,315
|
|
|
$
|
104,102
|
|
|
$
|
213
|
|
Receivables under securities borrowed transactions
|
|
|
271
|
|
|
|
271
|
|
|
|
-
|
|
Loans, notes and mortgages
|
|
|
1,237
|
|
|
|
1,321
|
|
|
|
(84
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
$
|
72,962
|
|
|
$
|
72,902
|
|
|
$
|
60
|
|
Short-term borrowings
|
|
|
3,079
|
|
|
|
3,071
|
|
|
|
8
|
|
Long-term
borrowings(1)
|
|
|
71,886
|
|
|
|
76,183
|
|
|
|
(4,297
|
)
|
|
|
|
|
|
(1) |
|
The majority of the difference
relates to the impact of the widening of Merrill Lynchs
credit spreads, the change in fair value of non-recourse debt,
and zero coupon notes issued at a substantial discount from the
principal amount. |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Fair Value
|
|
Principal
|
|
|
|
|
at
|
|
Amount
|
|
|
|
|
December 28,
|
|
Due Upon
|
|
|
|
|
2007
|
|
Maturity
|
|
Difference
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
100,214
|
|
|
$
|
100,090
|
|
|
$
|
124
|
|
Loans, notes and
mortgages(1)
|
|
|
1,149
|
|
|
|
1,355
|
|
|
|
(206
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings(2)
|
|
|
76,334
|
|
|
|
81,681
|
|
|
|
(5,347
|
)
|
|
|
|
|
|
(1) |
|
The majority of the difference
relates to loans purchased at a substantial discount from the
principal amount. |
|
|
|
(2) |
|
The majority of the difference
relates to the impact of the widening of Merrill Lynchs
credit spreads, the change in fair value of non-recourse debt,
and zero coupon notes issued at a substantial discount from the
principal amount. |
Trading
Risk Management
Trading activities subject Merrill Lynch to market and credit
risks. These risks are managed in accordance with established
risk management policies and procedures. Specifically, the
independent risk and control groups work to ensure that these
risks are properly identified, measured, monitored, and managed
throughout Merrill Lynch. Refer to Note 3 of the 2007
Annual Report for further information on trading risk management.
Concentration
of Risk to the Mortgage Markets
At September 26, 2008, Merrill Lynch had sizeable exposure
to the mortgage market through securities, derivatives, loans
and loan commitments. This included:
|
|
|
Net exposures of $34.6 billion in U.S. Prime
residential mortgage-related positions and $5.0 billion in
other residential mortgage-related positions, excluding Merrill
Lynchs U.S. banks investment securities portfolio;
|
|
Net exposure of $15.7 billion in Merrill Lynchs
U.S. banks investment securities portfolio;
|
|
Net exposure of $12.8 billion in commercial real estate
related positions, excluding First Republic, and
$2.9 billion in First Republic commercial real estate
related positions; and
|
|
Net exposure of $1.1 billion in U.S. super senior ABS
CDO exposures.
|
In September 2008, Merrill Lynch sold $30.6 billion gross
notional amount of U.S. super senior ABS CDOs (the
Portfolio) to Lone Star for a purchase price of
$6.7 billion. In connection with this sale, Merrill Lynch
provided financing to the purchaser for approximately 75% of the
purchase price. The recourse on this loan is limited to the
assets of the purchaser, which consist solely of the Portfolio.
All cash flows and distributions from the Portfolio (including
sale proceeds) will be applied in accordance
39
with a specified priority of payments. The loan is carried at
fair value. Events of default under the loan are customary
events of default, including failure to pay interest when due
and failure to pay principal at maturity.
Valuation of these exposures will continue to be impacted by
external market factors including default rates, rating agency
actions, and the prices at which observable market transactions
occur. Merrill Lynchs ability to mitigate its risk by
selling or hedging its exposures is also limited by the market
environment. Merrill Lynchs future results may continue to
be materially impacted by the valuation adjustments applied to
these positions.
Concentration
of Risk to Monoline Financial Guarantors
To economically hedge certain U.S. super senior ABS CDOs
and U.S. sub-prime mortgage positions, Merrill Lynch
entered into credit derivatives with various counterparties,
including financial guarantors. At the end of the third quarter
of 2008, the carrying value of hedges with financial guarantors
related to U.S. super senior ABS CDOs was
$1.4 billion, reduced from $2.9 billion at the end of
the second quarter. The carrying value of hedges with financial
guarantors related to other asset classes outside of
U.S. super senior ABS CDOs increased from $3.6 billion
at the end of the second quarter to $4.5 billion at the end
of the third quarter of 2008, resulting from gains in the market
value of these hedges.
During the third quarter of 2008, credit valuation adjustments
related to Merrill Lynchs remaining hedges with financial
guarantors, including those related to U.S. super senior
ABS CDOs, were not significant.
Note 4. Securities Financing Transactions
Merrill Lynch enters into secured borrowing and lending
transactions in order to meet customers needs and earn
residual interest rate spreads, obtain securities for settlement
and finance trading inventory positions.
Under these transactions, Merrill Lynch either receives or
provides collateral, including U.S. Government and
agencies, asset-backed, corporate debt, equity, and
non-U.S. governments
and agencies securities. Merrill Lynch receives collateral in
connection with resale agreements, securities borrowed
transactions, customer margin loans, and other loans. Under many
agreements, Merrill Lynch is permitted to sell or repledge the
securities received (e.g., use the securities to secure
repurchase agreements, enter into securities lending
transactions, or deliver to counterparties to cover short
positions). At September 26, 2008 and December 28,
2007, the fair value of securities received as collateral where
Merrill Lynch is permitted to sell or repledge the securities
was $676 billion and $853 billion, respectively, and
the fair value of the portion that has been sold or repledged
was $535 billion and $675 billion, respectively.
Merrill Lynch may use securities received as collateral for
resale agreements to satisfy regulatory requirements such as
Rule 15c3-3
of the SEC. The fair value of collateral used for this purpose
was $14.9 billion and $19.3 billion at
September 26, 2008 and December 28, 2007, respectively.
Merrill Lynch additionally receives securities as collateral in
connection with certain securities transactions in which Merrill
Lynch is the lender. In instances where Merrill Lynch is
permitted to sell or repledge securities received, Merrill Lynch
reports the fair value of such securities received as collateral
and the related obligation to return securities received as
collateral in the Condensed Consolidated Balance Sheets.
40
Merrill Lynch pledges assets to collateralize repurchase
agreements and other secured financings. Pledged securities that
can be sold or repledged by the secured party are
parenthetically disclosed in trading assets and investment
securities on the Condensed Consolidated Balance Sheets. The
parenthetically disclosed amount for December 28, 2007
relating to trading assets has been restated from approximately
$79 billion (as previously reported) to approximately
$45 billion to properly reflect the amount of pledged
securities that can be sold or repledged by the secured party.
The carrying value and classification of securities owned by
Merrill Lynch that have been pledged to counterparties where
those counterparties do not have the right to sell or repledge
at September 26, 2008 and December 28, 2007 are as
follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Sept. 26,
|
|
Dec. 28,
|
|
|
2008
|
|
2007
|
|
|
Trading asset category
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed, and asset-backed securities
|
|
$
|
16,746
|
|
|
$
|
11,873
|
|
U.S. Government and agencies
|
|
|
6,027
|
|
|
|
11,110
|
|
Corporate debt and preferred stock
|
|
|
12,918
|
|
|
|
17,144
|
|
Non-U.S.
governments and agencies
|
|
|
1,656
|
|
|
|
2,461
|
|
Equities and convertible debentures
|
|
|
16,179
|
|
|
|
9,327
|
|
Municipals and money markets
|
|
|
2,622
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,148
|
|
|
$
|
52,365
|
|
|
Additionally, Merrill Lynch has pledged approximately
$5.6 billion of loans and $12.5 billion of investment
securities to counterparties at September 26, 2008, where
those counterparties do not have the right to sell or repledge
those assets.
Note 5. Investment Securities
Investment securities on the Condensed Consolidated Balance
Sheets include:
|
|
|
SFAS No. 115 investments held by ML & Co.
and certain of its non-broker-dealer entities, including Merrill
Lynch banks. SFAS No. 115 investments consist of:
|
|
|
|
|
|
Debt securities, including debt held for investment and
liquidity and collateral management purposes that are classified
as available-for-sale, debt securities held for trading
purposes, and debt securities that Merrill Lynch intends to hold
until maturity;
|
|
|
Marketable equity securities, which are generally classified as
available-for-sale.
|
|
|
|
Non-qualifying investments are those that do not fall within the
scope of SFAS No. 115. Non-qualifying investments
consist principally of:
|
|
|
|
|
|
Equity investments, including investments in partnerships and
joint ventures. Included in equity investments are investments
accounted for under the equity method of accounting, which
consist of investments in (i) partnerships and certain
limited liability corporations where Merrill Lynch has more than
minor influence (i.e. generally defined as greater than a three
percent interest) and (ii) corporate entities where Merrill
Lynch has the ability to exercise significant influence over the
investee (i.e. generally defined as ownership and voting
interest of 20% to 50%). For information related to our
investments accounted for under the equity method, please refer
to Note 5 of the 2007 Annual Report. Also included in
equity investments are private equity investments that Merrill
Lynch holds for capital appreciation
and/or
current income and which are accounted for at fair value in
accordance with the Investment Company Guide, as well as private
equity investments accounted for at fair value under the fair
value option election in
|
41
|
|
|
|
|
SFAS No. 159. The carrying value of private equity
investments reflects expected exit values based upon market
prices or other valuation methodologies including discounted
expected cash flows and market comparables of similar companies.
|
|
|
|
|
|
Deferred compensation hedges, which are investments economically
hedging deferred compensation liabilities and are accounted for
at fair value.
|
Investment securities reported on the Condensed Consolidated
Balance Sheets at September 26, 2008 and December 28,
2007 are as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Sept. 26,
|
|
Dec. 28,
|
|
|
2008
|
|
2007
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
Available-for-sale(1)
|
|
$
|
40,206
|
|
|
$
|
50,922
|
|
Trading
|
|
|
3,407
|
|
|
|
5,015
|
|
Held-to-maturity
|
|
|
4,581
|
|
|
|
267
|
|
Non-qualifying(2)
|
|
|
|
|
|
|
|
|
Equity
investments(3)
|
|
|
27,892
|
|
|
|
29,623
|
|
Deferred compensation
hedges(4)
|
|
|
1,565
|
|
|
|
1,710
|
|
Investments in trust preferred securities and other investments
|
|
|
435
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,086
|
|
|
$
|
87,975
|
|
|
|
|
|
(1) |
|
At September 26, 2008 and
December 28, 2007, includes $5.9 billion and
$5.4 billion, respectively, of investment securities
reported in cash and securities segregated for regulatory
purposes or deposited with clearing organizations. |
|
|
|
(2) |
|
Non-qualifying for
SFAS No. 115 purposes. |
(3) |
|
Includes Merrill Lynchs
investment in BlackRock. |
(4) |
|
Represents investments that
economically hedge deferred compensation liabilities. |
Included in available-for-sale investment securities above are
certain mortgage- and asset-backed securities held in Merrill
Lynchs U.S. banks investment securities portfolio.
The fair values of most of these mortgage- and asset-backed
securities have declined below the respective securitys
amortized cost basis. Changes in fair value are initially
captured in the financial statements by reporting the securities
at fair value with the cumulative change in fair value reported
in accumulated other comprehensive loss, a component of
shareholders equity. Merrill Lynch regularly (at least
quarterly) evaluates each security whose value has declined
below amortized cost to assess whether the decline in fair value
is other-than-temporary. If the decline in fair value is
determined to be other-than-temporary, the cost basis of the
security is reduced to an amount equal to the fair value of the
security at the time of impairment (the new cost basis), and the
amount of the reduction in cost basis is recorded in earnings.
A decline in a debt securitys fair value is considered to
be other-than-temporary if it is probable that all amounts
contractually due will not be collected. In assessing whether it
is probable that all amounts contractually due will not be
collected, Merrill Lynch considers the following:
|
|
|
Whether there has been an adverse change in the estimated cash
flows of the security;
|
|
The period of time over which it is estimated that the fair
value will increase from the current level to at least the
amortized cost level, or until principal and interest is
estimated to be received;
|
|
The period of time a securitys fair value has been below
amortized cost;
|
|
The amount by which the securitys fair value is below
amortized cost;
|
|
The financial condition of the issuer; and
|
|
Managements ability and intent to hold the security until
fair value recovers or until the principal and interest is
received.
|
42
The determination of whether a security is
other-than-temporarily impaired is based, in large part, on
estimates and assumptions related to the prepayment and default
rates of the loans collateralizing the securities, the loss
severities experienced on the sale of foreclosed properties, and
other matters affecting the securitys underlying cash
flows. The cash flow estimates and assumptions used to assess
whether an adverse change has occurred as well as the other
factors affecting the other-than-temporary determination are
regularly reviewed and revised, incorporating new information as
it becomes available and due to changes in market conditions.
For all securities including those securities that are deemed to
be other-than-temporarily impaired based on specific analysis
described above, management must conclude on whether it has the
intent and ability to hold the securities to recovery. To that
end, management has considered its ability and intent to hold
available-for-sale securities relative to the cash flow
requirements of Merrill Lynchs operating, investing and
financing activities and has determined that it has the ability
and intent to hold the securities with unrealized losses until
the fair value recovers to an amount at least equal to the
amortized cost or principal is received.
