UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 26, 2008
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Commission file number: 1-7182
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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13-2740599
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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4 World Financial Center,
New York, New York
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10080
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(Address of principal executive offices)
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(Zip Code)
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(212) 449-1000
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Registrants telephone number, including area code:
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Trust Preferred Securities of Merrill Lynch Capital
Trust I (and the guarantees of the registrant with respect
thereto); Trust Preferred Securities of Merrill Lynch
Capital Trust II (and the guarantees of the registrant with
respect thereto); Trust Preferred Securities of Merrill
Lynch Capital Trust III (and the guarantees of the
registrant with respect thereto)
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New York Stock Exchange
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Convertible Securities Exchangeable into Pharmaceutical HOLDRs
due September 7, 2010
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NYSE Alternext US LLC
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See the full list of securities listed on the NYSE Arca and The
NASDAQ Stock Market on the pages directly following this cover.
Securities registered pursuant
to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
X YES NO
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.
YES X NO
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X YES NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form
10-K or any
amendment to this
Form 10-K. X
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated filer X
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
YES X NO
As of the close of business on June 27, 2008, the aggregate
market value of the voting stock, comprising the Common Stock
and the Exchangeable Shares, held by non-affiliates of the
Registrant was approximately $17.4 billion.
As of the close of business on February 20, 2009, there were
1,000 shares of Common Stock outstanding, all of which were
held by Bank of America Corporation.
The registrant is a wholly owned subsidiary of Bank of
America Corporation and meets the conditions set forth in
General Instructions I(1)(a) and (b) of
Form 10-K
and is therefore filing this Form with a reduced disclosure
format as permitted by Instruction I (2).
Securities
registered pursuant to Section 12(b) of the Act and listed
on the NYSE Arca are as follows:
Capped Leveraged Index Return
Notes®
Linked to the S&P
500®
Index due February 26, 2010; Accelerated Return Bear Market
Notes Linked to the S&P
500®
Index due October 30, 2009; Bear Market Strategic
Accelerated Redemption Securities Linked to the Dow Jones
U.S. Real Estate Index due March 2, 2010; Strategic
Accelerated Redemption Securities Linked to the Dow Jones
Industrial
AverageSM
due August 31, 2010; 9.25% Callable Stock Return Income
Debt
SecuritiesSM
due September 1, 2010 (payable on the maturity date with
Oracle Corporation common stock); Accelerated Return Bear Market
Notes Linked to the Russell
2000®
Index due November 25, 2009; Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P
500®
Index due October 5, 2010; Strategic Accelerated
Redemption SecuritiesSM
Linked to the
iShares®
MSCI
EAFE®
Index due October 5, 2010; 100% Principal Protected Range
Notes Linked to the S&P
500®
Index due October 6, 2009; Accelerated Return
NotesSM
Linked to the S&P
500®
Index due November 25, 2009; Capped Leverage Index Return
Notes®
Linked to the S&P
500®
Index due April 5, 2010; Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P
500®
Index due November 2, 2010; Accelerated Return Bear Market
Notes Linked to the S&P
500®
Index due January 21, 2010; Accelerated Return Notes Linked
to the S&P
500®
Index due January 21, 2010; Capped Leveraged Index Return
Notes®
Linked to the S&P
500®
Index due April 30, 2010; Bear Market Strategic Accelerated
Redemption SecuritiesSM
Linked to the SPDR S&P Retail Exchange Traded Fund due
May 4, 2010; 100% Principal Protected Bullish Range Notes
Linked to the S&P
500®
Index due November 9, 2009; Accelerated Return
NotesSM
Linked to the Consumer Staples Select Sector Index due
January 29, 2010; 100% Principal Protected Conditional
Participation Notes Linked to the S&P
500®
Index due December 2, 2009; Bear Market Strategic
Accelerated
Redemption SecuritiesSM
Linked to the
iShares®
Dow Jones U.S. Real Estate Index Fund due June 2,
2010; Capped Leveraged Index Return
Notes®
Linked to the S&P
500®
Index due May 28, 2010; Accelerated Return
NotesSM
Linked to the MSCI
EAFE®
Index due January 29, 2010; Accelerated Return
NotesSM
Linked to the S&P
500®
Index due January 29, 2010; Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P
500®
Index due December 1, 2010; Accelerated Return Bear Market
Notes Linked to the S&P
500®
Index due January 29, 2010; 12% Callable STock Return
Income DEbt
SecuritiesSM
Due September 4, 2009 (payable on the stated maturity date
with Apple Inc. common stock); STEP Income
SecuritiesSM
Due June 25, 2009 linked to the common stock of Apple Inc.;
Bear Market Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P Small Cap Regional Banks Index Due
February 2, 2010; Accelerated Return Bear Market Notes
Linked to the Russell
3000®
Index due October 2, 2009; Bear Market Strategic
Accelerated
Redemption SecuritiesSM
Linked to the Consumer Discretionary Select Sector Index Due
December 28, 2009; 9% Callable STock Return Income DEbt
SecuritiesSM
due March 5, 2009 (payable on the maturity date with Best
Buy Co., Inc. common stock); Capped Leveraged Index Return
Notes®
Linked to the MSCI Brazil
IndexSM
due January 20, 2010; Accelerated Return
NotesSM
Linked to the MSCI Brazil
IndexSM
Due May 5, 2009; 8% Monthly Income Strategic Return
Notes®
Linked to the CBOE DJIA BuyWrite Index due November 9,
2010; 8% Monthly Income Strategic Return
Notes®
Linked to the CBOE S&P
500®
BuyWrite Index due June 7, 2010; 10% Callable STock Return
Income DEbt
SecuritiesSM
Due March 6, 2009 (payable on the stated maturity date with
The Boeing Company common stock); 8% Monthly Income Strategic
Return
Notes®
Linked to the CBOE S&P
500®
BuyWrite Index due January 3, 2011; 11% Callable STock
Return Income DEbt
SecuritiesSM
Due April 28, 2009 (payable on the maturity date with Cisco
Systems, Inc. common stock); Strategic Accelerated
Redemption SecuritiesSM
Linked to the Dow Jones Industrial
AverageSM
due July 7, 2010; Strategic Accelerated
Redemption SecuritiesSM
Linked to the Dow Jones Industrial
AverageSM
Due April 2, 2010; Strategic Accelerated
Redemption SecuritiesSM
Linked to the Dow Jones EURO STOXX
50SM
Index Due November 9, 2009; STEP Income
SecuritiesSM
Due July 14, 2009 Linked to the common stock of
Freeport-McMoRan Copper & Gold Inc.; 9% Callable STock
Return Income DEbt
SecuritiesSM
Due March 1, 2010 (payable on the stated maturity date with
Google Inc. common stock); Bear Market Strategic Accelerated
Redemption SecuritiesSM
Linked to the PHLX Housing
SectorSM
Index due November 3, 2009; Strategic Return
Notes®
Linked to the Merrill Lynch Factor
ModelSM
due November 7, 2012; 11% Callable STock Return Income DEbt
SecuritiesSM
Due February 8, 2010 (payable on the stated maturity date
with The Home Depot, Inc. common stock); Accelerated Return
NotesSM
Linked to the Health Care Select Sector Index due June 2,
2009; Accelerated Return Bear Market Notes Linked to the Energy
Select Sector Index due June 29, 2009; Accelerated Return
Bear Market Notes Linked to the Energy Select Sector Index due
May 5, 2009; Strategic Return
Notes®
Linked to the Industrial 15 Index due August 9, 2010;
Accelerated Return
NotesSM
Linked to the MSCI
EAFE®
Index Due August 27, 2009; Callable Market Index
Target-Term
Securities®
due May 4, 2009 Linked to the S&P
500®
Index; Strategic Return
Notes®
Linked to the Baby Boomer Consumption Index due
September 6, 2011; Strategic Return
Notes®
Linked to the Industrial 15 Index due February 2, 2012; 9%
Callable STock Return Income DEbt
SecuritiesSM
Due December 4, 2009 (payable on the stated maturity date
with Exxon Mobil Corporation common stock); Capped Leveraged
Index Return
Notes®
Linked to the MSCI Emerging Markets
IndexSM
due January 29, 2010; Market Index Target-Term
Securities®
based upon the Dow Jones Industrial
AverageSM
due August 7, 2009; S&P
500®
Market Index Target-Term
Securities®
due September 4, 2009; Accelerated Return
NotesSM
Linked to the MSCI
EAFE®
Index due October 5, 2009; Dow Jones EURO STOXX
50SM
Index Market Index Target-Term
Securities®
due June 28, 2010; Strategic Return
Notes®
Linked to the Value 30 Index due July 6, 2011; S&P
500®
Market Index Target-Term
Securities®
due June 29, 2009; Nikkei 225 Market Index Target-Term
Securities®
due March 30, 2009; Nikkei 225 Market Index Target-Term
Securities®
due April 5, 2010; Strategic Return
Notes®
Linked to the Select Ten Index due March 8, 2012; Strategic
Return
Notes®
Linked to the Value 30 Index due August 8, 2011;
Accelerated Return
NotesSM
Linked to the MSCI
EAFE®
Index Due May 4, 2009; Strategic Return
Notes®
Linked to the Merrill Lynch Factor
ModelSM
due December 6, 2012; 12% Callable STock Return Income DEbt
SecuritiesSM
due March 26, 2010 (payable on the stated maturity date
with Monsanto Company common stock); STEP Income
SecuritiesSM
Due August 17, 2009 linked to the common stock of Monsanto
Company; Nikkei
225®
Market Index Target-Term
Securities®
due June 5, 2009; 50/100 Nikkei
225®
Index Notes due October 7, 2009; Accelerated Return
NotesSM
Linked to the S&P
500®
Index Due April 6, 2009; Accelerated Return
NotesSM
Linked to the
Nikkei 225®
Index Due June 26, 2009; STEP Income
SecuritiesSM
Due June 4, 2009 Linked to the common stock of Qualcomm
Incorporated; Strategic Accelerated
Redemption SecuritiesSM
Linked to the Russell
2000®
Index Due April 2, 2010; Capped Leveraged Index Return
Notes®
Linked to the Russell
2000®
Index due January 20, 2010; Capped Leveraged Index Return
Notes®
Linked to the Russell
2000®
Index Due October 30, 2009; Market Index Target-Term
Securities®
based upon the Russell
2000®
Index due March 30, 2009; Strategic Return
Notes®
Linked to the Select Ten Index due May 10, 2012; Strategic
Return
Notes®
Linked to the Select Ten Index due November 8, 2011;
Accelerated Return
NotesSM
Linked to the S&P
500®
Index due August 27, 2009; Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P
500®
Index due March 8, 2010; Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P
500®
Index due November 30, 2009; Strategic Return
Notes®
Linked to the Industrial 15 Index due August 3, 2009;
Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P
500®
Index Due May 4, 2010; 9% Callable STock Return Income DEbt
SecuritiesSM
Due September 24, 2009 (payable on the stated maturity date
with Caterpillar Inc. common stock); Strategic Accelerated
Redemption SecuritiesSM
Linked to the S&P
500®
Index Due August 3, 2010; Strategic Accelerated
Redemption SecuritiesSM
Linked to
ii
the S&P
500®
Index Due June 25, 2010; Strategic Return
Notes®
Linked to the Select 10 Index due July 5, 2012; Strategic
Return
Notes®
Linked to the Select Utility Index due February 25, 2009;
Strategic Return
Notes®
Linked to the Select Utility Index due September 28, 2009;
Accelerated Return
NotesSM
Linked to the PHLX Gold and Silver
SectorSM
Index Due June 2, 2009
Securities
registered pursuant to Section 12(b) of the Act and listed
on The NASDAQ Stock Market are as follows:
Strategic Return
Notes®
Linked to the Industrial 15 Index due April 25, 2011;
S&P
500®
Market Indexed Target-Term
Securities®
due June 7, 2010; Leveraged Index Return
Notes®
Linked to the Nikkei
225®
Index due March 2, 2009; S&P
500®
MITTS®
Securities due August 31, 2011; Strategic Return
Notes®
Linked to the Select Ten Index due June 4, 2009; 97%
Protected Notes Linked to Global Equity Basket due
February 14, 2012; Strategic Return
Notes®
Linked to the Industrial 15 Index due March 30, 2009;
Strategic Return
Notes®
Linked to the Select Ten Index due March 2, 2009; 97%
Protected Notes Linked to the performance of the Dow Jones
Industrial
AverageSM
due March 28, 2011; Dow Jones Industrial
AverageSM
MITTS®
Securities due December 27, 2010; Nikkei
225®
MITTS®
Securities due March 8, 2011; Nikkei
225®
MITTS®
Securities due September 30, 2010; S&P
500®
MITTS®
Securities due August 5, 2010; S&P
500®
MITTS®
Securities due June 3, 2010; Leveraged Index Return
Notes®
Linked to Dow Jones Industrial
AverageSM
due September 28, 2009
S&P 100 and S&P 500 are registered trademarks of
McGraw-Hill, Inc.; EAFE is a registered service mark of Morgan
Stanley Capital International Inc.; DOW JONES INDUSTRIAL AVERAGE
is a service mark of Dow Jones & Company, Inc.;
RUSSELL 1000, RUSSELL 2000 AND RUSSELL 3000 are registered
service marks of FRANK RUSSELL COMPANY; PHLX Gold and Silver
Sector, PHLX Housing Sector and PHLX Semiconductor Sector are
registered service marks of the Philadelphia Stock Exchange,
Inc.; STOXX and EURO STOXX 50 are registered service marks of
Stoxx Limited; NIKKEI is a registered trademark of KABUSHIKI
KAISHA NIHON KEIZAI SHIMBUN SHA. All other trademarks and
service marks are the property of Merrill Lynch & Co.,
Inc.
iii
ANNUAL
REPORT ON
FORM 10-K
FOR THE YEAR ENDED DECEMBER 26, 2008
TABLE OF CONTENTS
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Consolidated Financial Statements
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1
PART I
Merrill Lynch was formed in 1914 and became a publicly traded
company on June 23, 1971. In 1973, we created the holding
company, ML & Co., a Delaware corporation that,
through its subsidiaries, is one of the worlds leading
capital markets, advisory and wealth management companies with
offices in 40 countries and territories. In our Global Wealth
Management (GWM) business, we had total client
assets in GWM accounts of approximately $1.2 trillion at
December 26, 2008. As an investment bank, we are a leading
global trader and underwriter of securities and derivatives
across a broad range of asset classes, and we serve as a
strategic advisor to corporations, governments, institutions and
individuals worldwide. In addition, as of December 26,
2008, we owned approximately half of the economic interest of
BlackRock, Inc. (BlackRock), one of the worlds
largest publicly traded investment management companies with
approximately $1.3 trillion in assets under management at the
end of 2008.
On September 15, 2008, we entered into an Agreement and
Plan of Merger, as amended by Amendment No. 1 dated as of
October 21, 2008 (the Merger Agreement) with
Bank of America Corporation (Bank of America).
Pursuant to the Merger Agreement, on January 1, 2009, a
wholly-owned subsidiary of Bank of America (Merger
Sub) merged with and into ML & Co., with
ML & Co. continuing as the surviving corporation and a
subsidiary of Bank of America (the Merger).
Our activities are conducted through two business segments:
Global Markets and Investment Banking (GMI) and GWM.
In addition, we provide a variety of research services on a
global basis.
Global
Markets and Investment Banking
The Global Markets division consists of the Fixed Income,
Currencies and Commodities (FICC) and Equity Markets
sales and trading activities for investor clients and on a
proprietary basis, while the Investment Banking division
provides a wide range of origination and strategic advisory
services for issuer clients. Global Markets makes a market in
securities, derivatives, currencies, and other financial
instruments to satisfy client demands. In addition, Global
Markets engages in certain proprietary trading activities.
Global Markets is a leader in the global distribution of fixed
income, currency and energy commodity products and derivatives.
Global Markets also has one of the largest equity trading
operations in the world and is a leader in the origination and
distribution of equity and equity-related products. Further,
Global Markets provides clients with financing, securities
clearing, settlement, and custody services and also engages in
principal investing in a variety of asset classes and private
equity investing. The Investment Banking division raises capital
for its clients through underwritings and private placements of
equity, debt and related securities, and loan syndications.
Investment Banking also offers advisory services to clients on
strategic issues, valuation, mergers, acquisitions and
restructurings.
Global
Wealth Management
GWM, our full-service retail wealth management segment, provides
brokerage, investment advisory and financial planning services,
offering a broad range of both proprietary and third-party
wealth management products and services globally to individuals,
small- to mid-size businesses, and employee benefit plans. GWM
is comprised of Global Private Client (GPC) and
Global Investment Management (GIM).
GPC provides a full range of wealth management products and
services to assist clients in managing all aspects of their
financial profile through the Total
MerrillSM
platform. Total
MerrillSM
is the platform for GPCs core strategy offering investment
choices, brokerage, advice, planning
and/or
performance analysis to its clients. GPCs offerings
include commission and fee-based investment accounts; banking,
cash management, and credit services, including consumer and
small business lending and
Visa®
cards; trust and generational planning; retirement services; and
insurance products.
3
GPC services individuals and small- and middle-market
corporations and institutions through approximately 16,090
financial advisors as of December 26, 2008.
GIM includes our interests in creating and managing wealth
management products, including alternative investment products
for clients. GIM also includes our share of net earnings from
our ownership positions in other investment management
companies, including BlackRock.
Global
Research
We also provide a variety of research services on a global
basis. These services are at the core of the value proposition
we offer to institutional and individual investor clients and
are an integral component of the product offerings to GMI and
GWM. This group distributes research focusing on three main
disciplines globally: fundamental equity research, credit
research and macro research. We rank among the leading research
providers in the industry, and our analysts cover approximately
3,000 companies in equity research and 800 global bond
issuers.
Regulation
Certain aspects of our business, and the business of our
competitors and the financial services industry in general, are
subject to stringent regulation by U.S. federal and state
regulatory agencies and securities exchanges and by various
non-U.S. government
agencies or regulatory bodies, securities exchanges,
self-regulatory organizations, and central banks, each of which
has been charged with the protection of the financial markets
and the interests of those participating in those markets.
United
States Regulatory Oversight and Supervision
Holding
Company Supervision
Prior to our acquisition by Bank of America, we were a
consolidated supervised entity subject to group-wide supervision
by the SEC and capital requirements generally consistent with
the standards of the Basel Committee on Banking Supervision. As
such, we computed allowable capital and risk allowances
consistent with Basel II capital standards; permitted the
SEC to examine the books and records of ML & Co. and
any affiliate that did not have a principal regulator; and had
various additional SEC reporting, record-keeping, and
notification requirements.
As a wholly-owned subsidiary of Bank of America, a bank holding
company that is also a financial holding company, we are subject
to the oversight of, and inspection by, the Board of Governors
of the Federal Reserve System (the Federal Reserve
Board or FRB).
Broker-Dealer
Regulation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
(MLPF&S), Merrill Lynch Professional Clearing
Corp. (ML Pro) and certain other subsidiaries of
ML & Co. are registered as broker-dealers with the SEC
and, as such, are subject to regulation by the SEC and by
self-regulatory organizations, such as the Financial Industry
Regulatory Authority (FINRA). Certain Merrill Lynch
subsidiaries and affiliates, including MLPF&S, are
registered as investment advisers with the SEC.
The Merrill Lynch entities that are broker-dealers registered
with the SEC are subject to
Rule 15c3-1
under the Securities Exchange Act of 1934 (Exchange
Act) which is designed to measure the general financial
condition and liquidity of a broker-dealer. Under this rule,
these entities are required to maintain the minimum net capital
deemed necessary to meet broker-dealers continuing
commitments to customers and others. Under certain
circumstances, this rule limits the ability of such
broker-dealers to allow withdrawal of such capital by
ML & Co. or other Merrill Lynch subsidiaries.
Additional information regarding certain net capital
requirements is set forth in Note 15 to the Consolidated
Financial Statements.
4
Non-U.S.
Regulatory Oversight and Supervision
Merrill Lynchs business is also subject to extensive
regulation by various
non-U.S. regulators
including governments, securities exchanges, central banks and
regulatory bodies. Certain Merrill Lynch subsidiaries are
regulated as broker-dealers under the laws of the jurisdictions
in which they operate. Subsidiaries engaged in banking and trust
activities outside the United States are regulated by various
government entities in the particular jurisdiction where they
are chartered, incorporated
and/or
conduct their business activities. In some cases, the
legislative and regulatory developments outside the
U.S. applicable to these subsidiaries may have a global
impact.