Other-than-temporary impairments related to Merrill Lynchs
U.S. banks investment securities portfolio, which are
recorded within other revenues on the Condensed Consolidated
Statement of (Loss)/Earnings, have been recognized for the three
and nine month periods ended September 26, 2008 as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Sept. 26,
|
|
Sept. 26,
|
|
|
2008
|
|
2008
|
|
|
Security Description
|
|
|
|
|
|
|
|
|
Prime
|
|
$
|
58
|
|
|
$
|
255
|
|
Alt A
|
|
|
628
|
|
|
|
2,202
|
|
Sub-prime
|
|
|
110
|
|
|
|
204
|
|
CDOs
|
|
|
51
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
847
|
|
|
$
|
2,933
|
|
|
The cumulative pre-tax balance in other comprehensive loss
related to the U.S. banks investment securities portfolio
was approximately negative $5.5 billion as of
September 26, 2008.
Bloomberg,
L.P.
The Company had a 20% ownership stake in Bloomberg L.P., which
was accounted for under the equity method of accounting. On
July 17, 2008, Merrill Lynch announced and completed the
sale of its ownership stake in Bloomberg, L.P. to Bloomberg
Inc., for $4.4 billion. The sale resulted in a
$4.3 billion net pre-tax gain.
Note 6. Securitization Transactions and
Transactions with Special Purpose Entities (SPEs)
Securitizations
In the normal course of business, Merrill Lynch securitizes
commercial and residential mortgage loans, municipal,
government, and corporate bonds, and other types of financial
assets. SPEs, often referred to as VIEs are often used when
entering into or facilitating securitization transactions.
Merrill Lynchs involvement with SPEs used to securitize
financial assets includes: structuring
and/or
establishing
43
SPEs; selling assets to SPEs; managing or servicing assets held
by SPEs; underwriting, distributing, and making loans to SPEs;
making markets in securities issued by SPEs; engaging in
derivative transactions with SPEs; owning notes or certificates
issued by SPEs;
and/or
providing liquidity facilities and other guarantees to, or for
the benefit of, SPEs.
Merrill Lynch securitized assets of approximately
$20.9 billion and $154.4 billion for the nine months
ended September 26, 2008 and September 28, 2007,
respectively. For the nine months ended September 26, 2008
and September 28, 2007, Merrill Lynch received
$22.2 billion and $156.8 billion, respectively, of
proceeds, and other cash inflows, from securitization
transactions, and recognized net securitization gains of
$11 million and $287 million, respectively, in Merrill
Lynchs Condensed Consolidated Statements of
(Loss)/Earnings.
The table below summarizes the cash inflows received by Merrill
Lynch from securitization transactions related to the following
underlying asset types:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Nine Months Ended
|
|
|
Sept. 26,
|
|
Sept. 28,
|
|
|
2008
|
|
2007
|
|
|
Asset category
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
$
|
13,258
|
|
|
$
|
92,558
|
|
Municipal bonds
|
|
|
5,867
|
|
|
|
46,358
|
|
Commercial loans and corporate bonds
|
|
|
2,834
|
|
|
|
13,502
|
|
Other
|
|
|
196
|
|
|
|
4,430
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,155
|
|
|
$
|
156,848
|
|
|
In certain instances, Merrill Lynch retains interests in the
senior tranche, subordinated tranche,
and/or
residual tranche of securities issued by certain SPEs created to
securitize assets. The gain or loss on the sale of the assets is
determined with reference to the previous carrying amount of the
financial assets transferred, which is allocated between the
assets sold and the retained interests, if any, based on their
relative fair value at the date of transfer.
Retained interests are recorded in the Condensed Consolidated
Balance Sheets at fair value. To obtain fair values, observable
market prices are used if available. Where observable market
prices are unavailable, Merrill Lynch generally estimates fair
value initially and on an ongoing basis based on the present
value of expected future cash flows using managements best
estimates of credit losses, prepayment rates, forward yield
curves, and discount rates, commensurate with the risks
involved. Retained interests are either held as trading assets,
with changes in fair value recorded in the Condensed
Consolidated Statements of (Loss)/Earnings, or as securities
available-for-sale, with changes in fair value included in
accumulated other comprehensive loss. Retained interests held as
available-for-sale are reviewed periodically for impairment.
Retained interests in securitized assets were approximately
$3.0 billion and $6.1 billion at September 26,
2008 and December 28, 2007, respectively, which related
primarily to residential mortgage-related assets, municipal
bond, and
commercial-related
assets and corporate bond securitization transactions. The
majority of these retained interests include mortgage-backed
securities that Merrill Lynch had expected to sell to investors
in the normal course of its underwriting activity. However, the
timing of any sale is subject to current and future market
conditions.
The following table presents information on retained interests,
excluding the offsetting benefit of financial instruments used
to hedge risks, held by Merrill Lynch as of September 26,
2008 arising from Merrill Lynchs residential
mortgage-related assets, municipal bond, and commercial-related
assets and
44
corporate bond securitization transactions. The pre-tax
sensitivities of the current fair value of the retained
interests to immediate 10% and 20% adverse changes in
assumptions and parameters are also shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Commercial-Related
|
|
|
Residential
|
|
|
|
Assets and
|
|
|
Mortgage-Related
|
|
Municipal
|
|
Corporate
|
|
|
Assets
|
|
Bonds
|
|
Bonds
|
|
|
Retained interest amount
|
|
$
|
1,048
|
|
|
$
|
558
|
|
|
$
|
1,401
|
|
Weighted average credit losses (rate per
annum)(1)
|
|
|
0.7
|
%
|
|
|
0.0
|
%
|
|
|
2.0
|
%
|
Impact on fair value of 10% adverse change
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
(3
|
)
|
Impact on fair value of 20% adverse change
|
|
$
|
(3
|
)
|
|
$
|
-
|
|
|
$
|
(7
|
)
|
Weighted average discount rate
|
|
|
7.9
|
%
|
|
|
7.1
|
%
|
|
|
6.6
|
%
|
Impact on fair value of 10% adverse change
|
|
$
|
(31
|
)
|
|
$
|
(15
|
)
|
|
$
|
(15
|
)
|
Impact on fair value of 20% adverse change
|
|
$
|
(61
|
)
|
|
$
|
(27
|
)
|
|
$
|
(29
|
)
|
Weighted average life (in years)
|
|
|
7.1
|
|
|
|
8.9
|
|
|
|
5.7
|
|
Weighted average prepayment speed
(CPR)(2)
|
|
|
14.9
|
%
|
|
|
0.0
|
%
|
|
|
24.4
|
%
|
Impact on fair value of 10% adverse change
|
|
$
|
(9
|
)
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
Impact on fair value of 20% adverse change
|
|
$
|
(18
|
)
|
|
$
|
-
|
|
|
$
|
(8
|
)
|
|
CPR=Constant Prepayment
Rate
|
|
|
(1) |
|
Credit losses are computed only
on positions for which expected credit loss is either a key
assumption in the determination of fair value or is not
reflected in the discount rate. |
(2) |
|
Relates to select
securitization transactions where assets are
prepayable. |
The preceding sensitivity analysis is hypothetical and should be
used with caution. In particular, the effect of a variation in a
particular assumption on the fair value of the retained interest
is calculated independent of changes in any other assumption; in
practice, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities.
Further, changes in fair value based on a 10% or 20% variation
in an assumption or parameter generally cannot be extrapolated
because the relationship of the change in the assumption to the
change in fair value may not be linear. Also, the sensitivity
analysis does not include the offsetting benefit of financial
instruments that Merrill Lynch utilizes to hedge risks,
including credit, interest rate, and prepayment risk, that are
inherent in the retained interests. These hedging strategies are
structured to take into consideration the hypothetical stress
scenarios above such that they would be effective in principally
offsetting Merrill Lynchs exposure to loss in the event
these scenarios occur.
The weighted average assumptions and parameters used initially
to value retained interests relating to securitizations that
were still held by Merrill Lynch as of September 26, 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial-Related
|
|
|
Residential
|
|
|
|
Assets and
|
|
|
Mortgage-Related
|
|
Municipal
|
|
Corporate
|
|
|
Assets
|
|
Bonds
|
|
Bonds
|
|
|
Credit losses (rate per
annum)(1)
|
|
|
0.2
|
%
|
|
|
0.0
|
%
|
|
|
1.5
|
%
|
Weighted average discount rate
|
|
|
6.4
|
%
|
|
|
5.2
|
%
|
|
|
4.4
|
%
|
Weighted average life (in years)
|
|
|
6.8
|
|
|
|
10.9
|
|
|
|
6.3
|
|
Prepayment speed assumption
(CPR)(2)
|
|
|
15.7
|
%
|
|
|
0.0
|
%
|
|
|
16.6
|
%
|
|
CPR = Constant Prepayment
Rate
|
|
|
(1) |
|
Credit losses are computed only
on positions for which expected credit loss is either a key
assumption in the determination of fair value or is not
reflected in the discount rate. |
(2) |
|
Relates to select
securitization transactions where assets are
prepayable. |
45
For residential mortgage-related assets and commercial-related
assets and corporate bond securitizations, the investors and the
securitization trust generally have no recourse to Merrill Lynch
upon the event of a borrower default. See Note 11 to the
Condensed Consolidated Financial Statements for information
related to representations and warranties.
For municipal bond securitization SPEs, in the normal course of
dealer market-making activities, Merrill Lynch acts as liquidity
provider. Specifically, the holders of beneficial interests
issued by municipal bond securitization SPEs have the right to
tender their interests for purchase by Merrill Lynch on
specified dates at a specified price. Beneficial interests that
are tendered are then sold by Merrill Lynch to investors through
a best efforts remarketing where Merrill Lynch is the
remarketing agent. If the beneficial interests are not
successfully remarketed, the holders of beneficial interests are
paid from funds drawn under a standby liquidity facility issued
by Merrill Lynch.
In addition to standby liquidity facilities, Merrill Lynch also
provides default protection or credit enhancement to investors
in securities issued by certain municipal bond securitization
SPEs. Interest and principal payments on beneficial interests
issued by these SPEs are secured by a guarantee issued by
Merrill Lynch. In the event that the issuer of the underlying
municipal bond defaults on any payment of principal
and/or
interest when due, the payments on the bonds will be made to
beneficial interest holders from an irrevocable guarantee by
Merrill Lynch. Additional information regarding these
commitments is provided in Note 11 to the Condensed
Consolidated Financial Statements.
Mortgage
Servicing Rights
In connection with its residential mortgage business, Merrill
Lynch may retain or acquire servicing rights associated with
certain mortgage loans that are sold through its securitization
activities. These loan sale transactions create assets referred
to as mortgage servicing rights, or MSRs, which are included
within other assets on the Condensed Consolidated Balance Sheets.
Retained MSRs are accounted for in accordance with
SFAS No. 156, which requires all separately recognized
servicing assets and servicing liabilities to be initially
measured at fair value, if practicable. SFAS No. 156
also permits servicers to subsequently measure each separate
class of servicing assets and liabilities at fair value rather
than at the lower of amortized cost or market. Merrill Lynch has
not elected to subsequently fair value retained MSRs.
Retained MSRs are initially recorded at fair value and
subsequently amortized in proportion to and over the period of
estimated future net servicing revenues. MSRs are assessed for
impairment, at a minimum, on a quarterly basis.
Managements estimates of fair value of MSRs are determined
using the net discounted present value of future cash flows,
which consists of projecting future servicing cash flows and
discounting such cash flows using an appropriate risk-adjusted
discount rate. These valuations require various assumptions,
including future servicing fees, servicing costs, credit losses,
discount rates and mortgage prepayment speeds. Due to subsequent
changes in economic and market conditions, these assumptions
can, and generally will, change from quarter to quarter.
46
Changes in Merrill Lynchs MSR balance are summarized below:
|
|
|
|
|
(dollars in millions)
|
|
|
|
Carrying Value
|
|
|
Mortgage servicing rights, December 28, 2007 (fair
value is $476)
|
|
$
|
389
|
|
Additions
|
|
|
5
|
|
Amortization
|
|
|
(100
|
)
|
Valuation allowance adjustments
|
|
|
(63
|
)
|
|
|
|
|
|
Mortgage servicing rights, Sept. 26, 2008 (fair value is
$267)
|
|
$
|
231
|
|
|
The amount of contractually specified revenues for the three and
nine months ended September 26, 2008 and September 28,
2007, which are included within managed accounts and other
fee-based revenues in the Condensed Consolidated Statements of
(Loss)/Earnings include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
|
|
Sept. 26,
|
|
Sept. 28,
|
|
Sept. 26,
|
|
Sept. 28,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Servicing fees
|
|
$
|
82
|
|
|
$
|
96
|
|
|
$
|
284
|
|
|
$
|
262
|
|
Ancillary and late fees
|
|
|
12
|
|
|
|
17
|
|
|
|
44
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94
|
|
|
$
|
113
|
|
|
$
|
328
|
|
|
$
|
309
|
|
|
The following table presents Merrill Lynchs key
assumptions used in measuring the fair value of MSRs at
September 26, 2008 and the pre-tax sensitivity of the fair
values to an immediate 10% and 20% adverse change in these
assumptions:
|
|
|
|
|
(dollars in millions)
|
|
|
Fair value of capitalized MSRs
|
|
$
|
267
|
|
Weighted average prepayment speed (CPR)
|
|
|
24.4
|
%
|
Impact on fair value of 10% adverse change
|
|
$
|
(15
|
)
|
Impact on fair value of 20% adverse change
|
|
$
|
(32
|
)
|
Weighted average discount rate
|
|
|
17.2
|
%
|
Impact on fair value of 10% adverse change
|
|
$
|
(9
|
)
|
Impact on fair value of 20% adverse change
|
|
$
|
(17
|
)
|
|
The sensitivity analysis above is hypothetical and should be
used with caution. In particular, the effect of a variation in a
particular assumption on the fair value of MSRs is calculated
independent of changes in any other assumption; in practice,
changes in one factor may result in changes in another factor,
which may magnify or counteract the sensitivities. Further
changes in fair value based on a single variation in assumptions
generally cannot be extrapolated because the relationship of the
change in a single assumption to the change in fair value may
not be linear.
Variable
Interest Entities
FIN 46(R) requires an entity to consolidate a VIE if that
enterprise has a variable interest that will absorb a majority
of the variability of the VIEs expected losses, receive a
majority of the variability of the VIEs expected residual
returns, or both. The entity required to consolidate a VIE is
known as the primary beneficiary. A QSPE is a type of VIE that
holds financial instruments and distributes cash flows to
investors based on preset terms. QSPEs are commonly used in
mortgage and other securitization transactions. In accordance
with SFAS No. 140 and FIN 46(R), Merrill
Lynch typically
47
does not consolidate QSPEs. Information regarding QSPEs can be
found in the Securitization section of this Note and the
Guarantees section in Note 11 to the Condensed Consolidated
Financial Statements.
Where an entity is a significant variable interest holder,
FIN 46(R) requires that entity to disclose its maximum
exposure to loss as a result of its interest in the VIE. It
should be noted that this measure does not reflect Merrill
Lynchs estimate of the actual losses that could result
from adverse changes because it does not reflect the economic
hedges Merrill Lynch enters into to reduce its exposure.
The following tables summarize Merrill Lynchs involvement
with certain VIEs as of September 26, 2008 and
December 28, 2007, respectively. The table below does not
include information on QSPEs or those VIEs where Merrill Lynch
is the primary beneficiary and holds a majority of the voting
interests in the entity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Significant Variable
|
|
|
Primary Beneficiary
|
|
Interest Holder
|
|
|
|
|
|
Net
|
|
Recourse
|
|
Total
|
|
|
|
|
Asset
|
|
to Merrill
|
|
Asset
|
|
Maximum
|
|
|
Size(4)
|
|
Lynch(5)
|
|
Size(6)
|
|
Exposure
|
|
|
September 26, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and real estate VIEs
|
|
$
|
7,201
|
|
|
$
|
2,689
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Guaranteed and other
funds(1)
|
|
|
1,516
|
|
|
|
344
|
|
|
|
122
|
|
|
|
64
|
|
Credit-linked note and other
VIEs(2)
|
|
|
191
|
|
|
|
246
|
|
|
|
-
|
|
|
|
-
|
|
Tax planning
VIEs(3)
|
|
|
1
|
|
|
|
45
|
|
|
|
151
|
|
|
|
5
|
|
|
|
December 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and real estate VIEs
|
|
$
|
15,420
|
|
|
$
|
-
|
|
|
$
|
307
|
|
|
$
|
232
|
|
Guaranteed and other
funds(1)
|
|
|
4,655
|
|
|
|
928
|
|
|
|
246
|
|
|
|
23
|
|
Credit-linked note and other
VIEs(2)
|
|
|
83
|
|
|
|
-
|
|
|
|
5,438
|
|
|
|
9,081
|
|
Tax planning
VIEs(3)
|
|
|
1
|
|
|
|
-
|
|
|
|
483
|
|
|
|
15
|
|
|
|
|
|
|
(1) |
|
The maximum exposure for
guaranteed and other funds is the fair value of Merrill
Lynchs investments, derivatives entered into with the VIEs
if they are in an asset position, and liquidity and credit
facilities with certain VIEs. |
(2) |
|
The maximum exposure for
credit-linked note and other VIEs is the notional amount of
total return swaps that Merrill Lynch has entered into with the
VIEs. This assumes a total loss on the referenced assets
underlying the total return swaps. The maximum exposure may be
different than the total asset size due to the netting of
certain derivatives in the VIE. |
(3) |
|
The maximum exposure for tax
planning VIEs reflects indemnifications made by Merrill Lynch to
investors in the VIEs. |
(4) |
|
This column reflects the size
of the assets held in the VIE after accounting for intercompany
eliminations and any balance sheet netting of assets and
liabilities as permitted by FIN 39. |
(5) |
|
This column reflects the
extent, if any, to which investors have recourse to Merrill
Lynch beyond the assets held in the VIE. For certain loan and
real estate VIEs, recourse to Merrill Lynch represents the
notional amount of derivatives that Merrill Lynch has on the
assets in the VIEs. |
(6) |
|
This column reflects the total
size of the assets held in the VIE. |
Merrill Lynch has entered into transactions with a number of
VIEs in which it is the primary beneficiary and therefore must
consolidate the VIE or is a significant variable interest holder
in the VIE. These VIEs are as follows:
Loan and
Real Estate VIEs
|
|
|
|
|
Merrill Lynch has investments in VIEs that hold loans or real
estate. Merrill Lynch may be either the primary beneficiary
which would result in consolidation of the VIE, or may be a
|
48
|
|
|
|
|
significant variable interest holder. These VIEs include
entities that are primarily designed to provide financing to
clients, to invest in real estate or obtain exposure to mortgage
related assets. These VIEs include securitization vehicles that
Merrill Lynch is required to consolidate because QSPE status has
not been met and Merrill Lynch is the primary beneficiary as it
retains the residual interests. This was a result of Merrill
Lynchs inability to sell mortgage related securities
because of the illiquidity in the securitization markets.
Merrill Lynchs inability to sell certain securities
disqualified the VIEs as QSPEs thereby resulting in Merrill
Lynchs consolidation of the VIEs. Depending upon the
continued illiquidity in the securitization market, these
transactions and future transactions that could fail QSPE status
may require consolidation and related disclosures. Merrill Lynch
also is the primary beneficiary for certain VIEs as a result of
total return swaps over the assets (primarily mortgage related)
in the VIE.
|
For consolidated VIEs that hold loans or mortgage related
assets, the assets of the VIEs are recorded in trading
assets-mortgages, mortgage-backed and asset-backed, other
assets, or loans, notes, and mortgages in the Condensed
Consolidated Balance Sheets. For consolidated VIEs that hold
real estate investments, these real estate investments are
included in other assets in the Condensed Consolidated Balance
Sheets. In certain instances, the beneficial interest holders in
these VIEs have no recourse to the general credit of Merrill
Lynch; their investments are paid exclusively from the assets in
the VIE. However, investors have recourse to Merrill Lynch in
instances where Merrill Lynch retains all the exposure to the
assets in the VIE through total return swaps. These transactions
resulted in an increase in recourse to Merrill Lynch at
September 26, 2008 as compared to year end 2007. The net
assets of loan and real estate VIEs decreased as Merrill Lynch
sold mortgage-related securities, resulting in the associated
VIEs qualifying as QSPEs; therefore, Merrill Lynch no longer
consolidates these securitization vehicles.
Guaranteed
and Other Funds
|
|
|
|
|
Merrill Lynch is the sponsor of funds that provide a guaranteed
return to investors at the maturity of the VIE. This guarantee
may include a guarantee of the return of an initial investment
or of the initial investment plus an agreed upon return
depending on the terms of the VIE. Investors in certain of these
VIEs have recourse to Merrill Lynch to the extent that the value
of the assets held by the VIEs at maturity is less than the
guaranteed amount. In some instances, Merrill Lynch is the
primary beneficiary and must consolidate the fund. Assets held
in these VIEs are primarily classified in trading assets. In
instances where Merrill Lynch is not the primary beneficiary,
the guarantees related to these funds are further discussed in
Note 11 to the Condensed Consolidated Financial Statements.
|
|
|
|
Merrill Lynch has made certain investments in alternative
investment fund structures that are VIEs. Merrill Lynch is the
primary beneficiary of these funds as a result of its
substantial investment in the vehicles. Merrill Lynch records
the assets in these VIEs in investment securities in the
Condensed Consolidated Balance Sheets. The decrease in net
assets was a result of redemptions of investments in certain
funds.
|
|
|
|
Merrill Lynch had established two asset-backed commercial paper
conduits (Conduits), one of which remained active
until July 2008. Merrill Lynch had variable interests in these
Conduits in the form of 1) a liquidity facility that
protected commercial paper holders against short term changes in
the fair value of the assets held by the Conduit in the event of
a disruption in the commercial paper market, and 2) a
credit facility to the Conduit that protected commercial paper
investors against credit losses for up to a certain percentage
of the portfolio of assets held by the Conduit. Merrill Lynch
also provided a liquidity facility with a third Conduit that it
did
|
49
|
|
|
|
|
not establish and Merrill Lynch had purchased all the assets
from this Conduit at December 28, 2007.
|
The remaining Conduit became inactive in July 2008 as Merrill
Lynch purchased the assets of this Conduit. Merrill Lynch does
not intend to utilize this or the other Conduits discussed above
in the future. At September 26, 2008, Merrill Lynch has no
liquidity and credit facilities outstanding or maximum exposure
to loss as these Conduits are no longer active.
The liquidity and credit facilities are further discussed in
Note 11.
Credit-Linked
Note and Other VIEs
|
|
|
|
|
Merrill Lynch has entered into transactions with VIEs where
Merrill Lynch typically purchases credit protection from the VIE
in the form of a derivative in order to synthetically expose
investors to a specific credit risk. These are commonly known as
credit-linked note VIEs. Merrill Lynch also takes synthetic
exposure to the underlying investment grade collateral held in
these VIEs, which primarily includes super senior
U.S. sub-prime ABS CDOs, through total return swaps. As a
result of a reconsideration event during the first quarter of
2008, Merrill Lynchs exposure to these vehicles declined
such that Merrill Lynch no longer holds a significant variable
interest in these vehicles. The decrease in Total Asset Size and
Maximum Exposure as compared to year end 2007 is due to Merrill
Lynch no longer holding a significant variable interest in these
vehicles. Merrill Lynch recorded its transactions with these
VIEs as trading assets/liabilities-derivative contracts in the
Condensed Consolidated Financial Statements.
|
|
|
|
In 2004, Merrill Lynch entered into a transaction with a VIE
whereby Merrill Lynch arranged for additional protection for
directors and employees to indemnify them against certain losses
that they may incur as a result of claims against them. Merrill
Lynch is the primary beneficiary and consolidates the VIE
because its employees benefit from the indemnification
arrangement. As of September 26, 2008 and December 28,
2007 the assets of the VIE totaled approximately
$16 million, representing a purchased credit default
agreement, which is recorded in other assets on the Condensed
Consolidated Balance Sheets. In the event of a Merrill Lynch
insolvency, proceeds of $140 million will be received by
the VIE to fund any claims. Neither Merrill Lynch nor its
creditors have any recourse to the assets of the VIE.
|
Tax
Planning VIEs
|
|
|
|
|
Merrill Lynch has entered into transactions with VIEs that are
used, in part, to provide tax planning strategies to investors
and/or
Merrill Lynch through an enhanced yield investment security.
These structures typically provide financing to Merrill Lynch
and/or the
investor at enhanced rates. Merrill Lynch may be either the
primary beneficiary of and consolidate the VIE, or may be a
significant variable interest holder in the VIE.
|
Loans, notes, mortgages and related commitments to extend credit
include:
|
|
|
|
|
Consumer loans, which are substantially secured, including
residential mortgages, home equity loans, and other loans to
individuals for household, family, or other personal
expenditures.
|
50
|
|
|
|
|
Commercial loans including corporate and institutional loans
(including corporate and financial sponsor, non-investment grade
lending commitments), commercial mortgages, asset-based loans,
small- and middle-market business loans, and other loans to
businesses.