In the course of conducting our business operations, we are
exposed to a variety of risks that are inherent to the financial
services industry. The following discusses some of the key
inherent risk factors that could affect our business and
operations, as well as other risk factors which are particularly
relevant to us in the current period of significant economic and
market disruption. Other factors besides those discussed below
or elsewhere in this report also could adversely affect our
business and operations, and these risk factors should not be
considered a complete list of potential risks that may affect us.
Business and economic conditions. Our
businesses and earnings are affected by general business and
economic conditions in the United States and abroad. General
business and economic conditions that could affect us include
the level and volatility of short-term and long-term interest
rates, inflation, home prices, employment levels, bankruptcies,
household income, consumer spending, fluctuations in both debt
and equity capital markets, liquidity of the global financial
markets, the availability and cost of credit, investor
confidence, and the strength of the U.S. economy and the
local economies in which we operate.
Economic conditions in the United States and abroad deteriorated
significantly during the second half of 2008, and the United
States, Europe and Japan currently are in a recession. Dramatic
declines in the housing market, with falling home prices and
increasing foreclosures, unemployment and under-employment, have
negatively impacted the credit performance of mortgage loans and
resulted in significant write-downs of asset values by financial
institutions, including government sponsored entities as well as
major commercial and investment banks. These write-downs,
initially of mortgage-backed securities but spreading to credit
default swaps and other derivatives and cash securities, in
turn, have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in
some cases, to fail. Many lenders and institutional investors
have reduced or ceased providing funding to borrowers, including
to other financial institutions, reflecting concern about the
stability of the financial markets generally and the strength of
counterparties. This market turmoil and tightening of credit
have led to an increased level of commercial and consumer
delinquencies, a significant reduction in consumer confidence,
increased market volatility and widespread reduction of business
activity generally. The resulting economic pressure on consumers
and lack of confidence in the financial markets has adversely
affected our business, financial condition, results of
operations, liquidity and access to capital and credit. We do
not expect that the difficult conditions in the United States
and international financial markets are likely to improve in the
near future. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market
conditions on us and others in the financial institutions
industry.
Instability of the U.S. financial
system. Beginning in the fourth quarter of 2008,
the U.S. government has responded to the ongoing financial
crisis and economic slowdown by enacting new legislation and
expanding or establishing a number of programs and initiatives.
Each of the U.S. Treasury, the FDIC and the Federal Reserve
Board have developed programs and facilities, including, among
others, the U.S. Treasurys Troubled Asset Relief
Program (TARP) Capital Purchase Program and other
efforts designed to increase inter-bank lending, improve funding
for consumer receivables and restore consumer and counterparty
confidence in the banking sector. In addition, Congress recently
passed the
5
American Recovery and Reinvestment Act of 2009 (the
ARRA), legislation intended to expand and establish
government spending programs and provide tax cuts to stimulate
the economy. Congress and the U.S. government continue to
evaluate and develop various programs and initiatives designed
to stabilize the financial and housing markets and stimulate the
economy, including the U.S. Treasurys recently announced
Financial Stability Plan and the U.S. governments
recently announced foreclosure prevention program. The final
form of any such programs or initiatives or related legislation
cannot be known at this time. There can be no assurance as to
the impact that ARRA, the Financial Stability Plan or any other
such initiatives or governmental programs will have on the
financial markets, including the extreme levels of volatility
and limited credit availability currently being experienced. The
failure of these efforts to stabilize the financial markets and
a continuation or worsening of current financial market
conditions could materially and adversely affect our business,
financial condition, results of operations, access to credit, or
the trading price of our debt securities (including trust
preferred securities).
International risk. We do business throughout
the world, including in developing regions of the world commonly
known as emerging markets, and as a result, are exposed to a
number of risks, including economic, market, reputational,
litigation and regulatory risks, in
non-U.S. markets.
Our businesses and revenues derived from
non-U.S. operations
are subject to risk of loss from currency fluctuations, social
or political instability, changes in governmental policies or
policies of central banks, expropriation, nationalization,
confiscation of assets, unfavorable political and diplomatic
developments and changes in legislation relating to
non-U.S. ownership.
We also invest or trade in the securities of corporations
located in non-U.S. jurisdictions, including emerging
markets. Revenues from the trading of
non-U.S. securities
also may be subject to negative fluctuations as a result of the
above factors. The impact of these fluctuations could be
magnified, because generally
non-U.S. trading
markets, particularly in emerging market countries, are smaller,
less liquid and more volatile than U.S. trading markets.
Soundness of other financial institutions. Our
ability to engage in routine trading and funding transactions
could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing,
funding, counterparty or other relationships. We have exposure
to many different industries and counterparties, and we
routinely execute transactions with counterparties in the
financial industry, including brokers and dealers, commercial
banks, investment banks, mutual and hedge funds, and other
institutional clients. As a result, defaults by, or even rumors
or questions about the financial condition of, one or more
financial services institutions, or the financial services
industry generally, have led to market-wide liquidity problems
and could lead to losses or defaults by us or by other
institutions. Many of these transactions expose us to credit
risk in the event of default of our counterparty or client, and
our results of operations in 2007 and 2008 have been materially
affected by the credit valuation adjustments described in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations U.S. ABS CDO and Other
Mortgage-Related Activities Monoline Financial
Guarantors. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized or
is liquidated at prices not sufficient to recover the full
amount of the loan or derivative exposure due to us. There is no
assurance that any such losses would not materially and
adversely affect our future results of operations.
We are party to a large number of derivative transactions,
including credit derivatives. Many of these derivative
instruments are individually negotiated and non-standardized,
which can make exiting, transferring or settling the position
difficult. Many credit derivatives require that we deliver to
the counterparty the underlying security, loan or other
obligation in order to receive payment. In a number of cases, we
do not hold, and may not be able to obtain, the underlying
security, loan or other obligation. This could cause us to
forfeit the payments due to us under these contracts or result
in settlement delays with the attendant credit and operational
risk as well as increased costs to us.
Derivative contracts and other transactions entered into with
third parties are not always confirmed by the counterparties on
a timely basis. While the transaction remains unconfirmed, we
are subject to
6
heightened credit and operational risk and in the event of
default may find it more difficult to enforce the contract. In
addition, as new and more complex derivative products have been
created, covering a wider array of underlying credit and other
instruments, disputes about the terms of the underlying
contracts may arise, which could impair our ability to
effectively manage our risk exposures from these products and
subject us to increased costs.
Access to funds from subsidiaries and
parent. We are a holding company that is a
separate and distinct legal entity from its parent, Bank of
America, and our broker-dealer, banking and nonbanking
subsidiaries. We therefore depend on dividends, distributions
and other payments from our broker-dealer, banking and
nonbanking subsidiaries and borrowings and will depend in large
part on financing from Bank of America to fund payments on our
obligations, including debt obligations. Bank of America may in
some instances, because of its regulatory requirements as a bank
holding company, be unable to provide us with funding we need to
fund payments on our obligations. Many of our subsidiaries are
subject to laws that authorize regulatory bodies to block or
reduce the flow of funds from those subsidiaries to us.
Regulatory action of that kind could impede access to funds we
need to make payments on our obligations or dividend payments.
In addition, our right to participate in a distribution of
assets upon a subsidiarys liquidation or reorganization is
subject to the prior claims of the subsidiarys creditors.
Changes in accounting standards. Our
accounting policies and methods are fundamental to how we record
and report our financial condition and results of operations.
Some of these policies require use of estimates and assumptions
that may affect the value of our assets or liabilities and
financial results and are critical because they require
management to make difficult, subjective and complex judgments
about matters that are inherently uncertain. As a result of Bank
of Americas acquisition of us, we may adopt different
estimates and assumptions than those previously used in order to
align our estimates, assumptions and policies with those of Bank
of America. From time to time the Financial Accounting Standards
Board (FASB) and the SEC change the financial
accounting and reporting standards that govern the preparation
of our financial statements. In addition, accounting standard
setters and those who interpret the accounting standards (such
as the FASB, the SEC, banking regulators and our outside
auditors) may change or even reverse their previous
interpretations or positions on how these standards should be
applied. These changes can be hard to predict and can materially
impact how we record and report our financial condition and
results of operations. In some cases, we could be required to
apply a new or revised standard retroactively, resulting in our
restating prior period financial statements. For a further
discussion of some of our significant accounting policies and
standards and recent accounting changes, see Note 1 to the
Consolidated Financial Statements.
Competition. We operate in a highly
competitive environment. Over time, there has been substantial
consolidation among companies in the financial services
industry, and this trend accelerated over the course of 2008 as
the credit crisis has led to numerous mergers and asset
acquisitions among industry participants and in certain cases
reorganization, restructuring or even bankruptcy. This trend
also has hastened the globalization of the securities and
financial services markets. We will continue to experience
intensified competition as continued consolidation in the
financial services industry in connection with current market
conditions may produce larger and better-capitalized companies
that are capable of offering a wider array of financial products
and services at more competitive prices. To the extent we expand
into new business areas and new geographic regions, we may face
competitors with more experience and more established
relationships with clients, regulators and industry participants
in the relevant market, which could adversely affect our ability
to compete. Increased competition may affect our results by
creating pressure to lower prices on our products and services
and reducing market share.
Our continued ability to compete effectively in our businesses,
including management of our existing businesses as well as
expansion into new businesses and geographic areas, depends on
our ability to retain and motivate our existing employees and
attract new employees. We face significant competition for
qualified employees both within the financial services industry,
including foreign-based institutions and institutions not
subject to compensation restrictions imposed under the TARP
Capital Purchase
7
Program, the ARRA or any other U.S. government initiatives,
and from businesses outside the financial services industry.
This is particularly the case in emerging markets, where we are
often competing for qualified employees with entities that may
have a significantly greater presence or more extensive
experience in the region. Over the past year, we have
significantly reduced compensation levels. In January 2009, in
connection with the U.S. Treasurys purchase of an
additional series of Bank of Americas preferred stock,
Bank of America agreed to certain compensation limitations, and
ARRA also includes certain additional restrictions, applicable
to its senior executive officers and certain other senior
managers. A substantial portion of the annual bonus compensation
paid to our senior employees has in recent years been paid in
the form of equity-based awards, which are now payable in Bank
of America common stock. The value of these awards has been
impacted by the significant decline in the market price of Bank
of Americas common stock. We also have reduced the number
of employees across nearly all of our businesses during 2008 and
into 2009. In addition, the recent consolidation in the
financial services industry has intensified the challenges of
cultural integration between differing types of financial
services institutions. The combination of these events could
have a significant adverse impact on our ability to retain and
hire the most qualified employees.
Credit concentration risk. When we loan money,
commit to loan money or enter into a letter of credit or other
contract with a counterparty, we incur credit risk, or the risk
of losses if our borrowers do not repay their loans or our
counterparties fail to perform according to the terms of their
contracts. A number of our products expose us to credit risk,
including loans, leases and lending commitments, derivatives,
including credit default swaps, trading account assets and
assets held-for-sale.
We estimate and establish reserves or make credit valuation
adjustments for credit risks and potential credit losses
inherent in our credit exposure (including unfunded credit
commitments). This process, which is critical to our financial
results and condition, requires difficult, subjective and
complex judgments, including forecasts of economic conditions
and how these economic predictions might impair the ability of
our borrowers to repay their loans or counterparties to perform
their obligations. As is the case with any such assessments,
there is always the chance that we will fail to identify the
proper factors or that we will fail to accurately estimate the
impacts of factors that we identify. Our ability to assess the
creditworthiness of our counterparties may be impaired if the
models and approaches we use become less predictive of future
behaviors, valuations, assumptions or estimates.
We have experienced concentration of risk with respect to the
mortgage markets, including residential and commercial real
estate, each of which represents a significant percentage of our
overall credit portfolio. The current financial crisis and
economic slowdown has adversely affected this concentration of
risk. These exposures will also continue to be impacted by
external market factors including default rates, a decline in
the value of the underlying property, rating agency actions, the
prices at which observable market transactions occur and the
financial strength of counterparties, such as financial
guarantors, with whom we have economically hedged some of our
exposure to these assets.
In the ordinary course of our business, we also may be subject
to a concentration of credit risk to a particular industry,
counterparty, borrower or issuer. A deterioration in the
financial condition or prospects of a particular industry or a
failure or downgrade of, or default by, any particular entity or
group of entities could negatively impact our businesses,
perhaps materially, and the systems by which we set limits and
monitor the level of our credit exposure to individual entities,
industries and countries may not function as we have
anticipated. While our activities expose us to many different
industries and counterparties, we routinely execute a high
volume of transactions with counterparties in the financial
services industry, including brokers and dealers, commercial
banks, investment funds and insurers, including monolines and
other financial guarantors. This has resulted in significant
credit concentration with respect to this industry.
For a further discussion of credit risk, see
Concentrations of Credit Risk in Note 3 to the
Consolidated Financial Statements.
Liquidity risk. Liquidity is essential to our
businesses. Since we were acquired by Bank of America, we
established intercompany lending and borrowing arrangements with
Bank of America to facilitate
8
centralized liquidity management and as a result, our liquidity
risk is derived in large part from Bank of Americas
liquidity risk. Bank of Americas liquidity could be
impaired by an inability to access the capital markets or by
unforeseen outflows of cash, including deposits. This situation
may arise due to circumstances that Bank of America or we may be
unable to control, such as a general market disruption, negative
views about the financial services industry generally, or an
operational problem that affects third parties or us. Bank of
Americas ability to raise funding in the debt or equity
capital markets has been and could continue to be adversely
affected by conditions in the United States and international
markets and economy. Global capital and credit markets have been
experiencing volatility and disruption since the second half of
2007, and in the second half of 2008, volatility reached
unprecedented levels. In some cases, the markets have produced
downward pressure on stock prices and credit availability for
issuers without regard to those issuers underlying
financial strength. As a result of disruptions in the credit
markets, Bank of America and Merrill Lynch have utilized several
of the U.S. governments liquidity programs. Bank of
Americas ability and our ability to borrow from other
financial institutions or to engage in securitization funding
transactions on favorable terms or at all could be adversely
affected by further disruptions in the capital markets or other
events, including actions by rating agencies and deteriorating
investor expectations.
Our credit ratings and Bank of Americas credit ratings are
important to our liquidity. The ratings of Bank of
Americas long-term debt have been downgraded during 2008
by all of the major rating agencies. These rating agencies
regularly evaluate Bank of America, us and our securities, and
their ratings of our long-term and short-term debt and other
securities are based on a number of factors, including Bank of
Americas and our financial strength as well as factors not
entirely within our control, including conditions affecting the
financial services industry generally. In light of the
difficulties in the financial services industry and the
financial markets, there can be no assurance that we will
maintain our current ratings. Our failure to maintain those
ratings could adversely affect our liquidity and competitive
position, increase borrowing costs or limit access to the
capital markets. While the impact on the incremental cost of
funds and potential lost funding of an incremental downgrade of
our long-term debt by one level might be negligible, a downgrade
of Bank of Americas or our short-term credit rating could
negatively impact our commercial paper program by materially
affecting our incremental cost of funds and potential lost
funding. A reduction in our credit ratings also could have a
significant impact on certain trading revenues, particularly in
those businesses where longer term counterparty performance is
critical. In connection with certain trading agreements, we may
be required to provide additional collateral in the event of a
credit ratings downgrade.
For a further discussion of our liquidity position and other
liquidity matters and the policies and procedures we use to
manage our liquidity risks, see Liquidity Risk in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Market risk. We are directly and indirectly
affected by changes in market conditions. Market risk generally
represents the risk that values of assets and liabilities or
revenues will be adversely affected by changes in market
conditions. For example, changes in interest rates could
adversely affect our net interest profit and principal
transaction revenues (which we view together as our trading
revenues) which could in turn affect our net
earnings. Market risk is inherent in the financial instruments
associated with our operations and activities including loans,
deposits, securities, derivatives, short-term borrowings and
long-term debt. Just a few of the market conditions that may
shift from time to time, thereby exposing us to market risk,
include fluctuations in interest and currency exchange rates,
equity and futures prices, changes in the implied volatility of
interest rates, foreign exchange rates, credit spreads and price
deterioration or changes in value due to changes in market
perception or actual credit quality of either the issuer or its
country of origin. Accordingly, depending on the instruments or
activities impacted, market risks can have wide ranging, complex
adverse effects on our results from operations and our overall
financial condition.
The models that we use to assess and control our risk exposures
reflect assumptions about the degrees of correlation or lack
thereof among prices of various asset classes or other market
indicators. In times of market stress or other unforeseen
circumstances, such as the market conditions experienced during
9
2008, previously uncorrelated indicators may become correlated,
or previously correlated indicators may move in different
directions. These types of market movements have at times
limited the effectiveness of our hedging strategies and have
caused us to incur significant losses, and they may do so in the
future. These changes in correlation can be exacerbated where
other market participants are using risk or trading models with
assumptions or algorithms that are similar to ours. In these and
other cases, it may be difficult to reduce our risk positions
due to the activity of other market participants or widespread
market dislocations, including circumstances where asset values
are declining significantly or no market exists for certain
assets. To the extent that we make investments in securities
that do not have an established liquid trading market or are
otherwise subject to restrictions on sale or hedging, we may not
be able to reduce our positions and therefore reduce our risk
associated with such positions.
For a further discussion of market risk and our market risk
management policies and procedures, see Item 7A
Quantitative and Qualitative Disclosures About Market Risk.
Risks Related to our Commodities Business. We
are exposed to environmental, reputational, regulatory, market
and credit risk as a result of our commodities related
activities. Through our commodities business, we enter into
exchange-traded contracts, financially settled over-the-counter
derivatives, contracts for physical delivery and contracts
providing for the transportation, transmission
and/or
storage rights on or in vessels, barges, pipelines, transmission
lines or storage facilities. Contracts relating to physical
ownership, delivery
and/or
related activities can expose us to numerous risks, including
performance, environmental and reputational risks. For example,
we may incur civil or criminal liability under certain
environmental laws and our business and reputation may be
adversely affected. In addition, regulatory authorities have
recently intensified scrutiny of certain energy markets, which
has resulted in increased regulatory and legal enforcement,
litigation and remedial proceedings involving companies engaged
in the activities in which we are engaged.
Declining asset values. We have large
proprietary trading and investment positions in a number of our
businesses. These positions are accounted for at fair value, and
the declines in the values of assets had a direct and large
negative impact on our earnings in 2008. We may incur additional
losses as a result of increased market volatility or decreased
market liquidity, which may adversely impact the valuation of
our trading and investment positions. If an asset is
marked-to-market, declines in asset values directly and
immediately impact our earnings, unless we have effectively
hedged our exposures to such declines. These
exposures may continue to be impacted by declining values of the
underlying assets. In addition, the prices at which observable
market transactions occur and the continued availability of
these transactions, and the financial strength of
counterparties, such as financial guarantors, with whom we have
economically hedged some of our exposure to these assets, will
affect the value of these assets. Sudden declines and
significant volatility in the prices of assets may substantially
curtail or eliminate the trading activity for these assets,
which may make it very difficult to sell, hedge or value such
assets. The inability to sell or effectively hedge assets
reduces our ability to limit losses in such positions and the
difficulty in valuing assets may increase our risk-weighted
assets which requires us to maintain additional capital and
increases our funding costs.
Asset values also directly impact revenues from our wealth
management business. We receive certain account fees based on
the value of our clients portfolios or investment in funds
managed by us and, in some cases, we also receive incentive fees
based on increases in the value of such investments. Declines in
asset values have reduced the value of our clients
portfolios or fund assets, which in turn has reduced the fees we
earn for managing such assets.
Merger risks. There are significant risks and
uncertainties associated with mergers. The success of Bank of
Americas acquisition of us will depend, in part, on the
ability of the combined company to realize the anticipated
benefits and cost savings from combining our businesses with
Bank of Americas businesses. If the combined company is
unable to achieve these objectives, the anticipated benefits and
cost savings of the merger may not be realized fully or at all
or may take longer to realize than expected. For example, the
combined company may fail to realize the growth opportunities
and cost savings anticipated to be derived from the merger. Our
businesses currently are experiencing
10
unprecedented challenges as a result of the current economic
environment and ongoing financial crisis. It is possible that
the integration process, including changes or perceived changes
in our compensation practices, could result in the loss of key
employees, the disruption of our ongoing businesses or
inconsistencies in standards, controls, procedures and policies
that adversely affect our ability to maintain relationships with
clients and employees or to achieve the anticipated benefits of
the merger. Integration efforts also may divert management
attention and resources. These integration matters could have an
adverse effect on us for an undetermined period after
consummation of the merger.