|
Loans, notes, mortgages and related commitments to extend credit
at September 26, 2008 and December 28, 2007, are
presented below. This disclosure includes commitments to extend
credit that, if drawn upon, will result in loans held for
investment or loans held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Loans
|
|
Commitments(1)
|
|
|
|
|
|
Sept. 26,
|
|
Dec. 28,
|
|
Sept. 26,
|
|
Dec. 28,
|
|
|
2008
|
|
2007
|
|
2008(2)(3)
|
|
2007(3)
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages
|
|
$
|
30,027
|
|
|
$
|
26,939
|
|
|
$
|
9,154
|
|
|
$
|
7,023
|
|
Other
|
|
|
2,573
|
|
|
|
5,392
|
|
|
|
2,484
|
|
|
|
3,298
|
|
Commercial and small- and middle-market business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
|
|
|
14,684
|
|
|
|
18,917
|
|
|
|
33,842
|
|
|
|
36,921
|
|
Non-investment grade
|
|
|
29,305
|
|
|
|
44,277
|
|
|
|
10,818
|
|
|
|
30,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,589
|
|
|
|
95,525
|
|
|
|
56,298
|
|
|
|
78,232
|
|
Allowance for loan losses
|
|
|
(852
|
)
|
|
|
(533
|
)
|
|
|
-
|
|
|
|
-
|
|
Reserve for lending-related commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,668
|
)
|
|
|
(1,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
75,737
|
|
|
$
|
94,992
|
|
|
$
|
54,630
|
|
|
$
|
76,824
|
|
|
|
|
|
(1) |
|
Commitments are outstanding as
of the date the commitment letter is issued and are comprised of
closed and contingent commitments. Closed commitments represent
the unfunded portion of existing commitments available for draw
down. Contingent commitments are contingent on the borrower
fulfilling certain conditions or upon a particular event, such
as an acquisition. A portion of these contingent commitments may
be syndicated among other lenders or replaced with capital
markets funding. |
(2) |
|
See Note 11 to the
Condensed Consolidated Financial Statements for a maturity
profile of these commitments. |
(3) |
|
In addition to the loan
origination commitments included in the table above, at
September 26, 2008, Merrill Lynch entered into agreements
to purchase $395 million of loans that, upon settlement of
the commitment, will be classified in loans held for investment
and loans held for sale. Similar loan purchase commitments
totaled $330 million at December 28, 2007. See
Note 11 to the Condensed Consolidated Financial Statements
for additional information. |
Activity in the allowance for loan losses is presented below:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Nine Months Ended
|
|
|
Sept. 26,
|
|
Sept. 28,
|
|
|
2008
|
|
2007
|
|
|
Allowance for loan losses, at beginning of period
|
|
$
|
533
|
|
|
$
|
478
|
|
Provision for loan losses
|
|
|
538
|
|
|
|
96
|
|
Charge-offs
|
|
|
(233
|
)
|
|
|
(53
|
)
|
Recoveries
|
|
|
9
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(224
|
)
|
|
|
(28
|
)
|
Other
|
|
|
5
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, at end of period
|
|
$
|
852
|
|
|
$
|
588
|
|
|
|
Consumer loans, which are substantially secured, consisted of
approximately 317,000 individual loans at September 26,
2008. Commercial loans consisted of approximately 14,000
separate loans. The principal balance of non-accrual loans was
$1.2 billion at September 26, 2008 and
$607 million at December 28, 2007. The investment
grade and non-investment grade categorization is determined
51
using the credit rating agency equivalent of internal credit
ratings. Non-investment grade counterparties are those rated
lower than the BBB− category. In some cases Merrill Lynch
enters into single name and index credit default swaps to
mitigate credit exposure related to funded and unfunded
commercial loans. The notional value of these swaps totaled
$13.5 billion and $16.1 billion at September 26,
2008 and December 28, 2007, respectively. For information
on credit risk management see Note 3 of the 2007 Annual
Report.
The above amounts include $18.9 billion and
$49.0 billion of loans held for sale at September 26,
2008 and December 28, 2007, respectively. Loans held for
sale are loans that management expects to sell prior to
maturity. At September 26, 2008, such loans consisted of
$5.7 billion of consumer loans, primarily residential
mortgages and automobile loans, and $13.2 billion of
commercial loans, approximately 11% of which are to investment
grade counterparties. At December 28, 2007, such loans
consisted of $11.6 billion of consumer loans, primarily
residential mortgages and automobile loans, and
$37.4 billion of commercial loans, approximately 19% of
which were to investment grade counterparties.
Goodwill
Goodwill is the cost of an acquired company in excess of the
fair value of identifiable net assets at acquisition date.
Goodwill is tested annually (or more frequently under certain
conditions) for impairment at the reporting unit level in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. At September 26, 2008, Merrill Lynch
conducted an annual goodwill impairment test. The test was
performed for the Fixed Income, Currencies and Commodities
(FICC), Equity Markets, Investment Banking, and GWM
reporting units and compared the fair value of each reporting
unit to its carrying value, including goodwill. Based on this
analysis, Merrill Lynch determined that there was no impairment
of goodwill.
The following table sets forth the changes in the carrying
amount of Merrill Lynchs goodwill by business segment for
the nine months ended September 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
GMI
|
|
GWM
|
|
Total
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2007
|
|
$
|
2,970
|
|
|
$
|
1,620
|
|
|
$
|
4,590
|
|
Translation adjustment and other
|
|
|
(21
|
)
|
|
|
(1
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2008
|
|
$
|
2,949
|
|
|
$
|
1,619
|
|
|
$
|
4,568
|
|
|
Intangible
Assets
Intangible assets at September 26, 2008 and
December 28, 2007 consist primarily of value assigned to
customer relationships and core deposits. Intangible assets with
definite lives are tested for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,
(SFAS No. 144) whenever certain conditions
exist which would indicate the carrying amounts of such assets
may not be recoverable. Intangible assets with definite lives
are amortized over their respective estimated useful lives.
52
The gross carrying amounts of intangible assets were
$631 million and $644 million as of September 26,
2008 and December 28, 2007, respectively. Accumulated
amortization of other intangible assets amounted to
$210 million and $143 million at September 26,
2008 and December 28, 2007, respectively.
Amortization expense for the three and nine months ended
September 26, 2008 was $20 million and
$73 million, respectively. Amortization expense for the
three and nine months ended September 28, 2007 was
$128 million and $171 million, respectively, which
included a $107 million write-off of identifiable
intangible assets related to First Franklin mortgage broker
relationships in the third quarter of 2007.
ML & Co. is the primary issuer of all of Merrill
Lynchs debt instruments. For local tax or regulatory
reasons, debt is also issued by certain subsidiaries.
The value of Merrill Lynchs debt instruments as recorded
on the Condensed Consolidated Balance Sheets does not
necessarily represent the amount that will be repaid at
maturity. This is due to the following:
|
|
|
|
|
Certain debt issuances are issued at a discount to their
redemption amount, which will accrete up to the redemption
amount as they approach maturity;
|
|
|
|
Certain debt issuances are accounted for at fair value and
incorporate changes in Merrill Lynchs creditworthiness as
well as other underlying risks (see Note 3);
|
|
|
|
Certain structured notes whose coupon or repayment terms are
linked to the performance of debt and equity securities,
indices, currencies or commodities will take into consideration
the fair value of those risks; and
|
|
|
|
Certain debt issuances are adjusted for the impact of the
application of fair value hedge accounting (see Note 1).
|
Total borrowings at September 26, 2008 and
December 28, 2007, which are comprised of short-term
borrowings, long-term borrowings and junior subordinated notes
(related to trust preferred securities), consisted of the
following:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Sept. 26,
|
|
Dec. 28,
|
|
|
2008
|
|
2007
|
|
|
Senior debt issued by ML & Co.
|
|
$
|
137,077
|
|
|
$
|
148,190
|
|
Senior debt issued by subsidiaries guaranteed by
ML & Co.
|
|
|
9,862
|
|
|
|
14,878
|
|
Senior structured notes issued by ML & Co.
|
|
|
38,130
|
|
|
|
45,133
|
|
Senior structured notes issued by subsidiaries
guaranteed by ML & Co.
|
|
|
30,883
|
|
|
|
31,401
|
|
Subordinated debt issued by ML & Co.
|
|
|
12,725
|
|
|
|
10,887
|
|
Junior subordinated notes (related to trust preferred securities)
|
|
|
5,202
|
|
|
|
5,154
|
|
Other subsidiary financing
non-recourse(1)
and/or not guaranteed by ML & Co.
|
|
|
24,342
|
|
|
|
35,398
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
258,221
|
|
|
$
|
291,041
|
|
|
|
53
|
|
|
(1) |
|
Other subsidiary
financing non-recourse is primarily attributable to
debt issued to third parties by consolidated entities that are
VIEs. Additional information regarding VIEs is provided in
Note 6 to the Condensed Consolidated Financial
Statements. |
Borrowings and deposits at September 26, 2008 and
December 28, 2007, are presented below:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Sept. 26,
|
|
Dec. 28,
|
|
|
2008
|
|
2007
|
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
4,423
|
|
|
$
|
12,908
|
|
Promissory notes
|
|
|
-
|
|
|
|
2,750
|
|
Secured short-term
borrowings(1)
|
|
|
13,809
|
|
|
|
4,851
|
|
Other unsecured short-term borrowings
|
|
|
7,461
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,693
|
|
|
$
|
24,914
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings(2)
|
|
|
|
|
|
|
|
|
Fixed-rate
obligations(3)
|
|
$
|
106,440
|
|
|
$
|
102,020
|
|
Variable-rate
obligations(4)(5)
|
|
|
119,254
|
|
|
|
156,743
|
|
Zero-coupon contingent convertible debt
(LYONs®
)
|
|
|
1,599
|
|
|
|
2,210
|
|
Other Zero-coupon obligations
|
|
|
33
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
227,326
|
|
|
$
|
260,973
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
70,022
|
|
|
$
|
76,634
|
|
Non U.S.
|
|
|
19,979
|
|
|
|
27,353
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,001
|
|
|
$
|
103,987
|
|
|
|
|
|
|
(1) |
|
Consisted primarily of
borrowings from Federal Home Loan Banks for both periods, and as
of September 26, 2008, also included borrowings under a
secured bank credit facility. |
(2) |
|
Excludes junior subordinated
notes (related to trust preferred securities). |
(3) |
|
Fixed-rate obligations are
generally swapped to floating rates. |
(4) |
|
Variable interest rates are
generally based on rates such as LIBOR, the U.S. Treasury Bill
Rate, or the Federal Funds Rate. |
(5) |
|
Included are various
equity-linked, credit-linked or other indexed
instruments. |
At September 26, 2008, long-term borrowings mature as
follows:
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Less than 1 year
|
|
$
|
62,647
|
|
|
|
28
|
%
|
|
|
1 - 2 years
|
|
|
32,218
|
|
|
|
14
|
|
|
|
2+ - 3 years
|
|
|
14,877
|
|
|
|
7
|
|
|
|
3+ - 4 years
|
|
|
26,679
|
|
|
|
12
|
|
|
|
4+ - 5 years
|
|
|
16,420
|
|
|
|
7
|
|
|
|
Greater than 5 years
|
|
|
74,485
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
227,326
|
|
|
|
100
|
%
|
|
|
|
|
Certain long-term borrowing agreements contain provisions
whereby the borrowings are redeemable at the option of the
holder (put options) at specified dates prior to
maturity. These borrowings are reflected in the above table as
maturing at their put dates, rather than their contractual
maturities. Management believes, however, that a portion of such
borrowings will remain outstanding beyond their earliest
redemption date.
A limited number of notes whose coupon or repayment terms are
linked to the performance of debt and equity securities,
indices, currencies or commodities maturities may be accelerated
based on the
54
value of a referenced index or security, in which case Merrill
Lynch may be required to immediately settle the obligation for
cash or other securities. These notes are included in the
portion of long-term debt maturing in less than a year.
Except for the $1.6 billion of aggregate principal amount
of floating rate zero-coupon contingently convertible liquid
yield option notes
(LYONs®
) that were outstanding at September 26, 2008, the
$4.0 billion credit facility described below, the
$7.5 billion secured short-term credit facility described
below and the $10 billion short-term unsecured credit
facility described in Note 18, senior and subordinated debt
obligations issued by ML & Co. and senior debt issued
by subsidiaries and guaranteed by ML & Co. do not
contain provisions that could, upon an adverse change in
ML & Co.s credit rating, financial ratios,
earnings, cash flows, or stock price, trigger a requirement for
an early payment, additional collateral support, changes in
terms, acceleration of maturity, or the creation of an
additional financial obligation.
On March 13, 2008, approximately $0.6 billion of
LYONs®
were submitted to Merrill Lynch for repurchase at an accreted
price of $1,089.05, resulting in no gain or loss to Merrill
Lynch. Following the repurchase, $1.6 billion of
LYONs®
remain outstanding. Merrill Lynch amended the terms of its
outstanding
LYONs®
in March 2008 to include the following:
|
|
|
|
|
An increase in the number of shares into which the
LYONs®
convert from 14.0915 shares to 16.5 shares; in August
2008, the conversion rate was adjusted to 16.6771 shares
due to the payment of quarterly cash dividends in excess of
$0.16 per share,
|
|
|
|
An extension of the call protection in the
LYONs®
, which would otherwise have terminated on March 13, 2008,
through March 13, 2014,
|
|
|
|
|
|
The inclusion of two additional dates, September 13, 2010
and March 13, 2014, on which investors can require Merrill
Lynch to repurchase the
LYONs®
.
|
The modified conversion price (and the accreted conversion
price) for
LYONs®
as of March 28, 2008 is $66. Shares will not be included in
diluted earnings per share until Merrill Lynchs share
price exceeds the accreted conversion price. All other features
of the
LYONs®
remain unchanged (see Note 9 of Merrill Lynchs 2007
Annual Report for further information). In accordance with EITF
Issue
No. 06-6,
Debtors Accounting for Modification (or Exchange) of
Convertible Debt Instruments, the change to the terms of Merrill
Lynchs outstanding
LYONs®
resulted in a debt extinguishment and a new issuance of
long-term borrowings in the first quarter of 2008. The amount of
the loss on the debt extinguishment was not material to Merrill
Lynchs Condensed Consolidated Statements of
(Loss)/Earnings.
The effective weighted-average interest rates for borrowings at
September 26, 2008 and December 28, 2007 (excluding
structured notes) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 26,
|
|
Dec. 28,
|
|
|
2008
|
|
2007
|
|
|
Short-term borrowings
|
|
|
3.07
|
%
|
|
|
4.64
|
%
|
Long-term borrowings
|
|
|
4.91
|
|
|
|
4.35
|
|
Junior subordinated notes (related to trust preferred securities)
|
|
|
6.82
|
|
|
|
6.91
|
|
|
|
See Note 9 of the 2007 Annual Report for additional
information on Borrowings.
55
Merrill Lynch also obtains standby letters of credit from
issuing banks to satisfy various counterparty collateral
requirements, in lieu of depositing cash or securities
collateral. Such standby letters of credit aggregated
$4.4 billion and $5.8 billion at September 26,
2008 and December 28, 2007, respectively.