Regulatory considerations and restrictions on
dividends. As a subsidiary of Bank of America, we
are, and certain of our bank and non-bank subsidiaries are
heavily regulated by bank regulatory agencies at the federal and
state levels. This regulatory oversight is established to
protect depositors, federal deposit insurance funds and the
banking system as a whole, not security holders. Bank of
America, we and our broker-dealer and other non-bank
subsidiaries are also heavily regulated by securities
regulators, domestically and internationally. This regulation is
designed to protect investors in securities we sell or
underwrite and our clients assets. Congress and state
legislatures and foreign, federal and state regulatory agencies
continually review laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory
policies, including interpretation or implementation of
statutes, regulations or policies, could affect us in
substantial and unpredictable ways including limiting the types
of financial services and products we may offer and increasing
the ability of non-banks to offer competing financial services
and products.
As a result of the ongoing financial crisis and challenging
market conditions, we expect to face increased regulation and
regulatory and political scrutiny of the financial services
industry, including as a result of Bank of Americas or our
participation in the TARP Capital Purchase Program, the ARRA and
the U.S. Treasurys Financial Stability Plan.
Compliance with such regulation may significantly increase our
costs, impede the efficiency of our internal business processes,
and limit our ability to pursue business opportunities in an
efficient manner. The increased costs associated with
anticipated regulatory and political scrutiny could adversely
impact our results of operations.
Litigation risks. Both Bank of America and
Merrill Lynch face significant legal risks in our respective
businesses, and the volume of claims and amount of damages and
penalties claimed in litigation and regulatory proceedings
against financial institutions remain high and are increasing.
Substantial legal liability or significant regulatory action
against Bank of America or us could have material adverse
financial effects or cause significant reputational harm to us,
which in turn could seriously harm our business prospects. For a
further discussion of litigation risks, see Litigation and
Regulatory Matters in Note 11 to the Consolidated
Financial Statements.
We may explore potential settlements before a case is taken
through trial because of uncertainty, risks, and costs inherent
in the litigation process. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 5,
Accounting for Contingencies (SFAS No. 5),
we will accrue a liability when it is probable that a liability
has been incurred and the amount of the loss can be reasonably
estimated. In many lawsuits, arbitrations and investigations,
including almost all of the class action lawsuits disclosed in
Litigation and Regulatory Matters in Note 11 to
the Consolidated Financial Statements, 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
matter 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 matters
in which claimants seek substantial or indeterminate damages, we
cannot predict what the eventual loss or range of loss related
to such matters will be. Potential losses may be material to our
operating results for any particular period and may impact our
credit ratings. For a further discussion of litigation risks,
see Litigation and Regulatory Matters in
Note 11 to the Consolidated Financial Statements.
Governmental fiscal and monetary policy. Our
businesses and earnings are affected by domestic and
international fiscal and monetary policy. For example, the
Federal Reserve Board regulates the supply of money and credit
in the United States and its policies determine in large part
our cost of funds for
11
lending, investing and capital raising activities and the return
we earn on those loans and investments, both of which affect our
net interest profit. The actions of the Federal Reserve Board
also can materially affect the value of financial instruments we
hold, such as debt securities. Our businesses and earnings also
are affected by the fiscal or other policies that are adopted by
various regulatory authorities of the United States,
non-U.S. governments
and international agencies. Changes in domestic and
international fiscal and monetary policy are beyond our control
and hard to predict.
Operational risks. The potential for
operational risk exposure exists throughout our organization.
Integral to our performance is the continued efficacy of our
technical systems, operational infrastructure, relationships
with third parties and the vast array of associates and key
executives in our day-to-day and ongoing operations. Failure by
any or all of these resources subjects us to risks that may vary
in size, scale and scope. This includes but is not limited to
operational or technical failures, unlawful tampering with our
technical systems, terrorist activities, ineffectiveness or
exposure due to interruption in third party support, as well as
the loss of key individuals or failure on the part of the key
individuals to perform properly.
Products and services. Our business model is
based on a diversified mix of businesses that provides a broad
range of financial products and services, delivered through
multiple distribution channels. Our success depends, in part, on
our ability to adapt our products and services to evolving
industry standards. There is increasing pressure by competition
to provide products and services at lower prices. This can
reduce our revenues from our fee-based products and services. In
addition, the widespread adoption of new technologies, including
internet services, could require us to incur substantial
expenditures to modify or adapt our existing products and
services. We might not be successful in developing and
introducing new products and services, responding or adapting to
changes in consumer spending and saving habits, achieving market
acceptance of our products and services, or developing and
maintaining loyal customers.
Reputational risks. Our ability to attract and
retain clients and employees could be adversely affected to the
extent our reputation is damaged. Our actual or perceived
failure to address various issues could give rise to
reputational risk that could harm us or our business prospects.
These issues include, but are not limited to, appropriately
addressing potential conflicts of interest; legal and regulatory
requirements; ethical issues; money-laundering; privacy;
properly maintaining customer and associate personal
information; record keeping; sales and trading practices; and
the proper identification of the legal, reputational, credit,
liquidity and market risks inherent in our products.
Risk management processes and strategies. We
seek to monitor and control our risk exposure through a variety
of separate but complementary financial, credit, operational,
compliance and legal reporting systems. While we employ a broad
and diversified set of risk monitoring and risk mitigation
techniques, those techniques and the judgments that accompany
their application cannot anticipate every economic and financial
outcome or the specifics and timing of such outcomes.
Accordingly, our ability to successfully identify and manage
risks facing us is an important factor that can significantly
impact our results. For a further discussion of our risk
management policies and procedures, see Item 7A
Quantitative and Qualitative Disclosures About Market Risk.
Geopolitical risks. Geopolitical conditions
can affect our earnings. Acts or threats of terrorism, actions
taken by the United States or other governments in response to
acts or threats of terrorism
and/or
military conflicts, could affect business and economic
conditions in the United States and abroad.
Additional risks and uncertainties. We are a
diversified financial services company. Although we believe our
diversity helps lessen the effect when downturns affect any one
segment of our industry, it also means our earnings could be
subject to different risks and uncertainties than the ones
discussed herein. If any of the risks that we face actually
occur, irrespective of whether those risks are described in this
section or elsewhere in this report, our business, financial
condition and operating results could be materially adversely
affected.
12
|
|
Item 1B.
|
Unresolved
Staff Comments
|
There are no unresolved written comments that were received from
the SEC staff 180 days or more before the end of our fiscal
year relating to our periodic or current reports under the
Exchange Act.
We have offices in various locations throughout the world. Other
than those described below as being owned, substantially all of
our offices are located in leased premises. We believe that the
facilities we own or lease are adequate for the purposes for
which they are currently used and that they are well maintained.
Set forth below is the location and the approximate square
footage of our principal facilities. Each of these principal
facilities supports our GMI and GWM businesses. Information
regarding our property lease commitments is set forth in
Operating Leases in Note 11 to the Consolidated
Financial Statements.
Principal
Facilities in the United States
Our executive offices and principal administrative offices are
located in leased premises at the World Financial Center in New
York City. We lease portions of 4 World Financial Center
(1,800,000 square feet) and 2 World Financial Center
(2,500,000 square feet); both leases expire in 2013. One of
our subsidiaries is a partner in the partnership that holds the
ground lessees interest in 4 World Financial Center. As of
December 26, 2008, we occupied the entire 4 World
Financial Center and approximately 27% of 2 World Financial
Center.
We own a 760,000 square foot building at 222 Broadway,
New York and occupy 92% of this building. We also lease and
occupy, pursuant to an operating lease with an unaffiliated
lessor, 1,251,000 square feet of office space and
273,000 square feet of ancillary buildings in Hopewell, New
Jersey. One of our subsidiaries is the lessee under such
operating lease and owns the underlying land upon which the
Hopewell facilities are located. We also own a
54-acre
campus in Jacksonville, Florida, with four buildings.
Principal
Facilities Outside the United States
In London, we lease and occupy 100% of our 576,626 square
foot London headquarters facility known as Merrill Lynch
Financial Centre; this lease expires in 2022. In addition, we
lease approximately 305,086 square feet in other London
locations with various terms, the longest of which lasts until
2020. We occupy 134,375 square feet of this space and have
sublet the remainder. In Tokyo, we have leased
292,349 square feet until 2014 for our Japan headquarters.
Other leased facilities in the Pacific Rim are located in Hong
Kong, Singapore, Seoul, South Korea, Mumbai and Chunnai, India,
and Sydney and Melbourne, Australia.
|
|
Item 3.
|
Legal
Proceedings
|
Refer to Note 11 to the Consolidated Financial Statements
in Part II, Item 8 for a discussion of litigation and
regulatory matters.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
Not required pursuant to instruction I(2).
13
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
The table below sets forth the information with respect to
purchases made by or on behalf of us or any affiliated
purchaser of our common stock during the year ended
December 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
Total Number of
|
|
Approximate
|
|
|
|
|
|
|
Shares
|
|
Dollar Value of
|
|
|
|
|
|
|
Purchased as
|
|
Shares that May
|
|
|
Total Number of
|
|
Average
|
|
Part of Publicly
|
|
Yet be Purchased
|
|
|
Shares
|
|
Price Paid
|
|
Announced
|
|
Under the
|
Period
|
|
Purchased
|
|
per Share
|
|
Program(1)
|
|
Program
|
|
First Quarter 2008 (Dec. 29, 2007 Mar. 28, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
17,078,898
|
|
|
|
54.59
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 (Mar. 29, 2008 June 27,
2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
2,780,526
|
|
|
|
43.11
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2008 (Jun. 28, 2008 Sept. 26, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
6,197,808
|
|
|
|
25.42
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #1 (Sept. 27, 2008 Oct. 31, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
3,185,077
|
|
|
|
18.11
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #2 (Nov. 1, 2008 Nov. 28, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
2,153,426
|
|
|
|
12.44
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #3 (Nov. 29, 2008 Dec. 26, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
1,414,962
|
|
|
|
12.54
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter 2008 (Sept. 27, 2008 Dec. 26, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
6,753,465
|
|
|
|
15.14
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full Year 2008 (Dec. 29, 2007 Dec. 26, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Management Program
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3,971
|
|
Employee
Transactions(2)
|
|
|
32,810,697
|
|
|
|
39.99
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No repurchases were made for
2008. |
(2) |
|
Included in the total number of
shares purchased are: (i) shares purchased during the
period by participants in the Merrill Lynch 401(k) Savings and
Investment Plan (401(k)) and the Merrill Lynch
Retirement Accumulation Plan (RAP), (ii) shares
delivered or attested to in satisfaction of the exercise price
by holders of ML & Co. employee stock options (granted
under employee stock compensation plans) and (iii) Restricted
Shares withheld (under the terms of grants under employee stock
compensation plans) to offset tax withholding obligations that
occur upon vesting and release of Restricted Shares.
ML & Co.s employee stock compensation plans
provide that the value of the shares delivered, attested, or
withheld, shall be the average of the high and low price of
ML & Co.s common stock (Fair Market Value) on
the date the relevant transaction occurs. |
14
Dividends
Per Common Share
Prior to the acquisition by Bank of America, the principal
market on which ML & Co. common stock was traded was
the New York Stock Exchange. ML & Co. common stock was
also listed on the Chicago Stock Exchange, the London Stock
Exchange and the Tokyo Stock Exchange. Following the acquisition
by Bank of America, there is no longer an established public
trading market for ML & Co. common stock. Information
relating to the amount of cash dividends declared for the two
most recent fiscal years is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
(Declared and Paid)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
2008
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
2007
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the date of this report, Bank of America is the sole
holder of the outstanding common stock of ML & Co.
With the exception of regulatory restrictions on
subsidiaries abilities to pay dividends, there were no
restrictions on ML & Co.s present ability to pay
dividends on common stock, other than ML & Co.s
obligation to make payments on its mandatory convertible
preferred stock, junior subordinated debt related to trust
preferred securities, and the governing provisions of Delaware
General Corporation Law. Certain subsidiaries ability to
declare dividends may also be limited.
Securities
Authorized for Issuance under Equity Compensation
Plans
As a result of the acquisition by Bank of America, there are no
equity securities of ML & Co. that are authorized for
issuance under any equity compensation plans. Refer to
Note 12 and Note 13 of the Consolidated Financial
Statements for further information on equity compensation and
benefit plans.
|
|
Item 6.
|
Selected
Financial Data.
|
Not required pursuant to instruction I(2).
15
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results Of
Operations
|
Forward-Looking
Statements and Non-GAAP Financial Measures
We have included certain statements in this report which may be
considered forward-looking, including those about management
expectations and intentions, the impact of off-balance sheet
exposures, significant contractual obligations and anticipated
results of litigation and regulatory investigations and
proceedings. These forward-looking statements represent only
Merrill Lynch & Co., Inc.s (ML &
Co. and, together with its subsidiaries, Merrill
Lynch, the Company, the
Corporation, we, our or
us) beliefs regarding future performance, which is
inherently uncertain. There are a variety of factors, many of
which are beyond our control, which affect our operations,
performance, business strategy and results and could cause our
actual results and experience to differ materially from the
expectations and objectives expressed in any forward-looking
statements. These factors include, but are not limited to,
actions and initiatives taken by both current and potential
competitors and counterparties, general economic conditions,
market conditions, the effects of current, pending and future
legislation, regulation and regulatory actions, the actions of
rating agencies and the other risks and uncertainties detailed
in this report. See Risk Factors in Part I,
Item 1A of this
Form 10-K.
Accordingly, you should not place undue reliance on
forward-looking statements, which speak only as of the dates on
which they are made. We do not undertake to update
forward-looking statements to reflect the impact of
circumstances or events that arise after the dates they are
made. The reader should, however, consult further disclosures we
may make in future filings of our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K.
From time to time, we may also disclose financial information on
a non-GAAP basis where management uses this information and
believes this information will be valuable to investors in
gauging the quality of our financial performance, identifying
trends in our results and providing more meaningful
period-to-period comparisons.
Introduction
Merrill Lynch was formed in 1914 and became a publicly traded
company on June 23, 1971. In 1973, we created the holding
company, ML & Co., a Delaware corporation that,
through its subsidiaries, is one of the worlds leading
capital markets, advisory and wealth management companies. In
our Global Wealth Management (GWM) business, we had
total client assets in GWM accounts of approximately $1.2
trillion at December 26, 2008. As an investment bank, we
are a leading global trader and underwriter of securities and
derivatives across a broad range of asset classes, and we serve
as a strategic advisor to corporations, governments,
institutions and individuals worldwide. In addition, as of
December 26, 2008, we owned approximately half of the
economic interest of BlackRock, Inc. (BlackRock),
one of the worlds largest publicly traded investment
management companies with approximately $1.3 trillion in assets
under management at the end of 2008.
On January 1, 2009, Merrill Lynch was acquired by, and
became a wholly-owned subsidiary of, Bank of America Corporation
(Bank of America). As a result of the acquisition,
certain information is not required in this
Form 10-K
as permitted by general Instruction I of
Form 10-K.
We have also abbreviated Managements Discussion and
Analysis of Financial Condition and Results of Operations as
permitted by general Instruction I.
16
Our activities are conducted through two business segments:
Global Markets and Investment Banking (GMI) and GWM.
The following is a description of our business segments:
|
|
|
|
|
|
|
|
|
|
GMI
|
|
|
GWM
|
Clients
|
|
|
Corporations, financial institutions, institutional investors,
and governments
|
|
|
Individuals, small- to mid-size businesses, and employee benefit
plans
|
|
|
|
|
|
|
|
Products and businesses
|
|
|
Global Markets (comprised of Fixed Income, Currencies & Commodities (FICC) & Equity Markets) Facilitates client transactions and makes markets in securities, derivatives, currencies, commodities and other financial instruments to satisfy client demands Provides clients with financing, securities clearing, settlement, and custody services Engages in principal and private equity investing, including managing investment funds, and certain proprietary trading activities
|
|
|
Global Private Client (GPC)
Delivers products and services
primarily through our Financial Advisors (FAs)
Commission and fee-based investment
accounts
Banking, cash management, and credit
services, including consumer and small business lending and
Visa®
cards
Trust and generational planning
Retirement services
Insurance products
|
|
|
|
|
|
|
|
|
|
|
Investment Banking
|
|
|
Global Investment Management (GIM)
|
|
|
|
Provides a wide range of securities
origination services for issuer clients, including underwriting
and placement of public and private equity, debt and related
securities, as well as lending and other financing activities
for clients globally
Advises clients on strategic issues,
valuation, mergers, acquisitions and restructurings
|
|
|
Creates and manages hedge funds and
other alternative investment products for GPC clients
Includes net earnings from our ownership
positions in other investment management companies, including
our investment in BlackRock
|
|
|
|
|
|
|
|
17
Company
Results
We reported a net loss from continuing operations for 2008 of
$27.6 billion, or $24.82 per diluted share, compared with a
net loss from continuing operations of $8.6 billion, or
$10.73 per diluted share for 2007. Our net loss for 2008 was
$27.6 billion, or $24.87 per diluted share, compared with a
net loss of $7.8 billion, or $9.69 per diluted share for
2007. Revenues, net of interest expense (net
revenues) for 2008 were negative $12.6 billion,
compared with positive $11.3 billion in the prior-year,
while the pre-tax loss from continuing operations was
$41.8 billion for 2008 compared with $12.8 billion for
2007.
Net revenues and net earnings during 2008 were impacted by a
number of significant items, including the following:
|
|
|
|
|
Net losses due to credit valuation adjustments (CVA)
related to certain hedges with financial guarantors of
$10.4 billion;
|
|
|
Net write-downs of $10.2 billion (excluding CVA) on
U.S. asset-backed collateralized debt obligations
(U.S. ABS CDOs);
|
|
|
Net write-downs of approximately $10.8 billion related to
other-than-temporary impairment charges recognized on our
U.S. banks investment securities portfolio, losses
related to leveraged finance loans and commitments, losses
related to certain government sponsored entities
(GSEs) and major U.S. broker-dealers, the
default of a major U.S. broker-dealer and other market
dislocations;
|
|
|
Net losses of $6.5 billion resulting primarily from
write-downs and losses on asset sales across residential
mortgage-related exposures and commercial real estate exposures;
|
|
|
Net losses of $2.1 billion due to write-downs on private
equity investments;
|
|
|
Net gains of $5.1 billion due to the impact of the widening
of Merrill Lynchs credit spreads on the carrying value of
certain of our long-term debt liabilities;
|
|
|
A net pre-tax gain of $4.3 billion from the sale of our 20%
ownership stake in Bloomberg, L.P.;
|
|
|
A $2.6 billion foreign currency gain related to currency
hedges of our U.K. deferred tax assets;
|
|
|
A $2.5 billion non tax-deductible payment to affiliates and
transferees of Temasek Holdings (Private) Limited
(Temasek) related to our July 2008 common stock
offering;
|
|
|
A $2.3 billion goodwill impairment charge related to our
FICC and Investment Banking businesses;
|
|
|
A $0.5 billion expense, including a $125 million fine,
arising from Merrill Lynchs offer to repurchase auction
rate securities (ARS) from our private clients and
the associated settlement with regulators; and
|
|
|
A $0.5 billion restructuring charge associated with
headcount reduction initiatives conducted during the year.
|
Our net loss applicable to common shareholders for 2008 included
$2.1 billion of additional preferred stock dividends
associated with the exchange of the mandatory convertible
preferred stock.
In 2007, the net loss was primarily driven by write-downs within
FICC of approximately $23.2 billion related to
U.S. collateralized debt obligations comprised of
U.S. ABS CDOs, U.S. sub-prime residential mortgages
and securities, and credit valuation adjustments related to
hedges with financial guarantors on U.S. ABS CDOs.
Strategic
and Other Significant Transactions
Bank of
America
On January 1, 2009, we were acquired by Bank of America
through the merger of a wholly owned subsidiary of Bank of
America with and into ML & Co. with ML & Co.
continuing as the surviving corporation and a wholly owned
subsidiary of Bank of America. Upon completion of the
acquisition,
18
each outstanding share of ML & Co. common stock was
converted into 0.8595 shares of Bank of America common
stock. As of the completion of the acquisition, ML &
Co. Series 1 through Series 8 preferred stock were
converted into Bank of America preferred stock with
substantially identical terms to the corresponding series of
Merrill Lynch preferred stock (except for additional voting
rights provided to the Bank of America securities). Our 9.00%
Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock,
Series 2, and 9.00% Non-Voting Mandatory Convertible
Non-Cumulative Preferred Stock, Series 3 that was
outstanding immediately prior to the completion of the
acquisition remained issued and outstanding subsequent to the
acquisition, but are now convertible into Bank of America common
stock.
Capital
Transactions
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 ML & Co. 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.
On various dates in January and February 2008, we issued an
aggregate of 66,000 shares of newly issued 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, for an aggregate purchase price
of approximately $6.6 billion.
On April 29, 2008, Merrill Lynch issued $2.7 billion
of new perpetual 8.625% Non-Cumulative Preferred Stock,
Series 8.
On July 28, 2008, we 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 our obligations under the reset provisions
contained in the investment agreement with Temasek, we paid
Temasek $2.5 billion, which is recorded as a non-tax
deductible expense in the Consolidated Statement of
(Loss)/Earnings for the year-ended December 26, 2008.
Concurrent with the $9.8 billion common stock offering,
holders of $4.9 billion of the $6.6 billion of our
mandatory convertible preferred stock agreed to exchange their
preferred stock for approximately 177 million shares of
common stock, plus $65 million in cash. Holders of the
remaining $1.7 billion of mandatory convertible preferred
stock agreed to exchange their preferred stock for new mandatory
convertible preferred stock. The price reset feature for all
securities exchanged was eliminated. In connection with the
elimination of the price reset feature of the $6.6 billion
of preferred stock, we recorded additional preferred dividends
of $2.1 billion in 2008.
CDO Sale
and Termination of Monoline Hedges
On September 18, 2008, we sold $30.6 billion gross
notional amount of U.S. super senior ABS CDOs to an
affiliate of Lone Star Funds (Lone Star) for a sales
price of $6.7 billion. In addition to the ABS CDO sale, we
terminated certain hedges with monoline financial guarantors
related to U.S. super senior ABS CDOs. We recorded net
write-downs of $5.7 billion during 2008 as a result of this
sale of
19
U.S. super senior ABS CDOs and the termination and
potential settlement of related hedges with monoline guarantor
counterparties.
Bloomberg,
L.P.
On July 17, 2008, we sold our 20% 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. As
consideration for the sale of our interest in Bloomberg L.P., we
received notes issued by Bloomberg Inc. (the general partner and
owner of substantially all of Bloomberg L.P.) with an aggregate
face amount of approximately $4.3 billion and cash in the
amount of approximately $110 million. The notes represent
senior unsecured obligations of Bloomberg Inc. and are recorded
as Investment Securities on our Consolidated Balance Sheet.
Auction
Rate Securities
On August 21, 2008, we reached a global agreement with the
New York Attorney General, the Securities and Exchange
Commission, the Massachusetts Securities Division and other
state securities regulators relating to sales of Auction Rate
Securities (ARS). Under this agreement, eligible
retail clients of Merrill Lynch were given a
12-month or
15-month
period, depending on the level of assets held at Merrill Lynch
by such client, in which to sell certain eligible ARS to Merrill
Lynch at par. Merrill Lynchs offer to purchase such ARS
from those of its eligible clients or purchasers will remain
open through January 15, 2010. In connection with this
agreement, during 2008 we recorded a charge of
$0.5 billion, which includes a fine of $125 million.
The charge is recorded within Other expenses in the Consolidated
Statement of (Loss)/Earnings.
Goodwill
Impairment
Due to the severe deterioration in the financial markets in the
fourth quarter of 2008 and the related impact on the fair value
of Merrill Lynchs reporting units, an impairment analysis
was conducted in the fourth quarter of 2008. Based on this
analysis, a non-cash impairment charge of $2.3 billion,
primarily related to FICC, was recognized as a loss within the
GMI business segment.
Restructuring
Charge
During 2008, Merrill Lynch recorded a pre-tax restructuring
charge of $486 million, primarily related to severance
costs and the accelerated amortization of previously granted
stock awards associated with headcount reduction initiatives.
Refer to Note 17 to the Consolidated Financial Statements
for additional information.
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 of 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.
On October 26, 2008, we entered into a securities purchase
agreement with the U.S. Treasury setting forth the terms
upon which we would issue a new series of preferred stock and
warrants to the U.S. Treasury (the TARP Purchase
Agreement). However, in view of the Bank of America
acquisition, we determined that we would not sell securities to
the U.S. Treasury under the CPP.
20
Additionally, in October 2008, the Federal Reserve announced the
creation of the Commercial Paper Funding Facility to provide a
liquidity backstop to U.S. issuers of commercial paper. A
special purpose vehicle will purchase three-month unsecured and
asset-backed commercial paper directly from eligible issuers
through October 30, 2009. We were 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. We
agreed to participate in this FDIC program and have issued FDIC
guaranteed commercial paper.
On October 29, 2008, we had 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. There were no borrowings under this facility
at December 26, 2008. Following the completion of Bank of
Americas acquisition of ML & Co., this facility
was terminated. For additional information on our other credit
facilities, see Liquidity Risk Committed
Credit Facilities.
Other
Events
On January 16, 2009, due to larger than expected fourth
quarter losses of Merrill Lynch and as part of its commitment to
support financial market stability, the U.S. government
agreed to assist Bank of America in the Merrill Lynch
acquisition by agreeing to provide certain guarantees and
capital. With respect to the guarantees, the
U.S. government agreed in principle to provide protection
against the possibility of unusually large losses on a pool of
certain domestic assets. It is anticipated that a portion of the
exposures discussed in Results of Operations,
including leveraged loans and commercial real estate loans,
CDOs, certain trading counterparty exposure including monolines,
and investment securities, would be part of this agreement.
21
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions , except per share amounts)
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
2008 vs.
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
(27,225
|
)
|
|
$
|
(12,067
|
)
|
|
|
N/M
|
%
|
Commissions
|
|
|
6,895
|
|
|
|
7,284
|
|
|
|
(5
|
)
|
Managed accounts and other fee-based revenues
|
|
|
5,544
|
|
|
|
5,465
|
|
|
|
1
|
|
Investment banking
|
|
|
3,733
|
|
|
|
5,582
|
|
|
|
(33
|
)
|
Earnings from equity method investments
|
|
|
4,491
|
|
|
|
1,627
|
|
|
|
176
|
|
Other
|
|
|
(10,065
|
)
|
|
|
(2,190
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(16,627
|
)
|
|
|
5,701
|
|
|
|
N/M
|
|
Interest and dividend revenues
|
|
|
33,383
|
|
|
|
56,974
|
|
|
|
(41
|
)
|
Less interest expense
|
|
|
29,349
|
|
|
|
51,425
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
4,034
|
|
|
|
5,549
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
(12,593
|
)
|
|
|
11,250
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
14,763
|
|
|
|
15,903
|
|
|
|
(7
|
)
|
Communications and technology
|
|
|
2,201
|
|
|
|
2,057
|
|
|
|
7
|
|
Brokerage, clearing, and exchange fees
|
|
|
1,394
|
|
|
|
1,415
|
|
|
|
(1
|
)
|
Occupancy and related depreciation
|
|
|
1,267
|
|
|
|
1,139
|
|
|
|
11
|
|
Professional fees
|
|
|
1,058
|
|
|
|
1,027
|
|
|
|
3
|
|
Advertising and market development
|
|
|
652
|
|
|
|
785
|
|
|
|
(17
|
)
|
Office supplies and postage
|
|
|
215
|
|
|
|
233
|
|
|
|
(8
|
)
|
Other
|
|
|
2,402
|
|
|
|
1,522
|
|
|
|
58
|
|
Payment related to price reset on common stock offering
|
|
|
2,500
|
|
|
|
-
|
|
|
|
N/M
|
|
Goodwill impairment charge
|
|
|
2,300
|
|
|
|
-
|
|
|
|
N/M
|
|
Restructuring charge
|
|
|
486
|
|
|
|
-
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
29,238
|
|
|
|
24,081
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from continuing operations
|
|
|
(41,831
|
)
|
|
|
(12,831
|
)
|
|
|
N/M
|
|
Income tax benefit
|
|
|
(14,280
|
)
|
|
|
(4,194
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(27,551
|
)
|
|
|
(8,637
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from discontinued operations
|
|
|
(141
|
)
|
|
|
1,397
|
|
|
|
N/M
|
|
Income tax (benefit)/expense
|
|
|
(80
|
)
|
|
|
537
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from discontinued operations
|
|
|
(61
|
)
|
|
|
860
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(27,612
|
)
|
|
$
|
(7,777
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
2,869
|
|
|
|
270
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(30,481
|
)
|
|
$
|
(8,047
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share from continuing operations
|
|
$
|
(24.82
|
)
|
|
$
|
(10.73
|
)
|
|
|
N/M
|
|
Basic (loss)/earnings per common share from discontinued
operations
|
|
|
(0.05
|
)
|
|
|
1.04
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(24.87
|
)
|
|
$
|
(9.69
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share from continuing operations
|
|
$
|
(24.82
|
)
|
|
$
|
(10.73
|
)
|
|
|
N/M
|
|
Diluted (loss)/earnings per common share from discontinued
operations
|
|
|
(0.05
|
)
|
|
|
1.04
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(24.87
|
)
|
|
$
|
(9.69
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
7.12
|
|
|
$
|
29.34
|
|
|
|
(76
|
)
|
|
|
Note: Certain prior period amounts have
been reclassified to conform to the current period
presentation.
N/M = Not Meaningful
|
22
Consolidated
Results of Operations
Our net loss from continuing operations for 2008 was
$27.6 billion compared with a net loss from continuing
operations of $8.6 billion in 2007. Net revenues in 2008
were negative $12.6 billion compared with positive
$11.3 billion for the prior year. The increase in the net
loss and the decrease in net revenues were primarily driven by
the significant write-downs recorded during 2008, including:
credit valuation adjustments of $10.4 billion primarily
related to certain hedges with financial guarantors; net
write-downs of $10.2 billion related to U.S. ABS CDOs;
net losses of $6.5 billion related to certain residential
and commercial mortgage exposures; net losses of
$4.1 billion in the investment securities portfolio of
Merrill Lynchs U.S. banks; and $4.2 billion of
write-downs on leveraged finance loans and commitments. These
net losses were partially offset by a net gain of
$5.1 billion from the impact of the widening of credit
spreads on the carrying value of certain of our long-term debt
liabilities and a net pre-tax gain of $4.3 billion from the
sale of our 20% ownership stake in Bloomberg, L.P.
Losses per diluted share from continuing operations were $24.82
for 2008 and $10.73 for the prior year. The net loss from
discontinued operations was $61 million in 2008 compared
with net earnings of $860 million in 2007. Our total net
loss for 2008 was $27.6 billion, or $24.87 per diluted
share, as compared with a net loss of $7.8 billion, or
$9.69 per diluted share, in 2007.
2008
Compared With 2007
Principal transactions revenues include both realized and
unrealized gains and losses on trading assets and trading
liabilities and investment securities classified as trading
investments. Principal transactions revenues were negative
$27.2 billion in 2008 compared with negative
$12.1 billion in 2007. The negative revenues in 2008 were
driven primarily by net losses within FICC related to credit
valuation adjustments related to hedges with financial
guarantors, U.S. ABS CDOs, net losses associated with real
estate-related assets, and net losses from credit spreads
widening across most asset classes to significantly higher
levels for the year. FICC also recorded net losses on various
positions as a result of severe market dislocations, including
significant asset price declines, high levels of volatility and
reduced levels of liquidity, particularly following the default
of a major U.S. broker-dealer and the
U.S. governments conservatorship of certain GSEs.
These losses were partially offset by positive net revenues
generated from our interest rate and currencies, commodities and
cash equities businesses, as well as gains arising from the
impact of the widening of Merrill Lynchs credit spreads on
the carrying value of certain of our long-term debt liabilities.
The negative net principal transactions revenues in 2007 were
primarily driven by losses associated with U.S. ABS CDOs
and our residential-mortgage-related businesses, partially
offset by higher revenues generated by the rates and currencies,
equity-linked, cash equities trading and financing and services
businesses, as well as gains arising from the widening of
Merrill Lynchs credit spreads on the carrying value of
certain of our long-term debt liabilities. Principal
transactions revenues are primarily reported in our GMI business
segment.
Net interest profit is a function of (i) the level and mix
of total assets and liabilities, including trading assets owned,
deposits, financing and lending transactions, and trading
strategies associated with our businesses, and (ii) the
prevailing level, term structure and volatility of interest
rates. Net interest profit is an integral component of trading
activity. In assessing the profitability of our client
facilitation and trading activities, we view principal
transactions and net interest profit in the aggregate as net
trading revenues. Changes in the composition of trading
inventories and hedge positions can cause the mix of principal
transactions and net interest profit to fluctuate from period to
period. Net interest profit was $4.0 billion in 2008, down
27% from 2007, primarily due to decreased interest revenues
generated as a result of lower asset levels and stated interest
rates on those assets, partially offset by lower interest
expense associated with reduced funding levels in our GMI
businesses. Net interest profit is reported in both our GMI and
GWM business segments.
Commissions revenues primarily arise from agency transactions in
listed and OTC equity securities and commodities, insurance
products and options. Commissions revenues also include
distribution fees for
23
promoting and distributing mutual funds and hedge funds.
Commissions revenues were $6.9 billion in 2008, down 5%
from the prior year, driven primarily by lower revenues from
insurance sales and mutual funds within GWM due to challenging
market conditions, which was partially offset by an increase in
revenues from our global cash equity trading business resulting
from higher volumes. Commissions revenues are generated by our
GMI and GWM business segments.
Managed accounts and other fee-based revenues primarily consist
of asset-priced portfolio service fees earned from the
administration of separately managed and other investment
accounts for retail investors, annual account fees, and certain
other account-related fees. Managed accounts and other fee-based
revenues were $5.5 billion in 2008, an increase of 1% from
2007, as higher revenues from the global markets financing and
services and real estate principal investment businesses within
GMI were offset by lower fee-based revenues in GWM due to lower
asset levels as a result of difficult market conditions. Managed
accounts and other fee-based revenues are primarily generated by
our GWM business segment.
Investment banking revenues include (i) origination
revenues representing fees earned from the underwriting of debt,
equity and equity-linked securities, as well as loan syndication
and commitment fees and (ii) strategic advisory services
revenues including merger and acquisition and other investment
banking advisory fees. Investment banking revenues were
$3.7 billion in 2008, down 33% from 2007, driven by lower
net revenues from equity origination, debt origination and
M&A advisory revenues, reflecting significantly lower
industry-wide underwriting and advisory transaction volumes
compared with 2007. Investment banking revenues are primarily
reported in our GMI business segment but also include
origination revenues in GWM.
Earnings from equity method investments include our pro rata
share of income and losses associated with investments accounted
for under the equity method of accounting. Earnings from equity
method investments were $4.5 billion in 2008, which
includes a net pre-tax gain of $4.3 billion from the sale
of our 20% ownership stake in Bloomberg, L.P. Excluding this
gain, earnings from equity method investments were
$0.2 billion, down from $1.6 billion in 2007 due
largely to lower revenues from most investments, including
alternative investment management companies. Earnings from
equity method investments are reported in both our GMI and GWM
business segments. Refer to Note 5 to the Consolidated
Financial Statements for further information on equity method
investments.
Other revenues include gains and losses on investment
securities, including certain available-for-sale securities,
gains and losses on private equity investments, and gains and
losses on loans and other miscellaneous items. Other revenues
were negative $10.1 billion in 2008, compared with negative
$2.2 billion in 2007. The negative revenues for 2008 were
primarily due to net losses from other-than-temporary impairment
charges on available-for-sale securities within our
U.S. banks investment securities portfolio of
$4.1 billion, write-downs on our leveraged finance loans
and commitments of $4.2 billion, and net losses of
$1.9 billion related to our private equity investments due
primarily to the decline in value of private and public
investments. The negative net other revenues in 2007 were
primarily driven by loan-related losses, other-than-temporary
impairment charges on available-for-sale securities and
write-downs on leveraged finance commitments.
Compensation and benefits expenses were $14.8 billion in
2008 and $15.9 billion in 2007. The year over year decrease
primarily reflects lower incentive-based compensation costs as a
result of lower net revenues and net earnings, as well as
reduced headcount levels. The overall decrease in compensation
and benefits expense was driven by a 30% decline in
incentive-based compensation, partially offset by increased
amortization of prior year stock compensation awards.
Non-compensation expenses were $14.5 billion, which
included a $2.5 billion non-tax deductible payment to
Temasek related to the July 2008 common stock offering; a
$2.3 billion goodwill impairment charge related to the FICC
and Investment Banking businesses; a $0.5 billion expense,
including a $125 million fine, arising from Merrill
Lynchs offer to repurchase ARS from our private clients
and the associated settlement with regulators; and a
$0.5 billion restructuring charge associated with headcount
reduction initiatives. Excluding the aforementioned items,
non-compensation expenses
24
were $8.7 billion, up 6% from 2007. Communication and
technology costs were $2.2 billion, up 7% due primarily to
costs related to ongoing technology investments and system
development initiatives. The increase also reflected higher
costs associated with technology equipment depreciation and
market data information costs. Occupancy and related
depreciation costs were $1.3 billion, up 11% due
principally to higher office rental expenses associated with
data center growth and increased office space, including the
impact of First Republic Bank (First Republic),
which was acquired in September 2007. Advertising and market
development costs were $652 million, down 17% due primarily
to lower travel and entertainment expenses. Other expenses were
$2.4 billion, which included the $0.5 billion expense
related to the ARS settlement previously discussed and
$1.1 billion of litigation accruals. The majority of the
litigation accruals are related to class action litigation,
including $0.6 billion of proposed settlements of
sub-prime-related class actions that have been reached in
connection with claims by persons who invested in Merrill Lynch
securities (see Note 11 to the Consolidated Financial
Statements). Excluding these items, other expenses were
$0.8 billion, a decrease of 47% from 2007.
Income tax benefits from continuing operations were a net credit
of $14.3 billion in 2008, reflecting tax benefits
associated with our pre-tax losses. The effective tax rate in
2008 was 34.1% compared with 32.7% for 2007. The increase in the
effective tax rate reflected changes in the firms
geographic mix of earnings and the impact of tax benefits on
losses.
25
U.S. ABS
CDO and Other Mortgage-Related Activities
The challenging market conditions that have existed since the
second half of 2007, particularly those relating to the credit
markets, continued throughout 2008. Although the greatest impact
to date had been on U.S. ABS CDOs and the
U.S. sub-prime residential mortgage products, the adverse
conditions in the credit markets have also affected other
products, including U.S. Alt-A,
non-U.S. residential
mortgages and commercial real estate. In addition, these
conditions also negatively affected the value of leveraged
lending transactions and our exposure to monoline financial
guarantors. The following discussion details our activities and
net exposures as of December 26, 2008.
Residential
Mortgage-Related Activities (excluding U.S. banks
investment securities portfolio)
U.S. Prime: We had net exposures of
$34.8 billion at December 26, 2008, which consisted
primarily of prime mortgage whole loans, including approximately
$31.1 billion of prime loans originated with GWM clients
(of which $15.0 billion were originated by First Republic,
an operating division of Merrill Lynch Bank &
Trust Co., FSB (MLBT-FSB)). Net exposures
related to U.S. prime residential mortgages increased 25%
during 2008 as a result of loan originations within GWMs
high net worth client base.
In addition to our U.S. prime related net exposures, we
also had net exposures related to other residential
mortgage-related activities. These activities consisted of the
following:
U.S. Sub-prime: We define sub-prime mortgages as
single-family residential mortgages that have more than one high
risk characteristic, such as: (i) the borrower has a low
FICO score (generally below 660); (ii) the mortgage has a
high loan-to-value (LTV) ratio (LTV greater than 80%
without borrower paid mortgage insurance); (iii) the
borrower has a high debt-to-income ratio (greater than 45%); or
(iv) the mortgage was underwritten based on stated/limited
income documentation. Sub-prime mortgage-related securities are
those securities that derive more than 50% of their value from
sub-prime mortgages.
We had net exposures of $195 million at December 26,
2008, down from $2.7 billion at December 28, 2007
primarily due to $1.4 billion in net losses, sales of whole
loans, and increased short positions. Our U.S. Sub-prime
exposures consisted primarily of non-performing loans (valued
using discounted liquidation values) and secondary trading
exposures related to our residential mortgage-backed securities
business, which consist of trading activity including credit
default swaps (CDS) on single names and indices. We
value residential mortgage-backed securities based on observable
prices and where prices are not observable, values are based on
modeling the present value of projected cash flows that we
expect to receive, based on the actual and projected performance
of the mortgages underlying a particular securitization. Key
determinants affecting our estimates of future cash flows
include estimates for borrower prepayments, delinquencies,
defaults and loss severities.
U.S. Alt-A: We define Alt-A mortgages as
single-family residential mortgages that are generally higher
credit quality than sub-prime loans but have characteristics
that would disqualify the borrower from a traditional prime
loan. Alt-A lending characteristics may include one or more of
the following: (i) limited documentation; (ii) high
combined-loan-to-value (CLTV) ratio (CLTV greater
than 80%); (iii) loans secured by non-owner occupied
properties; or (iv) debt-to-income ratio above normal
limits.