Committed
Credit Facilities
Merrill Lynch maintains credit facilities that are available to
cover regular and contingent funding needs. Merrill Lynch
maintains a committed, three-year multi-currency, unsecured bank
credit facility that totaled $4.0 billion as of
September 26, 2008 and which expires in April 2010. Merrill
Lynch borrows regularly from this facility as an additional
funding source to conduct normal business activities. At both
September 26, 2008 and December 28, 2007, Merrill
Lynch had $1.0 billion of borrowings outstanding under this
facility. This facility requires Merrill Lynch to maintain a
minimum consolidated net worth, which it significantly exceeded.
Merrill Lynch also maintains two committed, secured credit
facilities which totaled $5.7 billion and
$6.5 billion, respectively, at September 26, 2008 and
December 28, 2007. One of these facilities matures in May
2009, and the other in December 2008. Both facilities include a
one-year term-out feature that allows ML & Co., at its
option, to extend borrowings under the facilities for an
additional year beyond their respective expiration dates. The
secured facilities permit borrowings by ML & Co. and
select subsidiaries, secured by a broad range of collateral. At
September 26, 2008 and December 28, 2007, Merrill
Lynch had no borrowings outstanding under either facility.
During June 2008, Merrill Lynch terminated the
$11.75 billion committed, secured credit facilities
previously maintained with two financial institutions. The
secured facilities were available if collateralized by
government obligations eligible for pledging. The facilities
were scheduled to expire at various dates through 2014, but
could be terminated earlier by either party under certain
circumstances. The decision to terminate the facilities was
based on changes in tax laws that adversely impacted the
economics of the facility structures. At December 28, 2007,
Merrill Lynch had no borrowings outstanding under the facilities.
In September 2008, Merrill Lynch established an additional
$7.5 billion bilateral secured credit facility with Bank of
America. This facility permits borrowings by Merrill Lynch and
select subsidiaries which can be collateralized by a variety of
assets, including corporate and commercial real estate loans.
The facility matures on the earlier of March 26, 2009 or
the completion or termination date of the pending acquisition of
Merrill Lynch by Bank of America. This facility requires Merrill
Lynch to maintain a minimum consolidated net worth, which it
significantly exceeded. As of September 26, 2008, there was
$3.0 billion outstanding under this facility.
Consistent with industry conventions, Merrill Lynch has
historically financed a portion of its financial assets through
short-term and secured funding. As a result of the prevailing
challenging conditions, many financial institutions, including
Merrill Lynch, have found it increasingly difficult to obtain
such financing on commercially reasonable terms. Any inability
of Merrill Lynch to obtain such financing on commercially
reasonable terms could adversely affect Merrill Lynchs
financial condition or results of operations.
Note 10. Stockholders Equity and
Earnings Per Share
Preferred
Stock Issuance
On April 29, 2008, Merrill Lynch issued $2.7 billion
of new perpetual 8.625% Non-Cumulative Preferred Stock,
Series 8.
56
Mandatory
Convertible Preferred Stock Issuance
On various dates in January and February 2008, Merrill Lynch
issued an aggregate of 66,000 shares of 9% Non-Voting
Mandatory Convertible Non-Cumulative Preferred Stock,
Series 1, par value $1.00 per share and liquidation
preference $100,000 per share, to several long-term investors at
a price of $100,000 per share (the Series 1
convertible preferred stock), for an aggregate purchase
price of approximately $6.6 billion. The Series 1
convertible preferred stock contained a reset feature, which
would have resulted in an adjustment to the conversion formula
in certain circumstances.
On July 28, 2008, holders of $4.9 billion of the
$6.6 billion of outstanding Series 1 convertible
preferred stock agreed to exchange their Series 1
convertible preferred stock for approximately 177 million
shares of common stock, plus $65 million in cash. Holders
of the remaining $1.7 billion of outstanding Series 1
convertible preferred stock agreed to exchange their preferred
stock for new mandatory convertible preferred stock described
below. Because all holders of Series 1 convertible
preferred stock exchanged their shares, the reset feature
associated with the Series 1 convertible preferred stock
has been eliminated. In connection with the exchange of the
Series 1 convertible preferred stock and in satisfaction of
its obligations under the reset provisions of the Series 1
convertible preferred stock, Merrill Lynch recorded additional
preferred dividends of $2.1 billion in the third quarter of
2008.
On July 28, 2008 Merrill Lynch issued an aggregate of
12,000 shares of newly issued 9% Non-Voting Mandatory
Convertible Non-Cumulative Preferred Stock, Series 2, par
value $1.00 per share and liquidation preference $100,000 per
share (the Series 2 convertible preferred
stock). On July 29, 2008 Merrill Lynch issued an
aggregate of 5,000 shares of newly issued 9% Non-Voting
Mandatory Convertible Non-Cumulative Preferred Stock,
Series 3, par value $1.00 per share and liquidation
preference $100,000 per share (the Series 3
convertible preferred stock and, together with the
Series 2 convertible preferred stock, the new
convertible preferred stock).
If not converted earlier, the new convertible preferred stock
will automatically convert into Merrill Lynch common stock on
October 15, 2010, based on the 20 consecutive trading day
volume weighted average price of Merrill Lynch common stock
ending the day immediately preceding the mandatory conversion
date (the current stock price). The number of shares
of Merrill Lynch common stock that a holder of the new
convertible preferred stock will receive upon conversion will be
determined based on the current stock price on the mandatory
conversion date relative to the respective minimum conversion
price and threshold appreciation price on the mandatory
conversion date.
If the current stock price at the mandatory conversion date is
less than the threshold appreciation price but greater than the
minimum conversion price, a holder will receive a variable
number of shares of common stock equal to the value of its
initial investment. The following table shows the number of
shares of common stock a holder will receive in other
circumstances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current stock price
|
|
Current stock price
|
|
|
|
|
|
|
is greater than or
|
|
is less than or
|
|
|
Initial minimum
|
|
Initial threshold
|
|
equal to initial threshold
|
|
equal to initial minimum
|
Series
|
|
conversion price
|
|
appreciation price
|
|
appreciation price
|
|
conversion price
|
|
|
Series 2
|
|
$
|
33.00
|
|
|
$
|
38.61
|
|
|
|
2,590 shares
|
|
|
|
3,030 shares
|
|
Series 3
|
|
$
|
22.50
|
|
|
$
|
26.33
|
|
|
|
3,798 shares
|
|
|
|
4,444 shares
|
|
|
|
The conversion rates described above are subject to certain
anti-dilution provisions. Holders of the new convertible
preferred stock may elect to convert anytime prior to
October 15, 2010 into the minimum number of shares
permitted under the conversion formula. In addition, Merrill
Lynch has the ability to accelerate conversion in the event that
the convertible preferred stock no longer qualifies as
Tier 1 capital for regulatory purposes. Upon an accelerated
conversion, a holder will receive the maximum
57
number of shares permitted under the conversion formula. In
addition, Merrill Lynch will pay to the holder of the new
convertible preferred stock an amount equal to the present value
of the remaining fixed dividend payments through and including
the original mandatory conversion date.
Dividends on the new convertible preferred stock, if and when
declared, are payable in cash on a quarterly basis in arrears on
February 28, May 28, August 28 and November 28 of each
year through the mandatory conversion date. Merrill Lynch may
not declare dividends on its common stock unless dividends have
been declared on the new convertible preferred stock.
The new convertible preferred stock is reported in Preferred
Stockholders Equity in the Condensed Consolidated Balance
Sheet.
Common
Stock Issuance
On December 24, 2007, Merrill Lynch reached agreements with
each of Temasek and Davis Selected Advisors LP
(Davis) to sell an aggregate of 116.7 million
shares of newly issued common stock, par value
$1.331/3
per share, at $48.00 per share, for an aggregate purchase price
of approximately $5.6 billion.
Davis purchased 25 million shares of Merrill Lynch common
stock on December 27, 2007 at a price per share of $48.00,
or an aggregate purchase price of $1.2 billion. Temasek
purchased 55 million shares on December 28, 2007 and
the remaining 36.7 million shares on January 11, 2008
for an aggregate purchase price of $4.4 billion. In
addition, Merrill Lynch granted Temasek an option to purchase an
additional 12.5 million shares of common stock under
certain circumstances. This option was exercised, with
2.8 million shares issued on February 1, 2008 and
9.7 million shares issued on February 5, 2008, in each
case at a purchase price of $48.00 per share for an aggregate
purchase price of $600 million.
In connection with the Temasek transaction, Merrill Lynch agreed
that if it were to sell any common stock (or equity securities
convertible into common stock) within one year of the closing of
the initial Temasek purchase at a purchase, conversion or
reference price per share less than $48.00, then it must make a
payment to Temasek to compensate Temasek for the aggregate
excess amount per share paid by Temasek, which is settled in
cash or common stock at Merrill Lynchs option.
On July 28, 2008, Merrill Lynch announced a public offering
of 437 million shares of common stock (including the
exercise of the over-allotment option) at a price of $22.50 per
share, for an aggregate amount of $9.8 billion. In
satisfaction of Merrill Lynchs obligations under the reset
provisions contained in the investment agreement with Temasek,
Merrill Lynch agreed to pay Temasek $2.5 billion, all of
which was invested in the offering at the public offering price
without any future reset protection. On August 1, 2008,
Merrill Lynch issued 368,273,954 shares of common stock as
part of the offering. On September 26, 2008 an additional
68,726,046 shares of common stock were issued to Temasek
after receipt of the requisite regulatory approvals. In total,
Temasek received $3.4 billion of common stock in the
offering. The $2.5 billion payment to Temasek was recorded
as an expense in the Condensed Consolidated Statement of
(Loss)/Earnings during the third quarter of 2008.
58
Earnings
Per Share
Basic EPS is calculated by dividing earnings applicable to
common stockholders by the weighted-average number of common
shares outstanding. Diluted EPS is similar to basic EPS, but
adjusts for the effect of the potential issuance of common
shares. The following table presents the computations of basic
and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
Sept. 26,
|
|
Sept. 28,
|
|
Sept. 26,
|
|
Sept. 28,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Net (loss)/earnings from continuing operations
|
|
$
|
(5,120
|
)
|
|
$
|
(2,380
|
)
|
|
$
|
(11,723
|
)
|
|
$
|
1,660
|
|
Net (loss)/earnings from discontinued operations
|
|
|
(32
|
)
|
|
|
139
|
|
|
|
(45
|
)
|
|
|
396
|
|
Preferred stock dividends
|
|
|
(2,319
|
)
|
|
|
(73
|
)
|
|
|
(2,730
|
)
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings applicable to common
stockholders for basic and diluted
EPS(1)
|
|
$
|
(7,471
|
)
|
|
$
|
(2,314
|
)
|
|
$
|
(14,498
|
)
|
|
$
|
1,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic shares
outstanding(2)
|
|
|
1,338,963
|
|
|
|
821,565
|
|
|
|
1,098,630
|
|
|
|
832,222
|
|
Effect of dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock
options(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,764
|
|
FACAAP
shares(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,552
|
|
Restricted shares and
units(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,524
|
|
Convertible
LYONs®
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,213
|
|
ESPP
shares(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Shares(5)(6)(7)
|
|
|
1,338,963
|
|
|
|
821,565
|
|
|
|
1,098,630
|
|
|
|
916,286
|
|
|
|
Basic EPS from continuing operations
|
|
$
|
(5.56
|
)
|
|
$
|
(2.99
|
)
|
|
$
|
(13.16
|
)
|
|
$
|
1.75
|
|
Basic EPS from discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.17
|
|
|
|
(0.04
|
)
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
(5.58
|
)
|
|
$
|
(2.82
|
)
|
|
$
|
(13.20
|
)
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS from continuing operations
|
|
$
|
(5.56
|
)
|
|
$
|
(2.99
|
)
|
|
$
|
(13.16
|
)
|
|
$
|
1.60
|
|
Diluted EPS from discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.17
|
|
|
|
(0.04
|
)
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
(5.58
|
)
|
|
$
|
(2.82
|
)
|
|
$
|
(13.20
|
)
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at period end
|
|
|
1,600,100
|
|
|
|
855,375
|
|
|
|
1,600,100
|
|
|
|
855,375
|
|
|
|
|
|
|
(1) |
|
Due to the net loss for the
three and nine months ended September 26, 2008, inclusion
of the incremental shares on the Mandatory Convertible Preferred
Stock would be antidilutive and have not been included as part
of the Diluted EPS calculation. See Mandatory Convertible
Preferred Stock Issuance section above for additional
information. |
(2) |
|
Includes shares exchangeable
into common stock. |
(3) |
|
See Note 13 of the 2007
Annual Report for a description of these instruments. |
(4) |
|
See Note 9 to the
Condensed Consolidated Financial Statements and Note 9 of
the 2007 Annual Report for additional information on
LYONs®
. |
(5) |
|
Due to the net loss for the
three months ended September 28, 2007, the Diluted EPS
calculation excludes 112 million of employee stock options,
37 million of FACAAP shares, 43 million of restricted
shares and units, and 183 thousand of ESPP shares, as they were
antidilutive. |
(6) |
|
Excludes 10 million of
instruments for the nine month period ended September 28,
2007, that were considered antidilutive and thus were not
included in the above calculations. |
(7) |
|
Due to the net loss for the
three and nine months ended September 26, 2008, the Diluted
EPS calculation excludes 304 million of non-employee stock
options,
59 million of
incremental shares related to the mandatory convertible
preferred stock, 124 million of employee stock options,
40 million of FACAAP shares, 42 million of restricted
shares and units, and 457 thousand of ESPP shares, as they were
antidilutive.
|
59
Note 11. Commitments, Contingencies and
Guarantees
Litigation
Merrill Lynch has been named as a defendant in various legal
actions, including arbitrations, class actions, and other
litigation arising in connection with its activities as a global
diversified financial services institution.