We had net exposures of $27 million at December 26,
2008, down from $2.7 billion at December 28, 2007
primarily due to net losses of $1.5 billion and sales of
related positions. These net exposures resulted from secondary
market trading activity or were retained from our
securitizations of Alt-A residential mortgages, which were
purchased from third-party mortgage originators.
Non-U.S.:
We had net exposures of $3.4 billion at December 26,
2008, which consisted primarily of residential mortgage whole
loans originated in the U.K., as well as through mortgage
originators in the Pacific Rim and asset-based lending
facilities backed by residential whole loans.
Non-U.S. net
exposures decreased 64% during 2008 due primarily to net losses
of $1.9 billion, paydowns of principal, sales of
mortgage-backed securities, maturity of a warehouse lending
facility and securitization activity in the U.K. Held for sale
loans are carried at the lower of cost or market value;
26
for those loans carried at market value, given the significant
illiquidity in the securitization market, values are based on
modeling the present value of projected cash flows that we
expect to receive, based on the actual and projected performance
of the mortgages. Key determinants affecting our estimates of
future cash flows include estimates for borrower prepayments,
delinquencies, defaults, and loss severities.
The following table provides a summary of our residential
mortgage-related net exposures and losses, excluding net
exposures to residential mortgage-backed securities held in our
U.S. banks investment securities portfolio, which are
described in the U.S. Banks Investment Securities
Portfolio section below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
exposures as
|
|
|
|
Other net changes
|
|
exposures as
|
|
|
of Dec. 28,
|
|
Net gains/(losses)
|
|
in net
|
|
of Dec. 26,
|
|
|
2007
|
|
reported in income
|
|
exposures(1)
|
|
2008
|
|
|
Residential Mortgage-Related (excluding U.S. banks
investment securities portfolio):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Prime(2)
|
|
$
|
27,789
|
|
|
$
|
76
|
|
|
$
|
6,934
|
|
|
$
|
34,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Residential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Sub-prime
|
|
$
|
2,709
|
|
|
$
|
(1,355
|
)
|
|
$
|
(1,159
|
)
|
|
$
|
195
|
|
U.S. Alt-A
|
|
|
2,687
|
|
|
|
(1,461
|
)
|
|
|
(1,199
|
)
|
|
|
27
|
|
Non-U.S.
|
|
|
9,379
|
|
|
|
(1,866
|
)
|
|
|
(4,133
|
)
|
|
|
3,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
Residential(3)
|
|
$
|
14,775
|
|
|
$
|
(4,682
|
)
|
|
$
|
(6,491
|
)
|
|
$
|
3,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents U.S. Prime
originations, foreign exchange revaluations, hedges, paydowns,
maturities, changes in loan commitments and related
funding. |
(2) |
|
As of December 26, 2008,
net exposures include approximately $31.1 billion of prime
loans originated with GWM clients (of which $15.0 billion
were originated by First Republic Bank). |
(3) |
|
Includes warehouse lending,
whole loans and residential mortgage-backed
securities. |
U.S. ABS
CDO Activities
In addition to our U.S. sub-prime residential
mortgage-related exposures, we have exposure to U.S. ABS
CDOs, which are securities collateralized by a pool of
asset-backed securities (ABS), for which the
underlying collateral is primarily sub-prime residential
mortgage loans.
We engaged in the underwriting and sale of U.S. ABS CDOs,
which involved the following steps: (i) determining
investor interest or responding to inquiries or mandates
received; (ii) engaging a collateralized debt obligation
(CDO) collateral manager who is responsible for
selection of the ABS securities that will become the underlying
collateral for the U.S. ABS CDO securities;
(iii) obtaining credit ratings from one or more rating
agencies for U.S. ABS CDO securities;
(iv) securitizing and pricing the various tranches of the
U.S. ABS CDO at representative market rates; and
(v) distributing the U.S. ABS CDO securities to
investors or retaining them for Merrill Lynch. As a result of
the continued deterioration in the sub-prime mortgage market, we
did not underwrite any U.S. ABS CDOs in 2008.
Our U.S. ABS CDO net exposure primarily consists of our
super senior ABS CDO portfolio, as well as secondary trading
exposures related to our ABS CDO business.
Super senior positions represent our exposure to the senior most
tranche in an ABS CDOs capital structure. This
tranches claims have priority to the proceeds from
liquidated cash ABS CDO assets.
27
At the end of 2008, net exposures to U.S. super senior ABS
CDOs were $708 million, down from $6.8 billion at the
end of 2007. The remaining net exposure is predominantly
comprised of U.S. super senior ABS CDOs based on mezzanine
underlying collateral.
The aggregate U.S. super senior ABS CDO long exposures were
$1.8 billion, substantially reduced from $30.4 billion
at the end of 2007. The reduction predominantly resulted from
the sale of ABS CDOs to an affiliate of Lone Star discussed
below, which decreased long exposures by $11.1 billion,
which includes a loss of $4.4 billion. Our long exposure
was further reduced during the year by other mark-to-market
adjustments, excluding credit valuation adjustments, of
$13.4 billion, $3.2 billion of which related to
additional sales in the fourth quarter of 2008, and
$0.9 billion primarily related to amortization and
liquidations.
At year end, the super senior ABS CDO long exposure was hedged
with an aggregate of $1.1 billion of short exposure, which
was down from $23.6 billion at the end of 2007. This
reduction primarily reflected $7.8 billion from the
termination and settlement of related hedges with monolines and
insurance companies, $7.5 billion of mark-to-market gains,
$6.5 billion of hedge ineffectiveness and $0.6 billion
of amortization and liquidations.
The following table provides an overview of changes to our
U.S. super senior ABS CDO net exposures from
December 28, 2007 to December 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
U.S. Super Senior ABS CDO
Exposure
|
|
Long
|
|
Short(1)
|
|
Net
|
|
|
December 28, 2007
|
|
$
|
30,432
|
|
|
$
|
(23,597
|
)
|
|
$
|
6,835
|
|
Exposure Changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of
CDOs(2)
|
|
|
(10,011
|
)
|
|
|
-
|
|
|
|
(10,011
|
)
|
Termination and Settlement of Monoline and Insurance Company
Hedges(3)
|
|
|
-
|
|
|
|
7,825
|
|
|
|
7,825
|
|
Hedge Ineffectiveness
|
|
|
-
|
|
|
|
6,543
|
|
|
|
6,543
|
|
Gains /
(Losses)(4)
|
|
|
(17,765
|
)
|
|
|
7,483
|
|
|
|
(10,282
|
)
|
Other(5)
|
|
|
(851
|
)
|
|
|
649
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2008
|
|
$
|
1,805
|
|
|
$
|
(1,097
|
)
|
|
$
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Hedges are affected by a
variety of factors that impact the degree of their
effectiveness. These factors may include differences in
attachment point, timing of cash flows, control rights, limited
recourse to counterparties and other basis risks. |
(2) |
|
Primarily consists of
$6.7 billion of assets sold to Lone Star. |
(3) |
|
Primarily consists of
termination of trades with ACA $(3.4) billion, AIG
$(3.2) billion, and XL $(1.2) billion. |
(4) |
|
Primarily consists of loss on
sale to Lone Star of $(4.4) billion and mark to market
losses on CDOs of $(5.9) billion. |
(5) |
|
Primarily consists of
liquidations and amortizations. |
Merrill Lynchs secondary trading exposure related to its
ABS CDO business was ($281) million at December 26,
2008. As of December 28, 2007, secondary trading exposure
was ($2.0) billion. The change in exposure was driven by
liquidations, unwinds, and net gains / (losses)
recognized.
On July 28, 2008, we agreed to sell $30.6 billion
gross notional amount of U.S. super senior ABS CDOs (the
Portfolio) to an entity owned and controlled by Lone
Star for a purchase price of $6.7 billion. The transaction
closed on September 18, 2008. In connection with this sale
we recorded a pre-tax write-down of $4.4 billion in 2008.
We provided a financing loan 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 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. As of December 26, 2008, all
scheduled payments on the loan have been received.
28
Monoline
Financial Guarantors
We hedge a portion of our long exposures of U.S. super
senior ABS CDOs with various market participants, including
financial guarantors. We define financial guarantors as monoline
insurance companies that provide credit support for a security
either through a financial guaranty insurance policy on a
particular security or through an instrument such as a credit
default swap (CDS). Under a CDS, the financial
guarantor generally agrees to compensate the counterparty to the
swap for the deterioration in the value of the underlying
security upon an occurrence of a credit event, such as a failure
by the underlying obligor on the security to pay principal
and/or
interest.
We hedged a portion of our long exposures to U.S. super
senior ABS CDOs with certain financial guarantors through the
execution of CDS that are structured to replicate standard
financial guaranty insurance policies, which provide for timely
payment of interest
and/or
ultimate payment of principal at their scheduled maturity date.
CDS gains and losses are based on the fair value of the
referenced ABS CDOs. Depending upon the creditworthiness of the
financial guarantor hedge counterparties, we may record credit
valuation adjustments in estimating the fair value of the CDS.
At December 26, 2008, the carrying value of our hedges with
financial guarantors related to U.S. super senior ABS CDOs
was $1.5 billion, reduced from $3.5 billion at
December 28, 2007. The decrease was primarily due to the
termination and settlement of monoline hedges.
The following table provides a summary of our total financial
guarantor exposures for U.S. super senior ABS CDOs from
December 28, 2007 to December 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Mark-to-
|
|
|
|
|
|
|
|
|
|
|
Market Prior
|
|
Life-to-Date
|
|
|
|
|
|
|
|
|
to Credit
|
|
Credit
|
|
|
Credit Default Swaps with
Financial
|
|
Notional of
|
|
Net
|
|
Valuation
|
|
Valuation
|
|
Carrying
|
Guarantors on U.S. Super Senior ABS CDOs
|
|
CDS
|
|
Exposure
|
|
Adjustments
|
|
Adjustments
|
|
Value
|
|
|
December 28, 2007
|
|
$
|
(19,901
|
)
|
|
$
|
(13,839
|
)
|
|
$
|
6,062
|
|
|
$
|
(2,608
|
)
|
|
$
|
3,454
|
|
Settlement and potential termination of monoline hedges on long
positions
sold(1)
|
|
|
16,959
|
|
|
|
9,538
|
|
|
|
(7,421
|
)
|
|
|
5,626
|
|
|
|
(1,795
|
)
|
Gains/(losses) and other activity
|
|
|
111
|
|
|
|
3,822
|
|
|
|
3,711
|
|
|
|
(3,912
|
)
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2008
|
|
$
|
(2,831
|
)
|
|
$
|
(479
|
)
|
|
$
|
2,352
|
|
|
$
|
(894
|
)
|
|
$
|
1,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We terminated all of our
CDO-related hedges with XL, which at the time of sale had a
carrying value of $1.0 billion, in exchange for an upfront
payment of $500 million. This termination resulted in a net
loss of $529 million. |
In addition to hedges with financial guarantors on
U.S. super senior ABS CDOs, we also have hedges on certain
long exposures related to corporate CDOs, Collateralized Loan
Obligations (CLOs), Residential Mortgage-Backed
Securities (RMBS) and Commercial Mortgage-Backed
Securities (CMBS). At December 26, 2008, the
carrying value of our hedges with financial guarantors related
to these types of exposures was $7.8 billion, of which
approximately 50% pertains to CLOs and various high grade basket
trades. The other 50% relates primarily to CMBS and RMBS in the
U.S. and Europe.
29
The following table provides a summary of our total financial
guarantor exposures to other referenced assets, as described
above, other than U.S. super senior ABS CDOs, as of
December 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
Mark-to-
|
|
|
|
|
|
|
|
|
|
|
Market Prior
|
|
Life-to-Date
|
|
|
|
|
|
|
|
|
to Credit
|
|
Credit
|
|
|
Credit Default Swaps with
Financial
|
|
Notional of
|
|
Net
|
|
Valuation
|
|
Valuation
|
|
Carrying
|
Guarantors (Excluding U.S. Super Senior ABS CDO)
|
|
CDS(1)
|
|
Exposure(2)
|
|
Adjustments
|
|
Adjustments
|
|
Value
|
|
|
By counterparty credit
quality(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$
|
(17,293
|
)
|
|
$
|
(13,718
|
)
|
|
$
|
3,575
|
|
|
$
|
(804
|
)
|
|
$
|
2,771
|
|
AA
|
|
|
(16,672
|
)
|
|
|
(11,851
|
)
|
|
|
4,821
|
|
|
|
(1,832
|
)
|
|
|
2,989
|
|
A
|
|
|
(1,197
|
)
|
|
|
(879
|
)
|
|
|
318
|
|
|
|
(118
|
)
|
|
|
200
|
|
BBB
|
|
|
(5,570
|
)
|
|
|
(4,522
|
)
|
|
|
1,048
|
|
|
|
(440
|
)
|
|
|
608
|
|
Non-investment grade or unrated
|
|
|
(9,581
|
)
|
|
|
(6,570
|
)
|
|
|
3,011
|
|
|
|
(1,809
|
)
|
|
|
1,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial guarantor exposures
|
|
$
|
(50,313
|
)
|
|
$
|
(37,540
|
)
|
|
$
|
12,773
|
|
|
$
|
(5,003
|
)
|
|
$
|
7,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the gross notional
amount of CDS purchased as protection to hedge predominantly
Corporate CDO, CLO, RMBS and CMBS exposure. Amounts do not
include exposure with financial guarantors on U.S. super senior
ABS CDOs which are reported separately above. |
(2) |
|
Represents the notional of the
total CDS, net of gains prior to credit valuation
adjustments. |
(3) |
|
Represents S&P rating band
as of December 26, 2008. |
On February 18, 2009, one of the monoline financial guarantors
included in the tables above with whom we have a significant
relationship announced a reorganization plan. We are currently
evaluating the impacts of the reorganization, including rating
downgrades and the impact on our 2009 financial results. See
Executive Overview Other Events on
page 21 for a discussion of the U.S. governments
agreement to provide assistance to Bank of America in the
Merrill Lynch acquisition.
U.S.
Banks Investment Securities Portfolio
The investment securities portfolio of Merrill Lynch Bank USA
(MLBUSA) and MLBT-FSB includes investment securities
comprising various asset classes. During the fourth quarter of
2008, in order to manage capital at MLBUSA, certain investment
securities were transferred from MLBUSA to a consolidated
non-bank entity. This transfer had no impact on how the
investment securities were valued or the subsequent accounting
treatment. As of December 26, 2008, the net exposure of
this portfolio was $10.4 billion, which included investment
securities of approximately $6.0 billion recorded in the
non-bank legal entity. The cumulative pre-tax balance in other
comprehensive (loss)/income related to this portfolio was
approximately negative $9.3 billion as of December 26,
2008. We regularly (at least quarterly) evaluate each security
whose value has declined below amortized cost to assess whether
the decline in fair value is
other-than-temporary.
Within this investment securities portfolio, net pre-tax losses
of approximately $4.1 billion were recognized through the
statement of earnings during 2008. These net losses primarily
reflected the
other-than-temporary
impairment in the value of certain securities, primarily
U.S. Alt-A residential mortgage-backed securities.
We value RMBS based on observable prices and where prices are
not observable, values are based on modeling the present value
of projected cash flows that we expect to receive, based on the
actual and projected performance of the mortgages underlying a
particular securitization. Key determinants affecting our
estimates of future cash flows include estimates for borrower
prepayments, delinquencies, defaults, and loss severities.
A decline in a debt securitys fair value is considered to
be
other-than-temporary
if it is probable that not all amounts contractually due will be
collected. In assessing whether it is probable that all amounts
contractually due will not be collected, we consider 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;
|
30
|
|
|
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.
|
Refer to Note 5 to the Consolidated Financial Statements
for additional information.
The following table provides a summary of our
U.S. banks investment securities portfolio net
exposures and losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Net
|
|
Net
|
|
Unrealized
|
|
Other
|
|
Net
|
|
|
|
|
Exposures
|
|
Gains/(Losses)
|
|
Gains/(Losses)
|
|
Net Changes
|
|
Exposures
|
|
|
|
|
as of Dec. 28,
|
|
Reported in
|
|
Included in OCI
|
|
in Net
|
|
as of Dec. 26,
|
|
Cumulative
|
|
|
2007
|
|
Income(2)
|
|
(pre-tax)
|
|
Exposures(3)
|
|
2008
|
|
OCI (pre-tax)
|
|
|
U.S. Banks Investment Securities Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime
residential mortgage-backed securities
|
|
$
|
4,161
|
|
|
$
|
(485
|
)
|
|
$
|
(1,200
|
)
|
|
$
|
(463
|
)
|
|
$
|
2,013
|
|
|
$
|
(1,942
|
)
|
Alt-A residential mortgage-backed securities
|
|
|
7,120
|
|
|
|
(3,028
|
)
|
|
|
(1,179
|
)
|
|
|
(618
|
)
|
|
|
2,295
|
|
|
|
(1,999
|
)
|
Commercial mortgage-backed securities
|
|
|
5,791
|
|
|
|
(117
|
)
|
|
|
(3,186
|
)
|
|
|
637
|
|
|
|
3,125
|
|
|
|
(3,499
|
)
|
Prime residential mortgage-backed securities
|
|
|
4,174
|
|
|
|
(349
|
)
|
|
|
(837
|
)
|
|
|
(1,143
|
)
|
|
|
1,845
|
|
|
|
(1,075
|
)
|
Non-residential asset-backed securities
|
|
|
1,214
|
|
|
|
(27
|
)
|
|
|
(178
|
)
|
|
|
(383
|
)
|
|
|
626
|
|
|
|
(216
|
)
|
Non-residential CDOs
|
|
|
903
|
|
|
|
(101
|
)
|
|
|
(407
|
)
|
|
|
(66
|
)
|
|
|
329
|
|
|
|
(483
|
)
|
Other
|
|
|
240
|
|
|
|
(1
|
)
|
|
|
(56
|
)
|
|
|
15
|
|
|
|
198
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
23,603
|
|
|
$
|
(4,108
|
)
|
|
$
|
(7,043
|
)
|
|
$
|
(2,021
|
)
|
|
$
|
10,431
|
|
|
$
|
(9,289
|
)
|
|
|
|
|
|
(1) |
|
The December 26,
2008 net exposures include investment securities of
approximately $6.0 billion recorded in a non-bank legal
entity. |
(2) |
|
Primarily represents losses on
certain securities deemed to be
other-than-temporarily
impaired. |
(3) |
|
Primarily represents principal
paydowns, sales and hedges. |
The continued adverse market environment and its potential
impact on the underlying securitized assets could result in
further
other-than-temporary
impairments in our U.S. banks investment securities
portfolio in 2009.
Commercial
Real Estate
As of December 26, 2008, net exposures related to
commercial real estate, excluding First Republic, totaled
approximately $9.7 billion, down 49% from December 28,
2007, due primarily to asset sales of whole loan/conduit
exposures in the U.S. and Europe and net write-downs. Net
exposures related to First Republic were $3.1 billion at
the end of 2008, up 36% from 2007 primarily due to new
originations.
31
The following table provides a summary of our Commercial Real
Estate portfolio net exposures from December 28, 2007 to
December 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Net
|
|
|
|
Net
|
|
|
Net Exposures
|
|
Gains/(Losses)
|
|
Other Net
|
|
Exposures
|
|
|
as of Dec. 28,
|
|
Reported in
|
|
Changes in Net
|
|
as of Dec. 26,
|
|
|
2007
|
|
Income
|
|
Exposures(1)
|
|
2008
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole Loans/Conduits
|
|
$
|
11,585
|
|
|
$
|
(1,548
|
)
|
|
$
|
(6,192
|
)
|
|
$
|
3,845
|
|
Securities and Derivatives
|
|
|
(123
|
)
|
|
|
(78
|
)
|
|
|
375
|
|
|
|
174
|
|
Real Estate
Investments(2)
|
|
|
7,486
|
|
|
|
(358
|
)
|
|
|
(1,443
|
)
|
|
|
5,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Real Estate, excluding First Republic
|
|
$
|
18,948
|
|
|
$
|
(1,984
|
)
|
|
$
|
(7,260
|
)
|
|
$
|
9,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Republic Bank
|
|
$
|
2,300
|
|
|
$
|
71
|
|
|
$
|
748
|
|
|
$
|
3,119
|
|
|
|
|
|
|
(1) |
|
Primarily represents sales,
paydowns and foreign exchange revaluations. |
(2) |
|
The Company makes equity and
debt investments in entities whose underlying assets are real
estate. The Company consolidates those entities in which we are
the primary beneficiary in accordance with
FIN No. 46(R), Consolidation of Variable Interest
Entities (revised December 2003) an interpretation
of ARB No. 51. The Company does not consider itself to have
economic exposure to the total underlying assets in those
entities. The amounts presented are the Companys net
investment and therefore exclude the amounts that have been
consolidated but for which the Company does not consider itself
to have economic exposure. |
32
Business
Segments
Our operations are organized into two business segments: GMI and
GWM. We also record revenues and expenses within a
Corporate category. Corporate results primarily
include unrealized gains and losses related to interest rate
hedges on certain debt. In addition, Corporate results for the
year ended December 26, 2008 included expenses of
$2.5 billion related to the payment to Temasek,
$0.5 billion associated with the ARS repurchase program,
and $0.7 billion of litigation accruals recorded in 2008.
Net revenues and pre-tax losses recorded within Corporate for
2008 were $1.1 billion and $2.6 billion, respectively,
as compared with net revenues and pre-tax losses of negative
$103 million and $116 million, respectively, in the
prior year period.
The following segment results represent the information that is
relied upon by management in its decision-making processes.
Revenues and expenses associated with inter-segment activities
are recognized in each segment. In addition, revenue and expense
sharing agreements for joint activities between segments are in
place, and the results of each segment reflect their
agreed-upon
apportionment of revenues and expenses associated with these
activities. See Note 2 to the Consolidated Financial
Statements for further information. Segment results are
presented from continuing operations and exclude results from
discontinued operations. Refer to Note 16 to the
Consolidated Financial Statements for additional information on
discontinued operations.
Global Markets and Investment Banking
GMI provides trading, capital markets services, and investment
banking services to issuer and investor clients around the
world. The Global Markets division consists of the FICC and
Equity Markets sales and trading activities for investor clients
and on a proprietary basis, while the Investment Banking
division provides a wide range of origination and strategic
advisory services for issuer clients.
GMI
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
2008 vs.
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
Global Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
FICC
|
|
$
|
(37,423
|
)
|
|
$
|
(15,873
|
)
|
|
|
N/M
|
%
|
Equity Markets
|
|
|
7,668
|
|
|
|
8,286
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Global Markets revenues, net of interest
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
(29,755
|
)
|
|
|
(7,587
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
931
|
|
|
|
1,550
|
|
|
|
(40
|
)
|
Equity
|
|
|
1,047
|
|
|
|
1,629
|
|
|
|
(36
|
)
|
Strategic Advisory Services
|
|
|
1,317
|
|
|
|
1,740
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Banking revenues, net of interest
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
3,295
|
|
|
|
4,919
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GMI revenues, net of interest expense
|
|
|
(26,460
|
)
|
|
|
(2,668
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses before restructuring charge
|
|
|
14,753
|
|
|
|
13,677
|
|
|
|
8
|
|
Restructuring charge
|
|
|
331
|
|
|
|
-
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from continuing operations
|
|
$
|
(41,544
|
)
|
|
$
|
(16,345
|
)
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
|
|
Total full-time employees
|
|
|
9,700
|
|
|
|
12,300
|
|
|
|
|
|
|
|
N/M = Not Meaningful
33
GMI recorded negative net revenues and a pre-tax loss from
continuing operations in 2008 of $26.5 billion and
$41.5 billion, respectively, as the difficult market
conditions that existed during the year contributed to net
losses in FICC and lower net revenues in Equity Markets and
Investment Banking. The 2008 pre-tax loss was primarily driven
by the net write-downs within FICC that are discussed below, as
well as a $2.3 billion impairment charge related to
goodwill. Partially offsetting these losses was a net gain of
approximately $5.1 billion recorded by GMI during 2008 due
to the impact of the widening of Merrill Lynchs credit
spreads on the carrying value of certain of our long-term debt
liabilities.
GMIs 2007 net revenues were negative
$2.7 billion, and the pre-tax loss from continuing
operations was $16.3 billion. The 2007 loss was primarily
driven by net write-downs within FICC, including
$20.9 billion related to U.S. ABS CDOs and residential
mortgage-related exposures and $3.1 billion related to
valuation adjustments against guarantor counterparties.
GMIs 2007 net revenues also included a net gain of
approximately $1.9 billion due to the impact of the
widening of Merrill Lynchs credit spreads on the carrying
value of certain of our long-term debt liabilities.
Fixed
Income, Currencies and Commodities (FICC)
During 2008, FICC was adversely impacted by extremely difficult
market conditions, particularly during the second half of the
year. Such conditions included the continuing deterioration in
the credit markets, lower levels of liquidity, reduced price
transparency, asset price declines, increased volatility and
severe market dislocations, particularly following the default
of a major U.S. broker-dealer and the
U.S. Governments conservatorship of certain GSEs.
In 2008, FICC recorded approximately $10.2 billion of net
write-downs related to U.S. ABS CDOs, approximately
$4.4 billion of which related to the sale of
U.S. super senior ABS CDOs conducted during the third
quarter. In addition, as a result of the deteriorating
environment for financial guarantors, FICC also recorded credit
valuation adjustments related to hedges with financial
guarantors of negative $10.4 billion. FICCs net
revenues were also adversely impacted by net losses related to
our U.S. banks investment securities portfolio of
$4.1 billion and certain of our
U.S. sub-prime,
U.S. Alt-A and
Non-U.S. residential
mortgage-related exposures aggregating approximately
$4.6 billion. FICC also recognized net write-downs related
to leveraged finance loans and commitments of approximately
$4.2 billion and $1.9 billion of net write-downs
related to commercial real estate. These losses were partially
offset by a foreign currency gain of $2.6 billion related
to currency hedges of our U.K. deferred tax assets recognized in
the fourth quarter of 2008 and a net gain of approximately
$3.7 billion related to the impact of the widening of our
credit spreads on the carrying value of certain of our long-term
debt liabilities. In addition, net revenues for most other FICC
businesses declined from 2007, as the environment for those
businesses was materially worse than the prior-year.
In 2007, FICC net revenues were negative $15.9 billion as
strong revenues in global rates and global currencies were more
than offset by declines in the global credit and structured
finance and investments businesses. FICCs 2007 net
revenues included net writedowns of approximately
$20.9 billion related to U.S. ABS CDOs and residential
mortgage-related exposures and $3.1 billion related to
valuation adjustments against guarantor counterparties, which
were partially offset by a net benefit of approximately
$1.2 billion related to the impact of the widening of our
credit spreads on the carrying value of certain of our long-term
debt liabilities.
Equity
Markets
Equity Markets net revenues for 2008 were $7.7 billion
compared with $8.3 billion in the prior-year period. Net
revenues in 2008 included a gain of $4.3 billion from the
sale of the investment in Bloomberg L.P. as well as a gain of
$1.4 billion related to changes in the carrying value of
certain of our long-term debt liabilities. These gains were more
than offset by declines from other equity products, including
cash and global equity-linked products. In addition, private
equity recorded negative net revenues of $2.1 billion in
2008 as compared with net revenues of $0.4 billion in 2007.
34
For 2007, Equity Markets net revenues were a record
$8.3 billion, driven by our equity-linked business, which
was up nearly 80%, global cash equity trading business which was
up over 30% and global markets financing and services business,
which includes prime brokerage, which was up over 45%. Equity
Markets 2007 net revenues included a gain of approximately
$700 million related to changes in the carrying value of
certain of our long-term debt liabilities.
Investment
Banking
For 2008, Investment Banking net revenues were
$3.3 billion, down 33% from a record $4.9 billion in
the prior-year period, as the difficult market conditions that
existed in 2008 resulted in lower industry-wide transaction
volumes across all product lines.
Origination
Origination revenues represent fees earned from the underwriting
of debt, equity, and equity-linked securities, as well as loan
syndication fees.
For 2008, origination revenues were $2.0 billion, down 38%
from the year-ago period. Debt and equity originations were down
40% and 36%, respectively, compared with 2007, primarily
reflecting lower industry-wide transaction volumes in 2008.
Strategic
Advisory Services
Strategic advisory services net revenues, which include merger
and acquisition and other advisory fees, were $1.3 billion
in 2008, a decrease of 24% from the prior-year. The decline was
primarily due to lower industry-wide transaction activity, which
reflected the high level of volatility in the global financial
markets, economic uncertainty and a lack of available liquidity
in the credit markets.
GWM, our full-service retail wealth management segment, provides
brokerage, investment advisory and financial planning services.
GWM is comprised of GPC and GIM.
GPC provides a full range of wealth management products and
services to assist clients in managing all aspects of their
financial profile principally through our FA network.
GIM includes our interests in creating and managing wealth
management products, including alternative investment products
for clients. GIM also includes our share of net earnings from
our ownership positions in other investment management
companies, including BlackRock.
35
GWM
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
2008 vs.
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
GPC
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee-based revenues
|
|
$
|
6,171
|
|
|
$
|
6,278
|
|
|
|
(2
|
)%
|
Transactional and origination revenues
|
|
|
3,313
|
|
|
|
3,887
|
|
|
|
(15
|
)
|
Net interest profit and related
hedges(1)
|
|
|
2,337
|
|
|
|
2,318
|
|
|
|
1
|
|
Other revenues
|
|
|
288
|
|
|
|
416
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GPC revenues, net of interest expense
|
|
|
12,109
|
|
|
|
12,899
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GIM
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GIM revenues, net of interest expense
|
|
|
669
|
|
|
|
1,122
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total GWM revenues, net of interest expense
|
|
|
12,778
|
|
|
|
14,021
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses before restructuring charge
|
|
|
10,277
|
|
|
|
10,391
|
|
|
|
(1
|
)
|
Restructuring charge
|
|
|
155
|
|
|
|
-
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings from continuing operations
|
|
$
|
2,346
|
|
|
$
|
3,630
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
|
|
18.4
|
%
|
|
|
25.9
|
%
|
|
|
|
|
Total full-time employees
|
|
|
29,400
|
|
|
|
31,000
|
|
|
|
|
|
Total Financial Advisors
|
|
|
16,090
|
|
|
|
16,740
|
|
|
|
|
|
|
|
N/M = Not Meaningful
|
|
|
(1) |
|
Includes the interest component
of non-qualifying derivatives, which are included in other
revenues on the Consolidated Statements of
(Loss)/Earnings. |
For 2008, GWMs net revenues were $12.8 billion, down
9% from the prior-year period, primarily due to declines in
transactional and origination revenues. GWM recorded
$2.3 billion of pre-tax earnings from continuing
operations, down 35% from the year-ago period. The pre-tax
profit margin was 18.4%, down from 25.9% in the prior-year
period. Excluding the impact of the $155 million
restructuring charge, GWMs pre-tax earnings were
$2.5 billion, a decline of 31% from 2007. On the same
basis, the pre-tax profit margin was 19.6%.
GWMs net revenues in 2007 were $14.0 billion,
reflecting strong growth in both GPCs and GIMs
businesses. GWM generated $3.6 billion of pre-tax earnings
from continuing operations. The pre-tax profit margin was 25.9%
in 2007.
Global
Private Client
GPCs 2008 net revenues were $12.1 billion, down
6% from the year-ago period, driven by lower transactional and
origination revenues, resulting from reduced client and
origination activity in a challenging market environment.
Financial Advisor headcount was 16,090 at the end of 2008, a
decrease of 650 FAs during the year.
Fee-Based
Revenues
GPC generated $6.2 billion of fee-based revenues in 2008,
down 2% from 2007, reflecting lower asset levels in annuitized
fee-based products resulting from market declines, partially
offset by the inclusion of fee-based accounts from First
Republic, which was acquired in September 2007.
36
The value of client assets in GWM accounts at year-end 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
(dollars in billions)
|
|
|
|
2008
|
|
2007
|
|
|
Assets in client accounts:
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,125
|
|
|
$
|
1,586
|
|
Non-U.S.
|
|
|
122
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,247
|
|
|
$
|
1,751
|
|
|
|
|
|
|
|
|
|
|
Assets in Annuitized-Revenue Products
|
|
$
|
466
|
|
|
$
|
655
|
|
|
|
Total client assets in GWM accounts were $1.2 trillion, down
from $1.8 trillion in 2007. Total net new money was negative
$12 billion for 2008 and was adversely affected by client
reaction to persistent volatility and significantly negative
market movements during the year. GWMs net inflows of
client assets into annuitized-revenue products were
$11 billion for 2008. Assets in annuitized-revenue products
ended 2008 at $466 billion, down from $655 billion in
2007. The decrease in total client assets and assets in
annuitized-revenue products in GWM accounts during 2008 was
primarily due to market depreciation.
Transactional
and Origination Revenues
Transactional and origination revenues were $3.3 billion in
2008, down 15% from the prior-year due to lower client
transaction and origination volumes amidst increasingly
challenging market conditions.
Net
Interest Profit and Related Hedges
Net interest profit (interest revenues less interest expenses)
and related hedges include GPCs allocation of the interest
spread earned in our banking subsidiaries for deposits, as well
as interest earned, net of provisions for loan losses, on
securities-based loans, mortgages, small- and middle-market
business and other loans, corporate funding allocations, and the
interest component of non-qualifying derivatives.
For 2008, net interest profit and related hedges were
$2.3 billion, up slightly from 2007.
Other
Revenues
For 2008, other revenues were down 31% to $288 million,
primarily due to lower gains on sales of mortgages and markdowns
on certain alternative investments.
Global
Investment Management
GIM includes revenues from the creation and management of hedge
fund and other alternative investment products for clients, as
well as our share of net earnings from our ownership positions
in other investment management companies, including BlackRock.
Under the equity method of accounting, an estimate of the net
earnings associated with our approximately half economic
ownership interest in BlackRock is recorded in the GIM portion
of the GWM segment.
GIMs 2008 revenues were $669 million, down 40% from
the year-ago period, primarily due to lower revenues from our
investments in investment management companies.
Off-Balance Sheet
Exposures
As a part of our normal operations, we enter into various
off-balance sheet arrangements that may require future payments.
The table and discussion below outline our significant
off-balance sheet
37
arrangements, as well as their future expirations, as of
December 26, 2008. Refer to Note 11 to the
Consolidated Financial Statements for further information:
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(dollars in millions)
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Expiration
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Less than
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1 - 3
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3+ -
5
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Over 5
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|
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Total
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1 Year
|
|
Years
|
|
Years
|
|
Years
|
|
|
Standby liquidity facilities
|
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$
|
9,144
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|
|
$
|
6,279
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|
|
$
|
-
|
|
|
$
|
2,849
|
|
|
$
|
16
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|
Auction rate security guarantees
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5,235
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|
|
|
-
|
|
|
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5,235
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|
|
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-
|
|
|
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-
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|
Residual value guarantees
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738
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|
|
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322
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|
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96
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|
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320
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|
|
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-
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|
Standby letters of credit and other guarantees
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40,499
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825
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2,738
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|
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690
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|
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36,246
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Standby
Liquidity Facilities
Merrill Lynch provides standby liquidity facilities to certain
municipal bond securitization special purpose entities
(SPEs). In these arrangements, Merrill Lynch is
required to fund these standby liquidity facilities if the fair
value of the assets held by the SPE declines below par value and
certain other contingent events take place. In those instances
where the residual interest in the securitized trust is owned by
a third party, any payments under the facilities are offset by
economic hedges entered into by Merrill Lynch. In those
instances where the residual interest in the securitized trust
is owned by Merrill Lynch, any requirement to pay under the
facilities is considered remote because Merrill Lynch, in most
instances, will purchase the senior interests issued by the
trust at fair value as part of its dealer market-making
activities. However, Merrill Lynch will have exposure to these
purchased senior interests. Refer also to Note 6 to the
Consolidated Financial Statements for further information.
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 ARS at par 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 were
eligible to sell 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 Lynch as of December 26, 2008 was
$5.2 billion. As of December 26, 2008 Merrill Lynch
had purchased $3.2 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 Merrill Lynch and transferred their accounts to
other brokers prior to February 13, 2008. At
December 26, 2008, a liability of $278 million has
been recorded for our estimated exposure related to this
guarantee.
Residual
Value Guarantees
At December 26, 2008 residual value guarantees of
$738 million included amounts associated with the Hopewell,
NJ campus, aircraft leases and certain power plant facilities.
Standby
Letters of Credit and Other FIN 45 Guarantees
Merrill Lynch provides guarantees to certain counterparties in
the form of standby letters of credit in the amount of
$2.6 billion. At December 26, 2008, Merrill Lynch held
marketable securities of $419 million as collateral to
secure these guarantees.
In conjunction with certain mutual funds, Merrill Lynch
guarantees the return of principal investments or distributions
as contractually specified. At December 26, 2008, Merrill
Lynchs maximum potential
38
exposure to loss with respect to these guarantees is
$298 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
December 26, 2008.
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 such representations and
warranties, Merrill Lynch may have an obligation to repurchase
the 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
$36 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
December 26, 2008 arising from these First Franklin
residential mortgage sales and securitization transactions.
Derivatives
We record all derivative transactions at fair value on our
Consolidated Balance Sheets. We do not monitor our exposure to
derivatives based on the notional amount because that amount is
not a relevant indicator of our exposure to these contracts, as
it is not indicative of the amount that we would owe on the
contract. 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.
Since derivatives are recorded on the Consolidated Balance
Sheets at fair value and the disclosure of the notional amounts
is not a relevant indicator of risk, notional amounts are not
provided for the off-balance sheet exposure on derivatives.
Derivatives that meet the definition of a guarantee under
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indebtedness of
Others, and credit derivatives are included in Note 11
to the Consolidated Financial Statements.
We also fund selected assets, including CDOs and CLOs, via
derivative contracts with third-party structures, the majority
of which are not consolidated on our balance sheets. Of the
total notional amount of these total return swaps, approximately
$6 billion is term financed through facilities provided by
commercial banks and $21 billion is financed by long term
funding provided by third party special purpose vehicles. In
certain circumstances, we may be required to purchase these
assets, which would not result in additional gain or loss to us
as such exposure is already reflected in the fair value of our
derivative contracts.
In order to facilitate client demand for structured credit
products, we sell protection on high-grade collateral to, and
buy protection on lesser grade collateral from, certain SPEs,
which then issue structured credit notes. We also enter into
other derivatives with SPEs, both Merrill Lynch and third party
sponsored, including interest rate swaps, credit default swaps
and other derivative instruments.
Involvement
with SPEs
We transact with SPEs in a variety of capacities, including
those that we help establish as well as those initially
established by third parties. Our involvement with SPEs can vary
and, depending upon the accounting definition of the SPE (i.e.,
voting rights entity (VRE), variable interest entity
(VIE) or qualified special purpose entity
(QSPE)), we may be required to reassess prior
consolidation and disclosure conclusions. An interest in a VRE
requires reconsideration when our equity interest or management
influence changes, an interest in a VIE requires reconsideration
when an event occurs that was not originally contemplated (e.g.,
a purchase of the SPEs assets or liabilities), and an
interest in a QSPE requires reconsideration if the entity no
longer meets the definition of a QSPE. Refer to Note 1
39
to the Consolidated Financial Statements for a discussion of our
consolidation accounting policies. Types of SPEs with which we
have historically transacted with include:
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Municipal bond securitization SPEs: SPEs that issue
medium-term paper, purchase municipal bonds as collateral and
purchase a guarantee to enhance the creditworthiness of the
collateral.
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Asset-backed securities SPEs: SPEs that issue
different classes of debt, from super senior to subordinated,
and equity and purchase assets as collateral, including
residential mortgages, commercial mortgages, auto leases and
credit card receivables.
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ABS CDOs: SPEs that issue different classes of debt,
from super senior to subordinated, and equity and purchase
asset-backed securities collateralized by residential mortgages,
commercial mortgages, auto leases and credit card receivables.
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Synthetic CDOs: SPEs that issue different classes of
debt, from super senior to subordinated, and equity, purchase
high-grade assets as collateral and enter into a portfolio of
credit default swaps to synthetically create the credit risk of
the issued debt.
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Credit-linked note SPEs: SPEs that issue
notes linked to the credit risk of a company, purchase
high-grade assets as collateral and enter into credit default
swaps to synthetically create the credit risk to pay the return
on the notes.
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Tax planning SPEs: SPEs are sometimes used to
legally isolate transactions for the purpose of obtaining a
particular tax treatment for our clients as well as ourselves.
The assets and capital structure of these entities vary for each
structure.
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Trust preferred security SPEs: These SPEs hold
junior subordinated debt issued by ML & Co. or our
subsidiaries, and issue preferred stock on substantially the
same terms as the junior subordinated debt to third party
investors. We also provide a parent guarantee, on a junior
subordinated basis, of the distributions and other payments on
the preferred stock to the extent that the SPEs have funds
legally available. The debt we issue into the SPE is classified
as long-term
borrowings on our Consolidated Balance Sheets. The
ML & Co. parent guarantees of its own subsidiaries are
not required to be recorded in the Consolidated Financial
Statements.