Some of the legal actions include claims for substantial
compensatory
and/or
punitive damages or claims for indeterminate amounts of damages.
In some cases, the issuers that would otherwise be the primary
defendants in such cases are bankrupt or otherwise in financial
distress. Merrill Lynch is also involved in investigations
and/or
proceedings by governmental and self-regulatory agencies.
Merrill Lynch believes it has strong defenses to, and where
appropriate, will vigorously contest many of these matters.
Given the number of these matters, some are likely to result in
adverse judgments, penalties, injunctions, fines, or other
relief. Merrill Lynch may explore potential settlements before a
case is taken through trial because of the uncertainty, risks,
and costs inherent in the litigation process. In accordance with
SFAS No. 5, Accounting for Contingencies,
Merrill Lynch will accrue a liability when it is probable of
being incurred and the amount of the loss can be reasonably
estimated. In many lawsuits and arbitrations, including almost
all of the class action lawsuits, it is not possible to
determine whether a liability has been incurred or to estimate
the ultimate or minimum amount of that liability until the case
is close to resolution, in which case no accrual is made until
that time. In view of the inherent difficulty of predicting the
outcome of such matters, particularly in cases in which
claimants seek substantial or indeterminate damages, Merrill
Lynch cannot predict or estimate what the eventual loss or range
of loss related to such matters will be. Merrill Lynch continues
to assess these cases and believes, based on information
available to it, that the resolution of these matters will not
have a material adverse effect on the financial condition of
Merrill Lynch as set forth in the Condensed Consolidated
Financial Statements, but may be material to Merrill
Lynchs operating results or cash flows for any particular
period and may impact ML & Co.s credit ratings.
Commitments
At September 26, 2008, Merrill Lynchs commitments had
the following expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Commitment expiration
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
Total
|
|
1 year
|
|
1 - 3 years
|
|
3+- 5 years
|
|
Over 5 years
|
|
|
Commitments to extend credit
|
|
$
|
56,298
|
|
|
$
|
18,056
|
|
|
$
|
13,397
|
|
|
$
|
18,639
|
|
|
$
|
6,206
|
|
Purchasing and other commitments
|
|
|
8,768
|
|
|
|
3,692
|
|
|
|
1,224
|
|
|
|
1,250
|
|
|
|
2,602
|
|
Operating leases
|
|
|
3,831
|
|
|
|
653
|
|
|
|
1,213
|
|
|
|
955
|
|
|
|
1,010
|
|
Commitments to enter into forward dated resale and securities
borrowing agreements
|
|
|
60,095
|
|
|
|
59,609
|
|
|
|
486
|
|
|
|
-
|
|
|
|
-
|
|
Commitments to enter into forward dated repurchase and
securities lending agreements
|
|
|
48,014
|
|
|
|
47,941
|
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
Commitments
to Extend Credit
Merrill Lynch primarily enters into commitments to extend
credit, predominantly at variable interest rates, in connection
with corporate finance, corporate and institutional transactions
and asset-based lending transactions. Clients may also be
extended loans or lines of credit collateralized by first and
second mortgages on real estate, certain liquid assets of small
businesses, or securities. These commitments usually have a
fixed expiration date and are contingent on certain contractual
conditions that may require payment of a fee by the
counterparty. Once commitments are drawn upon, Merrill Lynch may
require the counterparty to post collateral depending upon
creditworthiness and general market conditions. See Note 7
for additional information.
The contractual amounts of these commitments represent the
amounts at risk should the contract be fully drawn upon, the
client defaults, and the value of the existing collateral
becomes worthless. The total amount of outstanding commitments
may not represent future cash requirements, as commitments may
expire without being drawn upon.
For lending commitments where the loan will be classified as
held for sale upon funding, liabilities associated with unfunded
commitments are calculated at the lower of cost or fair value,
capturing declines in the fair value of the respective credit
risk. For loan commitments where the loan will be classified as
held for investment upon funding, liabilities are calculated
considering both market and historical loss rates. Loan
commitments held by entities that apply broker-dealer industry
level accounting are accounted for at fair value.
Purchasing
and Other Commitments
In the normal course of business, Merrill Lynch enters into
institutional and margin-lending transactions, some of which are
on a committed basis, but most of which are not. Margin lending
on a committed basis only includes amounts where Merrill Lynch
has a binding commitment. There were no binding margin lending
commitments outstanding at September 26, 2008 and
$693 million at December 28, 2007.
Merrill Lynch had commitments to purchase partnership interests,
primarily related to private equity and principal investing
activities, of $1.7 billion and $3.1 billion at
September 26, 2008 and December 28, 2007,
respectively. Merrill Lynch also has entered into agreements
with providers of market data, communications, systems
consulting, and other office-related services, including
Bloomberg Inc. At September 26, 2008 and December 28,
2007, minimum fee commitments over the remaining life of these
agreements totaled $2.3 billion and $453 million,
respectively. This increase in commitments primarily relates to
agreements entered into with Bloomberg Inc. Merrill Lynch
entered into commitments to purchase loans of $4.1 billion
(which upon settlement of the commitment will be included in
trading assets, loans held for investment or loans held for
sale) at September 26, 2008. Such commitments totaled
$3.0 billion at December 28, 2007. Other purchasing
commitments amounted to $0.7 billion and $0.9 billion
at September 26, 2008 and December 28, 2007,
respectively.
In the normal course of business, Merrill Lynch enters into
commitments for underwriting transactions. Settlement of these
transactions as of September 26, 2008 would not have a
material effect on the consolidated financial condition of
Merrill Lynch.
In connection with trading activities, Merrill Lynch enters into
commitments to enter into resale and securities borrowing and
also repurchase and securities lending agreements that are
primarily secured by collateral.
61
Operating
Leases
Merrill Lynch has entered into various non-cancelable long-term
lease agreements for premises that expire through 2024. Merrill
Lynch has also entered into various non-cancelable short-term
lease agreements, which are primarily commitments of less than
one year under equipment leases.
Guarantees
Merrill Lynch issues various guarantees to counterparties in
connection with certain leasing, securitization and other
transactions. In addition, Merrill Lynch enters into certain
derivative contracts that meet the accounting definition of a
guarantee under FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indebtedness of Others
(FIN 45). FIN 45 defines guarantees to
include derivative contracts that contingently require a
guarantor to make payment to a guaranteed party based on changes
in an underlying (such as changes in the value of interest
rates, security prices, currency rates, commodity prices,
indices, etc.), that relate to an asset, liability or equity
security of a guaranteed party. Derivatives that meet the
FIN 45 definition of guarantees include certain written
options and credit default swaps (contracts that require Merrill
Lynch to pay the counterparty the par value of a referenced
security if that referenced security defaults). Merrill Lynch
does not track, for accounting purposes, whether its clients
enter into these derivative contracts for speculative or hedging
purposes. Accordingly, Merrill Lynch has disclosed information
about all credit default swaps and certain types of written
options that can potentially be used by clients to protect
against changes in an underlying, regardless of how the
contracts are used by the client. These guarantees and their
maturity at September 26, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Payout /
|
|
Less than
|
|
|
|
|
|
Over
|
|
Carrying
|
|
|
Notional
|
|
1 year
|
|
1 - 3 years
|
|
3+- 5 years
|
|
5 years
|
|
Value
|
|
|
Derivative contracts
|
|
$
|
3,777,375
|
|
|
$
|
486,039
|
|
|
$
|
991,776
|
|
|
$
|
1,368,410
|
|
|
$
|
931,150
|
|
|
$
|
235,974
|
|
Standby liquidity facilities
|
|
|
13,328
|
|
|
|
9,813
|
|
|
|
-
|
|
|
|
3,494
|
|
|
|
21
|
|
|
|
348
|
|
Residual value guarantees
|
|
|
844
|
|
|
|
104
|
|
|
|
323
|
|
|
|
303
|
|
|
|
114
|
|
|
|
10
|
|
Standby letters of credit and other guarantees
|
|
|
43,290
|
|
|
|
1,510
|
|
|
|
1,620
|
|
|
|
810
|
|
|
|
39,350
|
|
|
|
626
|
|
Auction rate security guarantees
|
|
|
9,970
|
|
|
|
9,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300
|
|
|
|
Derivative
Contracts
For certain derivative contracts, such as written interest rate
caps and written currency options, the maximum payout could
theoretically be unlimited, because, for example, the rise in
interest rates or changes in foreign exchange rates could
theoretically be unlimited. In addition, Merrill Lynch does not
monitor its exposure to derivatives based on the theoretical
maximum payout because that measure does not take into
consideration the probability of the occurrence. As such, rather
than including the maximum payout, the notional value of these
contracts has been included to provide information about the
magnitude of involvement with these types of contracts. However,
it should be noted that the notional value is not a reliable
indicator of Merrill Lynchs exposure to these contracts.
Merrill Lynch records all derivative transactions at fair value
on its Condensed Consolidated Balance Sheets. As previously
noted, Merrill Lynch does not monitor its exposure to derivative
contracts in terms of maximum payout. Instead, a risk framework
is used to define risk tolerances and establish limits to help
to ensure that certain risk-related losses occur within
acceptable, predefined limits. Merrill Lynch economically hedges
its exposure to these contracts by entering into a variety of
offsetting derivative contracts and security positions. See the
Derivatives section of Note 1 for further
62
discussion of risk management of derivatives. Merrill Lynch also
funds selected assets, including CDOs and CLOs, via derivative
contracts with third party structures, the majority of which are
not consolidated on its balance sheet. Of the total notional
amount of these total return swaps, approximately
$9 billion is term financed through facilities provided by
commercial banks, $19 billion of long term funding is
provided by third party special purpose vehicles and
$1 billion is financed with asset backed commercial paper
conduits. In certain circumstances, Merrill Lynch may be
required to purchase these assets, which would not result in
additional gain or loss to the Company as such exposure is
already reflected in the fair value of the derivative contracts.
Standby
Liquidity Facilities
Merrill Lynch acts as liquidity provider to certain municipal
bond securitization SPEs and provides both liquidity and credit
default protection through derivatives (included in Derivative
contracts in the table above) to certain other municipal bond
securitization SPEs. As of September 26, 2008, the value of
the assets held by the SPEs plus any additional collateral
pledged to Merrill Lynch exceeded the amount of beneficial
interests issued, which provides additional support to Merrill
Lynch in the event that the standby facilities are drawn. In
certain of these facilities, Merrill Lynch is generally required
to provide liquidity support within seven days, while the
remainder have third-party liquidity support for between 30 and
364 days before Merrill Lynch is required to provide
liquidity. A significant portion of the facilities where Merrill
Lynch is required to provide liquidity support within seven days
are net liquidity facilities where upon draw Merrill
Lynch may direct the trustee for the SPE to collapse the SPE
trusts and liquidate the municipal bonds, and Merrill Lynch
would only be required to fund any difference between par and
the sale price of the bonds. Gross liquidity
facilities require Merrill Lynch to wait up to 30 days
before directing the trustee to liquidate the municipal bonds.
Beginning in the second half of 2007, Merrill Lynch began
reducing facilities that require liquidity in seven days, and
the total amount of such facilities was $7.2 billion as of
September 26, 2008. Details of these facilities as of
September 26, 2008, are illustrated in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Merrill Lynch Liquidity
Facilities Can Be Drawn:
|
|
Municipal Bonds to Which
|
|
|
In 7 Days with
|
|
In 7 Days with
|
|
After Up to
|
|
|
|
Merrill Lynch Has Recourse
|
|
|
Net Liquidity
|
|
Gross Liquidity
|
|
364 Days(1)
|
|
Total
|
|
if Facilities Are Drawn
|
|
|
Merrill Lynch provides standby liquidity facilities
|
|
$
|
5,016
|
|
|
$
|
2,181
|
|
|
$
|
5,717
|
|
|
$
|
12,914
|
|
|
$
|
13,327
|
|
|
|
|
|
|
(1) |
|
Initial liquidity support
within 7 days is provided by third parties for a maximum of
364 days. |
In addition, Merrill Lynch, through a U.S. bank subsidiary
has provided liquidity and credit facilities to three Conduits.
The assets in these Conduits included loans and asset-backed
securities. In the event of a disruption in the commercial paper
market, the Conduits were able to draw upon their liquidity
facilities and sell certain assets held by the respective
Conduits to Merrill Lynch, thereby protecting commercial paper
holders against certain changes in the fair value of the assets
held by the Conduits. The credit facilities protected commercial
paper investors against credit losses for up to a certain
percentage of the portfolio of assets held by the respective
Conduits. In July 2008, the last remaining Conduit became
inactive as Merrill Lynch purchased the assets. Merrill Lynch
does not intend to utilize these Conduits in the future.
Refer to Note 6 to the Condensed Consolidated Financial
Statements for more information on Conduits.
63
Residual
Value Guarantees
Residual value guarantees include amounts associated with the
Hopewell, NJ campus and aircraft leases of $322 million at
September 26, 2008.
Stand-by
Letters of Credit and Other Guarantees
Merrill Lynch provides guarantees to counterparties in the form
of standby letters of credit in the amount of $2.6 billion.
At September 26, 2008, Merrill Lynch held marketable
securities of $462 million as collateral to secure these
guarantees and a liability of $10 million was recorded on
the Condensed Consolidated Balance Sheets.