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Conduits: Generally, entities that issue commercial
paper and subordinated capital, purchase assets, and enter into
total return swaps or repurchase agreements with higher-rated
counterparties, particularly banks. The Conduits generally have
a liquidity
and/or
credit facility to further enhance the credit quality of the
commercial paper issuance. A single seller conduit will execute
total return swaps, repurchase agreements, and liquidity and
credit facilities with one financial institution. A multi-seller
Conduit will execute total return swaps, repurchase agreements,
and liquidity and credit facilities with numerous financial
institutions. Refer to Notes 6 and 11 to the Consolidated
Financial Statements for additional information on Conduits.
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Our involvement with SPEs includes off-balance sheet
arrangements discussed above, as well as the following
activities:
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Holder of Issued Debt and Equity: Merrill Lynch
invests in debt of third party securitization vehicles that are
SPEs and also invests in SPEs that we establish. In Merrill
Lynch formed SPEs, we may be the holder of debt and equity of an
SPE. These holdings will be classified as trading assets, loans,
notes and mortgages or investment securities. Such holdings may
change over time at our discretion and rarely are there
contractual obligations that require us to purchase additional
debt or equity interests. Significant obligations are disclosed
in the
off-balance
sheet arrangements table above.
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Warehousing of Loans and Securities: Warehouse loans
and securities represent amounts maintained on our balance sheet
that are intended to be sold into a trust for the purposes of
securitization. We may retain these loans and securities on our
balance sheet for the benefit of a
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40
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|
CDO managed by a third party. Warehoused loans are carried as
held for sale and warehoused securities are carried as trading
assets.
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Securitizations: In the normal course of business,
we securitize: commercial and residential mortgage loans;
municipal, government, and corporate bonds; and other types of
financial assets. Securitizations involve the selling of assets
to SPEs, which in turn issue debt and equity securities
(tranches) with those assets as collateral. We may
retain interests in the securitized financial assets through
holding tranches of the securitization. See Note 6 to the
Consolidated Financial Statements.
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Structured Investment Vehicles
(SIVs): SIVs are leveraged investment
programs that purchase securities and issue asset-backed
commercial paper and medium-term notes. These SPEs are
characterized by low equity levels with partial liquidity
support facilities and the assets are actively managed by the
SIV investment manager. We have not been the sponsor or equity
investor of any SIV, though we have acted as a commercial paper
or medium-term note placement agent for various SIVs.
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Funding and
Liquidity
Funding
We fund our assets primarily with a mix of secured and unsecured
liabilities through a globally coordinated funding strategy. We
fund a portion of our trading assets with secured liabilities,
including repurchase agreements, securities loaned and other
short-term secured borrowings, which are less sensitive to our
credit ratings due to the underlying collateral. Refer to
Note 9 to the Consolidated Financial Statements for
additional information regarding our borrowings.
Credit
Ratings
Our credit ratings affect the cost and availability of our
unsecured funding, and it is our objective to maintain high
quality credit ratings. In addition, credit ratings are
important when we compete in certain markets and when we seek to
engage in certain long-term transactions, including OTC
derivatives. Following the acquisition by Bank of America, the
major credit rating agencies have indicated that the primary
drivers of Merrill Lynchs credit ratings are Bank of
Americas credit ratings. The rating agencies have also
noted that Bank of Americas credit ratings currently
reflect significant support from the U.S. government. In
addition to Bank of Americas credit ratings, other factors
that influence our credit ratings include rating agencies
assessment of the general operating environment, our relative
positions in the markets in which we compete, our reputation,
our liquidity position, the level and volatility of our
earnings, our corporate governance and risk management policies,
and our capital management practices. Management maintains an
active dialogue with the rating agencies.
The following table sets forth ML & Co.s
unsecured credit ratings as of February 20, 2009.
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Senior
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Subordinated
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Preferred
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Commercial
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Debt
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Debt
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Stock
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Paper
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Rating
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Rating Agency
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Ratings
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Ratings
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Ratings
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Ratings
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Outlook
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Dominion Bond Rating Service Ltd.
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A(high)
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A
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A(low)
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R-1 (middle)
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Under Review -
Negative
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Fitch Ratings
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A+
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A
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BB
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F1+
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Stable
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Moodys Investors Service, Inc.
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A1
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A2
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Baa1
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P-1
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Negative
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Rating & Investment Information, Inc. (Japan)
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A+
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A
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Not Rated
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a-1
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Rating Monitor with
Direction Uncertain
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Standard & Poors Ratings Services
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A+
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A
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A-
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A-1
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Negative
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In connection with certain OTC derivatives transactions and
other trading agreements, we could be required to provide
additional collateral to or terminate transactions with certain
counterparties in the
41
event of a downgrade of the senior debt ratings of
ML & Co. The amount of additional collateral required
depends on the contract and is usually a fixed incremental
amount
and/or the
market value of the exposure. At December 26, 2008, the
amount of additional collateral and termination payments that
would be required for such derivatives transactions and trading
agreements was approximately $1.6 billion in the event of a
downgrade to mid single-A by all credit agencies. A further
downgrade of ML & Co.s long-term senior debt
credit rating to the A- or equivalent level would require
approximately an additional $232 million. Our liquidity
risk analysis considers the impact of additional collateral
outflows due to changes in ML & Co. credit ratings, as
well as for collateral that is owed by us and is available for
payment, but has not been called for by our counterparties.
Liquidity
Risk
During 2008, the credit markets continued to experience
significant deterioration, as spreads across the financial
services sector widened dramatically, significantly increasing
the cost and decreasing the availability of both secured and
unsecured funding. Amidst these challenging conditions and in
anticipation of our acquisition by Bank of America, Merrill
Lynch continued to actively manage its liquidity position and
reduce the size and risk of its balance sheet. Actions Merrill
Lynch took in order to maintain significant excess liquidity
included monetizing unencumbered assets through both sales and
secured financing transactions, accessing U.S. and other
government-sponsored liquidity facilities, and obtaining
additional secured credit facilities from Bank of America.
Excess
Liquidity and Unencumbered Assets
We maintained excess liquidity at ML & Co. and
selected subsidiaries in the form of cash and high quality
unencumbered liquid assets, which represents our Global
Liquidity Sources and serves as our primary source of
liquidity risk protection.
As of December 26, 2008 and December 28, 2007, the
aggregate Global Liquidity Sources were $156 billion and
$200 billion, respectively, consisting of the following:
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(dollars in billions)
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|
December 26,
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December 28,
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2008
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|
2007
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Excess liquidity pool
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$
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56
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|
$
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79
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Unencumbered assets at bank subsidiaries
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58
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57
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Unencumbered assets at non-bank subsidiaries
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42
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64
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Global Liquidity Sources
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|
$
|
156
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|
$
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200
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The excess liquidity pool is maintained at, or readily available
to, ML & Co. and our principal
non-U.S. broker-dealer
and can be deployed to meet cash outflow obligations under
stressed liquidity conditions. The excess liquidity pool
includes cash and cash equivalents, investments in short-term
money market mutual funds, U.S. government and agency
obligations and other liquid securities. At December 26,
2008 and December 28, 2007, the total carrying value of the
excess liquidity pool, net of related hedges, was
$56 billion and $79 billion, respectively, which
included liquidity sources at subsidiaries that we believe are
available to ML & Co.
During the fourth quarter of 2008, our excess liquidity pool was
reduced primarily from the repayment of maturing long-term debt
and funding business requirements. Following the completion of
the Bank of America acquisition, ML & Co. became a
subsidiary of Bank of America and established intercompany
lending and borrowing arrangements to facilitate centralized
liquidity management. Included in these intercompany agreements
is an initial $75 billion one year, revolving unsecured
line of credit that allows ML & Co. to borrow funds
from Bank of America for operating needs. Immediately following
the acquisition, we placed a substantial portion of our excess
liquidity with Bank of America through an intercompany lending
agreement.
42
At December 26, 2008 and December 28, 2007,
unencumbered liquid assets of $58 billion and
$57 billion, respectively, in the form of unencumbered
investment grade asset-backed securities and prime residential
mortgages were available at our regulated bank subsidiaries to
meet potential deposit obligations, business activity demands
and stressed liquidity needs of the bank subsidiaries. These
unencumbered assets are generally restricted from transfer and
unavailable as a liquidity source to ML & Co. and
other non-bank subsidiaries.
At December 26, 2008 and December 28, 2007, our
non-bank subsidiaries, including broker-dealer subsidiaries,
maintained $42 billion and $64 billion, respectively,
of unencumbered securities, including $7 billion of
customer margin securities at December 26, 2008 and
$10 billion at December 28, 2007. These unencumbered
securities are an important source of liquidity for
broker-dealer activities and other individual subsidiary
financial commitments, and are generally restricted from
transfer and therefore unavailable to support liquidity needs of
ML & Co. or other subsidiaries. Proceeds from
encumbering customer margin securities are further limited to
supporting qualifying customer activities.
Committed
Credit Facilities
In addition to the Global Liquidity Sources, we maintained
external credit facilities that were available to cover regular
and contingent funding needs. Following the Bank of America
acquisition, certain sources of liquidity were centralized, and
ML & Co. terminated all of its external committed
credit facilities.
We maintained a committed, three-year multi-currency, unsecured
bank credit facility that totaled $4.0 billion as of
December 26, 2008. We borrowed regularly from this facility
as an additional funding source to conduct normal business
activities. At both December 26, 2008 and December 28,
2007, we had $1.0 billion of borrowings outstanding under
this facility. Following the completion of the Bank of America
acquisition, we repaid the outstanding borrowings and terminated
the facility in January 2009.
We maintained a $2.7 billion committed, secured credit
facility at December 26, 2008. There were no borrowings
under the facility at December 26, 2008. Following the
completion of the Bank of America acquisition, we terminated the
facility in January 2009.
In December 2008 we decided not to seek a renewal of a
$3.0 billion committed, secured credit facility. There were
no borrowings under the facility at termination.
In October 2008, we entered into a $10.0 billion committed
unsecured bank revolving credit facility with Bank of America,
N.A. with borrowings guaranteed under the FDICs guarantee
program. There were no borrowings under the facility at
December 26, 2008. Following the completion of the Bank of
America acquisition, the facility was terminated.
In September 2008, we established an additional
$7.5 billion bilateral secured credit facility with Bank of
America. There was $3.5 billion outstanding under this
facility at year end. Following the completion of the Bank of
America acquisition, we repaid the outstanding borrowings and
the facility was terminated.
U.S.
Government Liquidity Facilities
During 2008, the U.S. Government created several programs
to enhance liquidity and provide stability to the financial
markets. Merrill Lynch participated in a number of these
programs throughout 2008.
In March 2008, the Federal Reserve announced an expansion of its
securities lending program to promote liquidity in the financing
markets for Treasury securities and other collateral. Under the
Term Securities Lending Facility (TSLF), the Federal
Reserve lends Treasury securities to primary dealers secured for
a term of 28 days by a pledge of other securities,
including U.S. Treasuries and Agencies and a range of
investment grade corporate securities, municipal securities,
mortgage-backed securities,
43
and asset-backed securities. We regularly participate in the
TSLF auctions, but generally reduced our usage during the fourth
quarter.
Also in March 2008, the Federal Reserve announced that the
Federal Reserve Bank of New York has been granted the authority
to establish a Primary Dealer Credit Facility
(PDCF). The PDCF provides overnight funding to
primary dealers in exchange for collateral that may include
U.S. Treasuries and Agencies and a broad range of debt and
equity securities. Following the further credit market
disruptions in September, we began utilizing the PDCF as an
additional source of funding. We reduced our usage of the PDCF
during the fourth quarter.
The Federal Reserve will operate the TSLF and PDCF through
October 30, 2009 and may grant further extensions based on
market conditions.
In October 2008, the Federal Reserve announced the creation of
the Commercial Paper Funding Facility to provide a liquidity
backstop to U.S. issuers of commercial paper. A special
purpose vehicle will purchase three-month unsecured and
asset-backed commercial paper directly from eligible issuers
through October 30, 2009. Also in October 2008, the FDIC
announced a new program, the Temporary Liquidity Guarantee
Program, that would guarantee newly issued senior unsecured debt
of banks, thrifts, and certain holding companies and provide
full FDIC insurance coverage of non-interest bearing deposit
transaction accounts, regardless of dollar amount. We are
eligible for both the Commercial Paper Funding Facility and the
Temporary Liquidity Guarantee Program and we began utilizing
these programs in October 2008 as additional sources of funding.
44
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Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Risk
Management Philosophy
In the course of conducting our business operations, we are
exposed to a variety of risks including market, credit,
liquidity, operational and other risks that are material and
require comprehensive controls and ongoing oversight. These
risks are monitored by our core business management as well as
our independent risk groups.
Risk
Management Process
Through 2008, Global Risk Management, Global Treasury and
Operational Risk Management worked to ensure that risks were
properly identified, measured, monitored, and managed throughout
Merrill Lynch together with other independent control groups,
including Corporate Audit, Finance and the Office of General
Counsel. To accomplish this, we maintained a risk management
process that included:
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|
A risk governance structure that defined the responsibilities of
the independent groups that monitored risk and the oversight
activities of the board committees, the Regulatory Oversight and
Controls Committee and Weekly Risk Review;
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|
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|
A regular review of the risk management process by the Audit
Committee of the Board of Directors (the Audit
Committee) as well as a regular review of credit, market
and liquidity risks and processes by the Finance Committee of
the Board of Directors (the Finance Committee);
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Clearly defined risk management policies and procedures;
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|
Communication and coordination among the businesses, executive
management, and risk functions while maintaining strict
segregation of responsibilities, controls, and
oversight; and
|
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|
Clearly articulated risk tolerance levels, which were included
within the framework established by Global Risk Management.
|
Risk
Governance Structure
Through 2008, our risk governance structure was comprised of the
Audit Committee and the Finance Committee of the Board, the
Regulatory Oversight and Controls Committee, the business units,
the independent risk and control groups, various other corporate
governance committees and senior management. During 2008 the
responsibilities that had been held by the former Risk Oversight
Committee (the ROC) through 2007 were assumed by
Global Risk Management, the newly established Regulatory
Oversight and Controls Committee and the Weekly Risk Review.
This structure was intended to provide effective management of
risk by senior business managers and Global Risk Management
jointly and clear accountability within the risk governance
structure.
Board of
Directors Committees
At the Board level, two committees were responsible for
oversight of the management of the risks and risk policies and
procedures of the firm. The Audit Committee, which was composed
entirely of independent directors, oversaw managements
policies and processes for managing all major categories of risk
affecting the firm, including operational, legal and
reputational risks and managements actions to assess and
control such risks. The Finance Committee, which was also
composed entirely of independent directors, reviewed the
firms policies and procedures for managing exposure to
market, credit and liquidity risk in general and, when
appropriate, reviewed significant risk exposures and trends in
these categories of risk. Both the Audit Committee and the
Finance Committee were provided with regular risk updates from
management and the independent control groups.
45
Global
Risk Management
Global Risk Management worked to establish our market and credit
risk tolerance levels, which were represented in part by
framework limits. Risk framework exceptions and violations were
reported and investigated at predefined levels of management.
Regulatory
Oversight and Controls Committee (ROCC) and Other
Governance Committees
We established the ROCC in 2008 to oversee management procedures
and controls related to risk, including the frameworks for
managing market, credit, and operational risks, internal audit
plans and information technology controls. The ROCC oversaw the
activities of a number of additional existing governance
committees, including new product, transaction review, and
monitoring and oversight committees, that served to create
policy, review activity, and verify that new and existing
business initiatives remained within established risk tolerance
levels. Representatives of the independent risk and control
groups participated as members of these committees along with
members from the businesses. The ROCC reported periodically to
the Audit Committee of the Board.
Following the acquisition of Merrill Lynch by Bank of America,
risk management and governance practices are being integrated
with the goals of maintaining disciplined risk-taking throughout
the transition and establishing best practices for the
integrated firm going forward.
Market
Risk
We define market risk as the potential change in value of
financial instruments caused by fluctuations in interest rates,
exchange rates, equity and commodity prices, credit spreads,
and/or other
risks.
Global Risk Management and other independent risk and control
groups were responsible for approving the products and markets
in which we transacted and took risk. Moreover, Global Risk
Management was responsible for identifying the risks to which
the firms business units were potentially exposed in these
approved products and markets. Global Risk Management used a
variety of quantitative methods to assess the risk of our
positions and portfolios. In particular, Global Risk Management
quantified the sensitivities of our current portfolios to
changes in market variables. These sensitivities were then
utilized in the context of historical data to estimate earnings
and loss distributions that our current portfolios would have
incurred throughout the historical period. From these
distributions, a number of useful risk statistics were derived,
including value at risk (VaR), which were used to
measure and monitor market risk exposures in trading portfolios.
VaR is a statistical indicator of the potential losses in fair
value of a portfolio due to adverse movements in underlying risk
factors. The Merrill Lynch Risk Framework was designed to define
and communicate our market risk tolerance and broad overall
limits across the firm by defining and constraining exposure to
specific asset classes, market risk factors and VaR.
The Trading VaR disclosed in the accompanying tables (which
excludes U.S. ABS CDO net exposures) is a measure of risk
based on a degree of confidence that the current portfolio could
lose at least a certain dollar amount, over a given period of
time. To calculate VaR, we aggregate sensitivities to market
risk factors and combine them with a database of historical
market factor movements to simulate a series of profits and
losses. The level of loss that is exceeded in that
series 5% of the time (i.e., one day in 20) is used as
the estimate for the 95% confidence level VaR. The overall
VaR amounts are presented across major risk categories, which
include exposure to volatility risk found in certain products,
such as options.
The calculation of VaR requires numerous assumptions and thus
VaR should not be viewed as a precise measure of risk. Rather,
it should be evaluated in the context of known limitations.
These limitations include, but are not limited to, the following:
|
|
|
VaR measures do not convey the magnitude of extreme events;
|
46
|
|
|
Historical data that forms the basis of VaR may fail to predict
current and future market volatility; and
|
|
|
VaR does not reflect the effects of market illiquidity (i.e.,
the inability to sell or hedge a position over a relatively long
period).
|
To complement VaR and in recognition of its inherent
limitations, we used a number of additional risk measurement
methods and tools as part of our overall market risk management
process. These included stress testing and event risk analysis,
which examine portfolio behavior under significant adverse
market conditions, including scenarios that may result in
material losses for Merrill Lynch. As a result of the
unprecedented credit market environment during 2007 and 2008, in
particular the extreme dislocation that affected
U.S. sub-prime
residential mortgage-related and ABS CDO positions, VaR, stress
testing and other risk measures significantly underestimated the
magnitude of actual loss. We continued to engage in the
development of additional risk measurement methods; however, we
also recognized the value of continuous re-evaluation of our
approaches to risk management based on experience and judgment.
Trading
Value at Risk
The tables that follow present our average and ending VaR for
trading instruments for 2008 and 2007. Additionally, high and
low VaR for 2008 is presented independently for each risk
category and overall.
The aggregate VaR for our trading portfolios is less than the
sum of the VaRs for individual risk categories because movements
in different risk categories occur at different times and,
historically, extreme movements have not occurred in all risk
categories simultaneously. Thus, the difference between the sum
of the VaRs for individual risk categories and the VaR
calculated for all risk categories is shown in the following
table and may be viewed as a measure of the diversification
within our portfolios. Because high and low VaR numbers for
these risk categories may have occurred on different days, high
and low numbers for diversification benefit would not be
meaningful.
Through the third quarter of 2008, the VaR metric which we
reported was a general market risk model, so called
because it captured general movements in broad market indices.
As noted in prior disclosure, we continued to make enhancements
to the VaR model to better reflect the risks of the portfolio
for purposes of internal risk management and calculation of
regulatory capital ratios. In particular, we implemented a
supplemental VaR model designed to capture issuer-specific risks
in credit and equity instruments and to better reflect the most
recent market conditions related to the spreads on credit
instruments. Table 1 below provides our General Market Risk VaR
to facilitate comparison with the prior year. Table 2 below
provides our Enhanced VaR model including Issuer Specific Risk
(the Specific Risk VaR) for 2008.