Further, in conjunction with certain principal-protected mutual
funds, Merrill Lynch guarantees the return of the initial
principal investment at the termination date of the fund. At
September 26, 2008, Merrill Lynchs maximum potential
exposure to loss with respect to these guarantees is
$328 million assuming that the funds are invested
exclusively in other general investments (i.e., the funds hold
no risk-free assets), and that those other general investments
suffer a total loss. As such, this measure significantly
overstates Merrill Lynchs exposure or expected loss at
September 26, 2008. These transactions met the
SFAS No. 133 definition of derivatives and, as such,
were carried as a liability with a fair value of approximately
$6 million at September 26, 2008.
Merrill Lynch also provides indemnifications related to the
U.S. tax treatment of certain foreign tax planning
transactions. The maximum exposure to loss associated with these
transactions at September 26, 2008 is $167 million;
however, Merrill Lynch believes that the likelihood of loss with
respect to these arrangements is remote, and therefore has not
recorded any liabilities in respect of these guarantees.
In connection with residential mortgage loan and other
securitization transactions, Merrill Lynch typically makes
representations and warranties about the underlying assets. If
there is a material breach of any such representation or
warranty, Merrill Lynch may have an obligation to repurchase
assets or indemnify the purchaser against any loss. For
residential mortgage loan and other securitizations, the maximum
potential amount that could be required to be repurchased is the
current outstanding asset balance. Specifically related to First
Franklin activities, there is currently approximately
$39 billion (including loans serviced by others) of
outstanding loans that First Franklin sold in various asset
sales and securitization transactions where management believes
we may have an obligation to repurchase the asset or indemnify
the purchaser against the loss if claims are made and it is
ultimately determined that there has been a material breach
related to such loans. Merrill Lynch has recognized a repurchase
reserve liability of approximately $560 million at
September 26, 2008 arising from these First Franklin
residential mortgage sales and securitization transactions.
Auction
Rate Security Guarantees
Under the terms of its announced purchase program, as augmented
by the global agreement reached with the New York Attorney
General, the Securities and Exchange Commission, the
Massachusetts Securities Division and other state securities
regulators, Merrill Lynch agreed to purchase at par auction rate
securities, or ARS, from its retail clients, including
individual, not-for-profit, and small business clients. Certain
retail clients with less than $4 million in assets with
Merrill Lynch as of February 13, 2008 were eligible to sell
eligible ARS to Merrill Lynch starting on October 1, 2008.
Other eligible retail clients meeting specified asset
requirements may sell eligible ARS to Merrill Lynch beginning on
January 2, 2009. The final date of the ARS purchase program
is January 15, 2010. Under the ARS purchase program, the
eligible ARS held in accounts of eligible retail clients at
Merrill
64
Lynch as of September 26, 2008 was $10.0 billion. As
of October 31, 2008 Merrill Lynch had purchased
$2.75 billion of ARS from eligible clients. In addition,
under the ARS purchase program, Merrill Lynch has agreed to
purchase ARS from retail clients who purchased their securities
from the Company and transferred their accounts to other brokers
prior to February 13, 2008. At September 26, 2008, a
liability of $300 million has been recorded for the
Companys estimated exposure related to these ARS
commitments.
See Note 11 of the 2007 Annual Report for additional
information on guarantees.
Note 12. Employee Benefit Plans
Merrill Lynch provides pension and other postretirement benefits
to its employees worldwide through defined contribution pension,
defined benefit pension, and other postretirement plans. These
plans vary based on the country and local practices. Merrill
Lynch reserves the right to amend or terminate these plans at
any time. Refer to Note 12 of the 2007 Annual Report for a
complete discussion of employee benefit plans.
Defined
Benefit Pension Plans
Pension cost for the three and nine months ended
September 26, 2008 and September 28, 2007, for Merrill
Lynchs defined benefit pension plans, included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Three Months Ended
|
|
|
September 26, 2008
|
|
September 28, 2007
|
|
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
|
|
|
Plans
|
|
Plans
|
|
Total
|
|
Plans
|
|
Plans
|
|
Total
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
-
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Interest cost
|
|
|
24
|
|
|
|
21
|
|
|
|
45
|
|
|
|
24
|
|
|
|
20
|
|
|
|
44
|
|
Expected return on plan assets
|
|
|
(29
|
)
|
|
|
(21
|
)
|
|
|
(50
|
)
|
|
|
(29
|
)
|
|
|
(21
|
)
|
|
|
(50
|
)
|
Amortization of net (gains)/losses, prior service costs and other
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension cost
|
|
$
|
(5
|
)
|
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
(6
|
)
|
|
$
|
13
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Nine Months Ended
|
|
|
September 26, 2008
|
|
September 28, 2007
|
|
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
|
|
|
Plans
|
|
Plans
|
|
Total
|
|
Plans
|
|
Plans
|
|
Total
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
21
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
21
|
|
|
$
|
21
|
|
Interest cost
|
|
|
72
|
|
|
|
64
|
|
|
|
136
|
|
|
|
72
|
|
|
|
60
|
|
|
|
132
|
|
Expected return on plan assets
|
|
|
(88
|
)
|
|
|
(64
|
)
|
|
|
(152
|
)
|
|
|
(87
|
)
|
|
|
(60
|
)
|
|
|
(147
|
)
|
Amortization of net (gains)/losses, prior service costs and other
|
|
|
-
|
|
|
|
9
|
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
22
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension cost
|
|
$
|
(16
|
)
|
|
$
|
30
|
|
|
$
|
14
|
|
|
$
|
(18
|
)
|
|
$
|
43
|
|
|
$
|
25
|
|
|
|
Merrill Lynch disclosed in its 2007 Annual Report that it
expected to pay $1 million of benefit payments to
participants in the U.S. non-qualified pension plan and
Merrill Lynch expected to
65
contribute $11 million and $74 million respectively to
its U.S. and
non-U.S. defined
benefit pension plans in 2008. Merrill Lynch periodically
updates these estimates, and currently expects to contribute
$96 million to its U.S. defined benefit pension plan.
The increase in estimated contributions was primarily related to
market conditions and changes in the retiree population.
Postretirement
Benefits Other Than Pensions
Other postretirement benefit cost for the three and nine months
ended September 26, 2008 and September 28, 2007,
included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 26,
|
|
September 28,
|
|
September 26,
|
|
September 28,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
5
|
|
Interest cost
|
|
|
4
|
|
|
|
4
|
|
|
|
11
|
|
|
|
12
|
|
Amortization of net (gains)/losses, prior service costs and other
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(13
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other postretirement benefits cost
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
12
|
|
|
|
Approximately 86% of the postretirement benefit cost components
for the period relate to the U.S. postretirement plan.
Merrill Lynch is under examination by the Internal Revenue
Service (IRS) and other tax authorities in countries
including Japan and the U.K., and states in which Merrill Lynch
has significant business operations, such as New York. The tax
years under examination vary by jurisdiction. The IRS audit for
the year 2004 was completed in the second quarter of 2008 and
the statute of limitations for the year expired during the third
quarter of 2008. Adjustments were proposed for two issues which
Merrill Lynch will challenge. The issues involve eligibility for
the dividend received deduction and foreign tax credits with
respect to different transactions. These two issues have also
been raised in the ongoing IRS audits for the years 2005 and
2006, which may be completed during the next twelve months.
During the third quarter of 2008, Japan tax authorities
completed the audit of the fiscal tax years April 1, 2004
through March 31, 2007. An assessment was issued, which has
been paid, reflecting the Japanese tax authorities view
that certain income on which Merrill Lynch previously paid
income tax to other international jurisdictions, primarily the
U.S., should have been allocated to Japan. Similar to the Japan
tax assessment received in 2005, Merrill Lynch will utilize the
process of obtaining clarification from international
authorities (Competent Authority) on the appropriate allocation
of income among multiple jurisdictions to prevent double
taxation. The audits in the U.K. for the tax year 2005, and in
Germany for the tax years 2002 through 2006 were also completed
during the third quarter. The Canadian tax authorities have
commenced the audit of the tax years 2004 and 2005. New York
State and New York City audits are in progress for the years
2002 through 2006.
Depending on the outcomes of our multi-jurisdictional global
audits and the ongoing Competent Authority proceeding with
respect to the Japan assessments, it is reasonably possible our
unrecognized tax benefits may be reduced during the next twelve
months, either because our tax positions are sustained on audit
or we agree to settle certain issues. While it is reasonably
possible that a significant reduction in unrecognized tax
benefits may occur within twelve months of September 26,
2008,
66
quantification of an estimated range cannot be made at this time
due to the uncertainty of the potential outcomes.
At December 28, 2007, Merrill Lynch had a U.K. net
operating loss carryforward of approximately $13.5 billion.
The estimated U.K. net operating loss carryforward at the
end of the third quarter of 2008 increased to approximately
$28 billion primarily as a result of significant losses
related to certain FICC positions in 2008. The U.K. net
operating loss is denoted in British Pounds and the dollar
equivalent will fluctuate based on exchange rate movements. The
Company has entered into foreign exchange contracts to
economically hedge the currency exposure related to the deferred
tax asset associated with the net operating loss carryforward.
The loss has an unlimited carryforward period and a tax benefit
has been recognized for the deferred tax asset with no valuation
allowance.
|
|
Note 14. |
Regulatory Requirements
|
Effective January 1, 2005, Merrill Lynch became a
consolidated supervised entity (CSE) as defined by
the SEC. As a CSE, Merrill Lynch is subject to voluntary
group-wide supervision and examination by the SEC as well as to
minimum consolidated capital requirements. Although the SEC has
rescinded the CSE program we are still required to report under
the CSE standards.
Certain U.S. and
non-U.S. subsidiaries
are subject to various securities and banking regulations and
capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate.
These regulatory restrictions may impose regulatory capital
requirements and limit the amounts that these subsidiaries can
pay in dividends or advance to Merrill Lynch. Merrill
Lynchs principal regulated subsidiaries are discussed
below.
Securities
Regulation
As a registered broker-dealer, Merrill Lynch, Pierce,
Fenner & Smith Incorporated (MLPF&S)
is subject to the net capital requirements of
Rule 15c3-1
under the Securities Exchange Act of 1934 (the
Rule). Under the alternative method permitted by the Rule,
the minimum required net capital, as defined, shall be the
greater of 2% of aggregate debit items (ADI) arising
from customer transactions or $500 million in accordance
with Appendix E of the Rule. At September 26, 2008,
MLPF&Ss regulatory net capital of $4,705 million
was approximately 19.4% of ADI, and its regulatory net capital
in excess of the SEC minimum required was $4,172 million.
As a futures commission merchant, MLPF&S is also subject to
the capital requirements of the Commodity Futures Trading
Commission (CFTC), which requires that minimum net
capital should not be less than 8% of the total customer risk
margin requirement plus 4% of the total non-customer risk margin
requirement. MLPF&S regulatory net capital of
$4,705 million exceeded the CFTC minimum requirement of
$685 million by $4,020 million.
Merrill Lynch International (MLI), a U.K. regulated
investment firm, is subject to capital requirements of the
Financial Services Authority (FSA). Financial
resources, as defined, must exceed the total financial resources
requirement set by the FSA. At September 26, 2008,
MLIs financial resources were $17,721 million,
exceeding the minimum requirement by $3,332 million.
Merrill Lynch Government Securities Inc. (MLGSI), a
primary dealer in U.S. Government securities, is subject to
the capital adequacy requirements of the Government Securities
Act of 1986. This rule requires dealers to maintain liquid
capital in excess of market and credit risk, as defined, by 20%
(a 1.2-to-1 capital-to-risk standard). At September 26,
2008, MLGSIs liquid capital of $2,153 million was
67
237% of its total market and credit risk, and liquid capital in
excess of the minimum required was $1,063 million.
Merrill Lynch Japan Securities Co. Ltd. (MLJS), a
Japan-based regulated broker-dealer, is subject to capital
requirements of the Japanese Financial Services Agency
(JFSA). Net capital, as defined, must exceed 120% of
the total risk equivalents requirement of the JFSA. At
September 26, 2008, MLJSs net capital was
$1,452 million, exceeding the minimum requirement by
$914 million.
Banking
Regulation
Merrill Lynch Bank USA (MLBUSA) is a Utah-chartered
industrial bank, regulated by the Federal Deposit Insurance
Corporation (FDIC) and the State of Utah Department
of Financial Institutions (UTDFI). Merrill Lynch
Bank & Trust Co., FSB (MLBT-FSB) is a
full service thrift institution regulated by the Office of
Thrift Supervision (OTS), whose deposits are insured
by the FDIC. Both MLBUSA and MLBT-FSB are required to maintain
capital levels that at least equal minimum capital levels
specified in federal banking laws and regulations. Failure to
meet the minimum levels will result in certain mandatory, and
possibly additional discretionary, actions by the regulators
that, if undertaken, could have a direct material effect on the
banks. The following table illustrates the actual capital ratios
and capital amounts for MLBUSA and MLBT-FSB as of
September 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
MLBUSA
|
|
MLBT-FSB
|
|
|
|
|
|
|
|
Well
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
Actual
|
|
Actual
|
|
Actual
|
|
Actual
|
|
|
Minimum
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
Tier 1 leverage
|
|
|
5%
|
|
|
|
10.26%
|
|
|
$
|
5,940
|
|
|
|
7.95%
|
|
|
$
|
2,683
|
|
Tier 1 capital
|
|
|
6%
|
|
|
|
12.36%
|
|
|
|
5,940
|
|
|
|
10.93%
|
|
|
|
2,683
|
|
Total capital
|
|
|
10%
|
|
|
|
14.65%
|
|
|
|
7,043
|
|
|
|
11.41%
|
|
|
|
2,801
|
|
|
|
As a result of its ownership of MLBT-FSB, ML & Co. is
registered with the OTS as a savings and loan holding company
(SLHC) and is subject to regulation and examination
by the OTS as a SLHC. ML & Co. is classified as a
unitary SLHC, and will continue to be so classified as long as
it and MLBT-FSB continue to comply with certain conditions.
Unitary SLHCs are exempt from the material restrictions imposed
upon the activities of SLHCs that are not unitary SLHCs. SLHCs
other than unitary SLHCs are generally prohibited from engaging
in activities other than conducting business as a savings
association, managing or controlling savings associations,
providing services to subsidiaries or engaging in activities
permissible for bank holding companies. Should ML &
Co. fail to continue to qualify as a unitary SLHC, in order to
continue its present businesses that would not be permissible
for a SLHC, ML & Co. could be required to divest
control of MLBT-FSB.
Merrill Lynch International Bank Limited (MLIB), an
Ireland-based regulated bank, is subject to the capital
requirements of the Irish Financial Services Regulatory
Authority (IFSRA). MLIB is required to meet minimum
regulatory capital requirements under the European Union
(EU) banking law as implemented in Ireland by the
IFSRA. At September 26, 2008, MLIBs financial
resources were $12,069 million, exceeding the minimum
requirement by $2,418 million.
Note 15. Discontinued Operations
On August 13, 2007, Merrill Lynch announced a strategic
business relationship with AEGON in the areas of insurance and
investment products. As part of this relationship, Merrill Lynch
sold MLIG to AEGON for $1.3 billion in the fourth quarter
of 2007, which resulted in an after-tax gain of
68
$316 million. The gain, along with the financial results of
MLIG, have been reported within discontinued operations for all
periods presented and the assets and liabilities were not
considered material for separate presentation. Merrill Lynch
previously reported the results of MLIG in the GWM business
segment.
On December 24, 2007 Merrill Lynch announced that it had
reached an agreement with GE Capital to sell Merrill Lynch
Capital, a wholly-owned middle-market commercial finance
business. The sale included substantially all of Merrill Lynch
Capitals operations, including its commercial real estate
division and closed on February 4, 2008. Merrill Lynch has
included results of Merrill Lynch Capital within discontinued
operations for all periods presented and the assets and
liabilities were not considered material for separate
presentation. Merrill Lynch previously reported results of
Merrill Lynch Capital in the GMI business segment.
Net losses from discontinued operations for the three and nine
months ended September 26, 2008 were $32 million and
$45 million, respectively, compared with net earnings of
$139 million and $396 million for the three and nine
months ended September 28, 2007, respectively.
Certain financial information included in discontinued
operations on Merrill Lynchs Condensed Consolidated
Statements of (Loss)/Earnings is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
For the Three
|
|
For the Nine
|
|
|
Months Ended
|
|
Months Ended
|
|
|
|
|
|
Sept. 26,
|
|
Sept. 28,
|
|
Sept. 26,
|
|
Sept. 28,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Total revenues, net of interest expense
|
|
$
|
-
|
|
|
$
|
261
|
|
|
$
|
28
|
|
|
$
|
781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) / earnings before income taxes
|
|
|
(53
|
)
|
|
|
211
|
|
|
|
(110
|
)
|
|
|
602
|
|
Income tax (benefit) /expense
|
|
|
(21
|
)
|
|
|
72
|
|
|
|
(65
|
)
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) / earnings from discontinued operations
|
|
$
|
(32
|
)
|
|
$
|
139
|
|
|
$
|
(45
|
)
|
|
$
|
396
|
|
|
|
The following assets and liabilities related to discontinued
operations are recorded on Merrill Lynchs Condensed
Consolidated Balance Sheets as of September 26, 2008 and
December 28, 2007:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Sept. 26,
|
|
Dec. 28,
|
|
|
2008
|
|
2007
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
$
|
176
|
|
|
$
|
12,995
|
|
Other assets
|
|
|
13
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
189
|
|
|
$
|
13,327
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Other payables, including interest
|
|
|
-
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
489
|
|
|
|
As of September 26, 2008, a small portfolio of commercial
real estate loans related to the Merrill Lynch Capital portfolio
remain in discontinued operations as they were not part of the
GE Capital transaction. Merrill Lynch anticipates selling these
loans in the near future.
69
Note 16. Cash Flow Restatement
Subsequent to the issuance of the Companys Condensed
Consolidated Financial Statements for the quarter ended
September 28, 2007, the Company determined that its
previously issued Condensed Consolidated Statements of Cash
Flows for the nine months ended September 28, 2007
contained an error resulting from the reclassification of
certain cash flows from trading liabilities into derivative
financing transactions. This error resulted in an overstatement
of cash used for operating activities and a corresponding
overstatement of cash provided by financing activities for the
period described above.
This adjustment to the Condensed Consolidated Statements of Cash
Flows does not affect the Companys Condensed Consolidated
Statements of (Loss)/Earnings, Condensed Consolidated Balance
Sheets, and Condensed Consolidated Statements of Comprehensive
(Loss)/Income, or cash and cash equivalents. These adjustments
also do not affect the Companys compliance with any
financial covenants under its borrowing facilities.
A summary presentation of this cash flow restatement for the
nine months ended September 28, 2007 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
As Previously
Presented
|
|
Adjustments
|
|
As Restated
|
|
|
For the nine months ended Sept. 28,
2007(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities
|
|
$
|
5,096
|
|
|
$
|
22,853
|
|
|
$
|
27,949
|
|
Cash used for operating activities
|
|
|
(79,885
|
)
|
|
|
22,853
|
|
|
|
(57,032
|
)
|
Derivative financing transactions
|
|
|
22,849
|
|
|
|
(22,853
|
)
|
|
|
(4
|
)
|
Cash provided by financing activities
|
|
|
105,989
|
|
|
|
(22,853
|
)
|
|
|
83,136
|
|
|
|
|
|
|
(1) |
|
There was no change in cash and
cash equivalents for the period restated. |
In connection with its previously announced expense reduction
initiative, the Company recorded a pre-tax restructuring charge
of approximately $39 million ($25 million after-tax)
and $484 million ($315 million after-tax) for the
three and nine months ended September 26, 2008,
respectively. This charge was comprised of severance costs of
$37 million and $346 million for the three and nine
months ended September 26, 2008, respectively, and expenses
related to the accelerated amortization of previously granted
equity-based compensation awards of $2 million and
$138 million for the three and nine months ended
September 26, 2008, respectively. These charges were
recorded within the GMI and GWM operating segments. For GMI,
these expenses were $18 million and $329 million for
the three and nine months ended September 26, 2008,
respectively. For GWM these expenses were $21 million and
$155 million for the three and nine months ended
September 26, 2008, respectively.
At the end of the second quarter of 2008, the remaining
liability balance relating to severance costs was
$241 million. During the third quarter of 2008, the Company
recorded additional severance accruals and adjustments of
$32 million and made cash payments of $150 million,
resulting in a remaining liability balance of approximately
$123 million as of September 26, 2008, a majority of
which will be settled by the end of 2008. This liability is
recorded in other payables on the Condensed Consolidated Balance
Sheet at September 26, 2008.
70
|
|
Note 18. |
Subsequent Events
|
Emergency
Economic Stabilization Act of 2008
On October 3, 2008, President Bush signed into law the
Emergency Economic Stabilization Act of 2008 (the
EESA). Pursuant to the EESA, the United States
Department of the Treasury (the U.S. Treasury)
has the authority to, among other things, invest in financial
institutions and purchase mortgages, mortgage-backed securities
and certain other financial instruments from financial
institutions, in an aggregate up to $700 billion, for the
purpose of stabilizing and providing liquidity to the
U.S. financial markets. On October 14, 2008, the
U.S. Treasury announced a plan (the Capital Purchase
Program or CPP) to invest up to
$250 billion of this $700 billion in certain eligible
U.S. financial institutions in the form of non-voting,
preferred stock initially paying quarterly dividends at a 5%
annual rate. In the event the U.S. Treasury makes any such
preferred stock investment in any company it will also receive
10-year
warrants to acquire common shares of the company having an
aggregate market price of 15% of the amount of the preferred
stock investment.
On October 26, 2008, Merrill Lynch entered into a
securities purchase agreement with the U.S. Treasury
setting forth the terms upon which Merrill Lynch would issue a
new series of preferred stock and warrants to the
U.S. Treasury (the TARP Purchase Agreement). In
view of the pending merger agreement with Bank of America,
Merrill Lynch has determined that it will not sell securities to
the U.S. Treasury under the CPP at this time, but may do so
in the future under certain circumstances. The TARP Purchase
Agreement provides for delayed settlement of a sale of
$10 billion of a new series of Merrill Lynch preferred
stock and warrants to purchase 64,991,334 shares of Merrill
Lynch Common Stock at an exercise price of $23.08 per share. The
TARP Purchase Agreement provides that the closing will take
place on the earlier of (i) the second business day
following a termination of the merger agreement with Bank of
America and (ii) a date during the period beginning on
January 2, 2009 and ending on January 31, 2009 if the
merger agreement is still in effect but the merger has not been
completed by the specified date, but, in the case of either
(i) or (ii), in no event later than January 31, 2009.
In addition, prior to January 2, 2009, if the merger
agreement is still in effect but the merger has not been
completed, Merrill Lynch has the right, after consultation with
the Federal Reserve and Bank of America, to request that the
U.S. Treasury consummate the CPP investment on or prior to
January 1, 2009. The TARP Purchase Agreement will terminate
at 12:01 a.m. on February 1, 2009 if the investment
has not been made by that date.
Completion of the CPP investment prior to the termination of the
merger agreement is subject to Bank of Americas approval.
Bank of America has agreed that it will not unreasonably
withhold or delay its consent. After January 1, 2009, Bank
of America may not withhold its consent if, after consulting
with Bank of America, Merrill Lynch reasonably determines that
the failure to obtain the CPP investment would have a material
adverse impact on Merrill Lynch. On or after January 30,
2009 until 12:01 a.m. on February 1, 2009, Merrill
Lynch will have the unilateral right to obtain the CPP
investment and Bank of America has consented in advance to the
investment at such time if the merger has not been completed at
that date.
71
Additionally, in October 2008, the Federal Reserve announced the
creation of the Commercial Paper Funding Facility, which will
provide a liquidity backstop to U.S. issuers of commercial
paper through a special purpose vehicle that will purchase
three-month unsecured and asset-backed commercial paper directly
from eligible issuers. Merrill Lynch is eligible for the
Commercial Paper Funding Facility and began utilizing this
program in October 2008 as an additional source of funding.
Also, on October 14, 2008, the Federal Deposit Insurance
Corporation (FDIC) announced a new program, the
Temporary Liquidity Guarantee Program, under which specific
categories of newly issued senior unsecured debt issued by
eligible financial institutions on or before June 30, 2009
would be guaranteed until June 30, 2012. This program also
provides deposit insurance for funds in non-interest bearing
transaction deposit accounts at FDIC-insured institutions.
Merrill Lynch has agreed to participate in this FDIC program.
On October 29, 2008, Merrill Lynch entered into a
$10 billion committed unsecured bank revolving credit
facility with Bank of America, N.A. with borrowings guaranteed
under the FDICs guarantee program. This facility will be
available to Merrill Lynch until January 30, 2009 but may
expire at an earlier date if the merger with Bank of America is
terminated or consummated prior to January 30, 2009 or
Merrill Lynch elects to participate in the CPP. This facility
requires Merrill Lynch to maintain a minimum consolidated net
worth, which we significantly exceed. If Merrill Lynch
participates in the CPP, the proceeds received from the
U.S. Treasury will be used to repay in full any outstanding
amounts owed under this facility. For additional information on
our other credit facilities see Note 9.
72
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Merrill Lynch
& Co., Inc.:
We have reviewed the accompanying condensed consolidated balance
sheet of Merrill Lynch & Co., Inc. and subsidiaries
(Merrill Lynch) as of September 26, 2008, and
the related condensed consolidated statements of (loss)/earnings
and comprehensive (loss)/income for the three-month and
nine-month periods ended September 26, 2008 and
September 28, 2007, and the related condensed consolidated
statements of cash flows for the nine-month periods ended
September 26, 2008 and September 28, 2007. These
interim financial statements are the responsibility of Merrill
Lynchs management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to such condensed consolidated
interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1, Merrill Lynch entered into an
agreement and plan of merger with Bank of America Corporation on
September 15, 2008.
As discussed in Note 16, the condensed consolidated
statement of cash flows for the nine-month period ended
September 28, 2007 has been restated.
As discussed in Note 18, Merrill Lynch entered into a
securities purchase agreement with the U.S. Treasury
pursuant to the Emergency Economic Stabilization Act of 2008,
and is participating in the Federal Deposit Insurance
Corporations Temporary Liquidity Guarantee Program and the
Federal Reserves Commercial Paper Funding Facility.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of Merrill Lynch as of
December 28, 2007, and the related consolidated statements
of (loss)/earnings, changes in stockholders equity,
comprehensive (loss)/income and cash flows for the year then
ended (not presented herein); and in our report dated
February 25, 2008, we expressed an unqualified opinion on
those financial statements and included an explanatory paragraph
regarding the change in accounting method in 2007 relating to
the adoption of Statement of Financial Accounting Standards
No. 157, Fair Value Measurements,
Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB
Statement No. 115, and FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement
No. 109. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet
as of December 28, 2007 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
November 4, 2008
73