Table 1 Trading Value at Risk 95%
One-day
General Market Risk VaR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Daily
|
|
|
|
|
|
|
|
Daily
|
|
|
Year-End
|
|
Average
|
|
High
|
|
Low
|
|
Year-End
|
|
Average
|
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
|
Trading
Value-at-Risk(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and credit spread
|
|
$
|
36
|
|
|
$
|
49
|
|
|
$
|
92
|
|
|
$
|
28
|
|
|
$
|
52
|
|
|
$
|
52
|
|
Equity
|
|
|
9
|
|
|
|
17
|
|
|
|
28
|
|
|
|
7
|
|
|
|
26
|
|
|
|
28
|
|
Commodity
|
|
|
16
|
|
|
|
19
|
|
|
|
36
|
|
|
|
10
|
|
|
|
15
|
|
|
|
18
|
|
Currency
|
|
|
7
|
|
|
|
6
|
|
|
|
15
|
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal(2)
|
|
|
68
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
103
|
|
Diversification benefit
|
|
|
(27
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall
|
|
$
|
41
|
|
|
$
|
51
|
|
|
$
|
90
|
|
|
$
|
30
|
|
|
$
|
65
|
|
|
$
|
65
|
|
|
|
|
|
|
(1) |
|
Based on a 95% confidence level
and a
one-day
holding period. |
(2) |
|
Subtotals are not provided for
highs and lows as they are not meaningful. |
47
General Market Risk VaR was lower at the end of 2008 as compared
with 2007 primarily due to positioning and hedging in credit and
equity markets and as a result of sales and markdowns in certain
credit instruments. The reduction in General Market Risk VaR was
partially offset by an increase in market volatility and
correlations. Daily average General Market Risk VaR for 2008 was
lower than that of 2007 due primarily to reductions in credit
and equity exposures.
Table 2 Trading Value at Risk 95%
One-day
Specific Risk VaR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Daily
|
|
|
|
|
|
|
|
|
Year-end
|
|
Average
|
|
High
|
|
Low
|
|
Year-end
|
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
2007
|
|
|
Trading
value-at-risk(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and credit spread
|
|
$
|
100
|
|
|
$
|
73
|
|
|
$
|
114
|
|
|
$
|
54
|
|
|
$
|
69
|
|
Equity
|
|
|
21
|
|
|
|
25
|
|
|
|
48
|
|
|
|
16
|
|
|
|
38
|
|
Commodity
|
|
|
16
|
|
|
|
19
|
|
|
|
36
|
|
|
|
10
|
|
|
|
15
|
|
Currency
|
|
|
7
|
|
|
|
6
|
|
|
|
15
|
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal(2)
|
|
|
144
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
Diversification benefit
|
|
|
(44
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall
|
|
$
|
100
|
|
|
$
|
74
|
|
|
$
|
112
|
|
|
$
|
52
|
|
|
$
|
81
|
|
|
|
|
|
|
(1) |
|
Based on a 95% confidence level
and a
one-day
holding period. |
(2) |
|
Subtotals are not provided for
highs and lows as they are not meaningful. |
Specific Risk VaR was higher at the end of 2008 as compared with
2007, driven primarily by an increase in credit markets
volatility and the general level of credit spreads to which the
Specific Risk VaR model is more sensitive than the General
Market Risk VaR model. The 2007 Average Specific Risk VaR is not
available as the model was implemented in 2008.
Non-Trading
Market Risk
Non-trading market risk includes the risks associated with
certain non-trading activities, including investment securities,
securities financing transactions and certain equity and
principal investments. Interest rate risks related to funding
activities are also included; however, potential gains and
losses due to changes in credit spreads on the firms own
funding instruments are excluded. Risks related to lending
activities are covered separately in the Counterparty Credit
Risk section below.
The primary market risk of non-trading investment securities and
repurchase and reverse repurchase agreements is expressed as
sensitivity to changes in the general level of credit spreads,
which are defined as the differences in the yields on debt
instruments from relevant LIBOR/Swap rates. Non-trading
investment securities include securities that are classified as
available-for-sale
and
held-to-maturity.
At December 26, 2008, the total credit spread sensitivity
of these instruments was a pre-tax loss of $16 million in
economic value for an increase of one basis point, which is one
one-hundredth of a percent, in credit spreads, compared with
$24 million at December 28, 2007. This change in
economic value is a measurement of economic risk which may
differ significantly in magnitude and timing from the actual
profit or loss that would be realized under generally accepted
accounting principles.
The interest rate risk associated with the non-trading
positions, together with funding activities, is expressed as
sensitivity to changes in the general level of interest rates.
Our funding activities include
LYONs®,
trust preferred securities and other long-term debt issuances
together with interest rate hedges. At December 26, 2008
the net interest rate sensitivity of these positions was a
pre-tax gain in economic value of less than $1 million for
a parallel one basis point increase in interest rates across all
yield curves, compared to a pre-tax loss of $1 million at
December 28, 2007. This change in economic value is a
measurement of economic risk which may differ significantly in
magnitude and timing from the actual profit or loss that would
be realized under generally accepted accounting principles.
48
Other non-trading equity investments include direct private
equity interests, private equity fund investments, hedge fund
interests, certain direct and indirect real estate investments
and other principal investments. These investments are broadly
sensitive to general price levels in the equity or commercial
real estate markets as well as to specific business, financial
and credit factors which influence the performance and valuation
of each investment uniquely. Refer to Note 5 to the
Consolidated Financial Statements for additional information on
these investments.
Counterparty
Credit Risk
We define counterparty credit risk as the potential for loss
that can occur as a result of an individual, counterparty, or
issuer being unable or unwilling to honor its contractual
obligations to us. At Merrill Lynch the Credit Risk Framework
was the primary tool used to communicate firm-wide credit limits
and monitor exposure by constraining the magnitude and tenor of
exposure to counterparty and issuer families.
Additionally, we deployed country risk limits to constrain total
aggregate exposure across all counterparties and issuers
(including sovereign entities) for a given country within
predefined tolerance levels. Global Risk Managements role
was to assess the creditworthiness of existing and potential
individual clients, institutional counterparties and issuers,
and determine firm-wide credit risk levels within the Credit
Risk Framework among other tools. This group was responsible for
reviewing and monitoring specific transactions as well as
portfolio and other credit risk concentrations both within and
across businesses. This group was also responsible for ongoing
monitoring of credit quality and limit compliance and worked
actively with all of our business units to manage and mitigate
credit risk.
Global Risk Management used a variety of methodologies to set
limits on exposure and potential loss resulting from an
individual, counterparty or issuer failing to fulfill its
contractual obligations. To determine tolerance levels, the
group performed analyses in the context of industrial, regional,
and global economic trends and incorporated portfolio and
concentration considerations. Credit risk limits were designed
to take into account measures of both current and potential
exposure as well as potential loss and were set and monitored by
broad risk type, product type, and maturity. Credit risk
mitigation techniques would include, where appropriate, the
right to require initial collateral or margin, the right to
terminate transactions or to obtain collateral should
unfavorable events occur, the right to call for collateral when
certain exposure thresholds are exceeded, the right to call for
third party guarantees and the purchase of credit default
protection. With senior management involvement, Global Risk
Management conducted regular portfolio reviews, monitored
counterparty creditworthiness, and evaluated potential
transaction risks with a view toward early problem
identification and protection against unacceptable
credit-related losses.
Senior members of Global Risk Management chaired various
commitment committees with membership across business, control
and support units. These committees reviewed and approved
commitments, underwritings and syndication strategies related to
debt, syndicated loans, equity, real estate and asset-based
finance, among other products and activities.
Following the acquisition of Merrill Lynch by Bank of America,
risk management and governance practices are being integrated
with the goals of maintaining disciplined risk-taking throughout
the transition and establishing the best practices for the
integrated firm going forward.
Derivatives
We enter into International Swaps and Derivatives Association,
Inc. (ISDA) master agreements or their equivalent
(master netting agreements) with almost all of our
derivative counterparties. Master netting agreements provide
protection in bankruptcy in certain circumstances and, in some
cases, enable receivables and payables with the same
counterparty to be offset for risk management purposes.
Agreements are negotiated bilaterally and can require complex
terms. While we make reasonable efforts to execute such
agreements, it is possible that a counterparty may be unwilling
to sign such an agreement and, as a result, would subject us to
additional credit risk. The enforceability of master
49
netting agreements under bankruptcy laws in certain countries or
in certain industries is not free from doubt, and receivables
and payables with counterparties in these countries or
industries are accordingly recorded on a gross basis.
In addition, to reduce the risk of loss, we require collateral,
principally cash and U.S. Government and agency securities,
on certain derivative transactions. From an economic standpoint,
we evaluate risk exposures net of related collateral that meets
specified standards.
The following is a summary of counterparty credit ratings for
the fair value (net of $52.5 billion of collateral, of
which $50.2 billion represented cash collateral) of OTC
trading derivative assets by maturity at December 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Years to Maturity
|
|
Maturity
|
|
|
Credit
Rating(1)
|
|
0 to 3
|
|
3+ to 5
|
|
5+ to 7
|
|
Over 7
|
|
Netting(2)
|
|
Total
|
|
|
AA or above
|
|
$
|
7,773
|
|
|
$
|
3,537
|
|
|
$
|
3,654
|
|
|
$
|
18,905
|
|
|
$
|
(10,916
|
)
|
|
$
|
22,953
|
|
A
|
|
|
9,719
|
|
|
|
2,589
|
|
|
|
2,260
|
|
|
|
6,998
|
|
|
|
(6,662
|
)
|
|
|
14,904
|
|
BBB
|
|
|
4,873
|
|
|
|
2,094
|
|
|
|
942
|
|
|
|
14,424
|
|
|
|
(2,216
|
)
|
|
|
20,117
|
|
BB
|
|
|
2,291
|
|
|
|
1,040
|
|
|
|
512
|
|
|
|
2,248
|
|
|
|
(259
|
)
|
|
|
5,832
|
|
B or below
|
|
|
3,210
|
|
|
|
1,782
|
|
|
|
689
|
|
|
|
4,753
|
|
|
|
(674
|
)
|
|
|
9,760
|
|
Unrated
|
|
|
1,918
|
|
|
|
188
|
|
|
|
25
|
|
|
|
566
|
|
|
|
(94
|
)
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,784
|
|
|
$
|
11,230
|
|
|
$
|
8,082
|
|
|
$
|
47,894
|
|
|
$
|
(20,821
|
)
|
|
$
|
76,169
|
|
|
|
|
|
|
(1) |
|
Represents credit rating agency
equivalent of internal credit ratings. |
(2) |
|
Represents netting of payable
balances with receivable balances for the same counterparty
across maturity band categories. Receivable and payable balances
with the same counterparty in the same maturity category,
however, are net within the maturity category. |
In addition to obtaining collateral, we attempt to mitigate our
default risk on derivatives whenever possible by entering into
transactions with provisions that enable us to terminate or
reset the terms of our derivative contracts.
50
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Merrill
Lynch & Co., Inc.:
We have audited the accompanying consolidated balance sheets of
Merrill Lynch & Co., Inc. and subsidiaries
(Merrill Lynch) as of December 26, 2008 and
December 28, 2007, and the related consolidated statements
of (loss)/earnings, changes in stockholders equity,
comprehensive (loss)/income and cash flows for each of the three
years in the period ended December 26, 2008. These
financial statements are the responsibility of Merrill
Lynchs management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Merrill Lynch as of December 26, 2008 and December 28,
2007, and the results of its operations and its cash flows for
each of the three years in the period ended December 26,
2008, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Notes 1 and 3 to the consolidated financial
statements, in 2007 Merrill Lynch adopted 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.
As discussed in Note 1, Merrill Lynch became a wholly-owned
subsidiary of Bank of America Corporation on January 1,
2009.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Merrill Lynchs internal control over financial reporting
as of December 26, 2008, based on the criteria established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 23, 2009
expressed an adverse opinion on Merrill Lynchs internal
control over financial reporting because of material weaknesses.
/s/ Deloitte & Touche LLP
New York, New York
February 23, 2009
51
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of (Loss)/Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended Last Friday in December
|
|
|
2008
|
|
2007
|
|
2006
|
(dollars in millions, except per share amounts)
|
|
(52 weeks)
|
|
(52 weeks)
|
|
(52 weeks)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
(27,225
|
)
|
|
$
|
(12,067
|
)
|
|
$
|
7,248
|
|
Commissions
|
|
|
6,895
|
|
|
|
7,284
|
|
|
|
5,985
|
|
Managed accounts and other fee-based revenues
|
|
|
5,544
|
|
|
|
5,465
|
|
|
|
6,273
|
|
Investment banking
|
|
|
3,733
|
|
|
|
5,582
|
|
|
|
4,648
|
|
Earnings from equity method investments
|
|
|
4,491
|
|
|
|
1,627
|
|
|
|
556
|
|
Other
|
|
|
(10,065
|
)
|
|
|
(2,190
|
)
|
|
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(16,627
|
)
|
|
|
5,701
|
|
|
|
27,593
|
|
Interest and dividend revenues
|
|
|
33,383
|
|
|
|
56,974
|
|
|
|
39,790
|
|
Less interest expense
|
|
|
29,349
|
|
|
|
51,425
|
|
|
|
35,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
4,034
|
|
|
|
5,549
|
|
|
|
4,219
|
|
Gain on merger
|
|
|
-
|
|
|
|
-
|
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
(12,593
|
)
|
|
|
11,250
|
|
|
|
33,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
14,763
|
|
|
|
15,903
|
|
|
|
16,867
|
|
Communications and technology
|
|
|
2,201
|
|
|
|
2,057
|
|
|
|
1,838
|
|
Brokerage, clearing, and exchange fees
|
|
|
1,394
|
|
|
|
1,415
|
|
|
|
1,096
|
|
Occupancy and related depreciation
|
|
|
1,267
|
|
|
|
1,139
|
|
|
|
991
|
|
Professional fees
|
|
|
1,058
|
|
|
|
1,027
|
|
|
|
885
|
|
Advertising and market development
|
|
|
652
|
|
|
|
785
|
|
|
|
686
|
|
Office supplies and postage
|
|
|
215
|
|
|
|
233
|
|
|
|
225
|
|
Other
|
|
|
2,402
|
|
|
|
1,522
|
|
|
|
1,383
|
|
Payment related to price reset on common stock offering
|
|
|
2,500
|
|
|
|
-
|
|
|
|
-
|
|
Goodwill impairment charge
|
|
|
2,300
|
|
|
|
-
|
|
|
|
-
|
|
Restructuring charge
|
|
|
486
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
29,238
|
|
|
|
24,081
|
|
|
|
23,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from continuing operations
|
|
|
(41,831
|
)
|
|
|
(12,831
|
)
|
|
|
9,810
|
|
Income tax (benefit)/expense
|
|
|
(14,280
|
)
|
|
|
(4,194
|
)
|
|
|
2,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from continuing operations
|
|
|
(27,551
|
)
|
|
|
(8,637
|
)
|
|
|
7,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from discontinued operations
|
|
|
(141
|
)
|
|
|
1,397
|
|
|
|
616
|
|
Income tax (benefit)/expense
|
|
|
(80
|
)
|
|
|
537
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from discontinued operations
|
|
|
(61
|
)
|
|
|
860
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings
|
|
$
|
(27,612
|
)
|
|
$
|
(7,777
|
)
|
|
$
|
7,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
2,869
|
|
|
|
270
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings applicable to common stockholders
|
|
$
|
(30,481
|
)
|
|
$
|
(8,047
|
)
|
|
$
|
7,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per common share from continuing operations
|
|
$
|
(24.82
|
)
|
|
|
(10.73
|
)
|
|
|
7.96
|
|
Basic (loss)/earnings per common share from discontinued
operations
|
|
|
(0.05
|
)
|
|
|
1.04
|
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/earnings per common share
|
|
$
|
(24.87
|
)
|
|
$
|
(9.69
|
)
|
|
$
|
8.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per common share from continuing
operations
|
|
$
|
(24.82
|
)
|
|
|
(10.73
|
)
|
|
|
7.17
|
|
Diluted (loss)/earnings per common share from discontinued
operations
|
|
|
(0.05
|
)
|
|
|
1.04
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)/earnings per common share
|
|
$
|
(24.87
|
)
|
|
$
|
(9.69
|
)
|
|
$
|
7.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid per common share
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in computing (losses)/earnings per common
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,225.6
|
|
|
|
830.4
|
|
|
|
868.1
|
|
Diluted
|
|
|
1,225.6
|
|
|
|
830.4
|
|
|
|
963.0
|
|
See Notes to Consolidated
Financial Statements
52
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
Dec. 26,
|
|
Dec. 28,
|
(dollars in millions, except per
share amounts)
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
68,403
|
|
|
$
|
41,346
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
32,923
|
|
|
|
22,999
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
Receivables under resale agreements (includes $62,146 in 2008
and $100,214 in 2007 measured at fair value in accordance with
SFAS No. 159)
|
|
|
93,247
|
|
|
|
221,617
|
|
Receivables under securities borrowed transactions (includes
$853 in 2008 measured at fair value in accordance with
SFAS No. 159)
|
|
|
35,077
|
|
|
|
133,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,324
|
|
|
|
354,757
|
|
|
|
|
|
|
|
|
|
|
Trading assets, at fair value (includes securities
pledged as collateral that can be sold or repledged of $18,663
in 2008 and $45,177 in 2007)
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
89,477
|
|
|
|
72,689
|
|
Corporate debt and preferred stock
|
|
|
30,829
|
|
|
|
37,849
|
|
Equities and convertible debentures
|
|
|
26,160
|
|
|
|
60,681
|
|
Mortgages, mortgage-backed, and asset-backed
|
|
|
13,786
|
|
|
|
28,013
|
|
Non-U.S.
governments and agencies
|
|
|
6,107
|
|
|
|
15,082
|
|
U.S. Government and agencies
|
|
|
5,253
|
|
|
|
11,219
|
|
Municipals, money markets and physical commodities
|
|
|
3,993
|
|
|
|
9,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,605
|
|
|
|
234,669
|
|
|
|
|
|
|
|
|
|
|
Investment securities (includes $2,770 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 $2,557 in 2008 and
$16,124 in 2007)
|
|
|
57,007
|
|
|
|
82,532
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral, at fair value
|
|
|
11,658
|
|
|
|
45,245
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
|
|
|
|
|
|
Customers (net of allowance for doubtful accounts of $143 in
2008 and $24 in 2007)
|
|
|
51,131
|
|
|
|
70,719
|
|
Brokers and dealers
|
|
|
12,410
|
|
|
|
22,643
|
|
Interest and other
|
|
|
26,331
|
|
|
|
23,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,872
|
|
|
|
116,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages (net of allowances for loan
losses of $2,072 in 2008 and $533 in 2007) (includes $979 in
2008 and $1,149 in 2007 measured at fair value in accordance
with SFAS No. 159)
|
|
|
69,190
|
|
|
|
94,992
|
|
|
|
|
|
|
|
|
|
|
Equipment and facilities (net of accumulated depreciation
and amortization of $5,856 in 2008 and $5,518 in 2007)
|
|
|
2,928
|
|
|
|
3,127
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
2,616
|
|
|
|
5,091
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
29,017
|
|
|
|
18,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
667,543
|
|
|
$
|
1,020,050
|
|
|
|
|
|
|
|
|
|
|
53
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
Dec. 26,
|
|
Dec. 28,
|
(dollars in millions, except per
share amounts)
|
|
2008
|
|
2007
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements (includes $32,910 in 2008
and $89,733 in 2007 measured at fair value in accordance with
SFAS No. 159)
|
|
$
|
92,654
|
|
|
$
|
235,725
|
|
Payables under securities loaned transactions
|
|
|
24,426
|
|
|
|
55,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,080
|
|
|
|
291,631
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (includes $3,387 in 2008 measured
at fair value in accordance with SFAS No. 159)
|
|
|
37,895
|
|
|
|
24,914
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
96,107
|
|
|
|
103,987
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, at fair value
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
71,363
|
|
|
|
73,294
|
|
Equities and convertible debentures
|
|
|
7,871
|
|
|
|
29,652
|
|
Non-U.S.
governments and agencies
|
|
|
4,345
|
|
|
|
9,407
|
|
U.S. Government and agencies
|
|
|
3,463
|
|
|
|
6,135
|
|
Corporate debt and preferred stock
|
|
|
1,318
|
|
|
|
4,549
|
|
Municipals, money markets and other
|
|
|
1,111
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,471
|
|
|
|
123,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation to return securities received as collateral, at
fair value
|
|
|
11,658
|
|
|
|
45,245
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
|
|
|
|
|
|
|
Customers
|
|
|
44,924
|
|
|
|
63,582
|
|
Brokers and dealers
|
|
|
12,553
|
|
|
|
24,499
|
|
Interest and other
|
|
|
32,918
|
|
|
|
44,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,395
|
|
|
|
132,626
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings (includes $49,521 in 2008 and
$76,334 in 2007 measured at fair value in accordance with
SFAS No. 159)
|
|
|
199,678
|
|
|
|
260,973
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes (related to trust preferred
securities)
|
|
|
5,256
|
|
|
|
5,154
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
647,540
|
|
|
|
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
|
|
Common stock (par value
$1.331/3
per share; authorized: 3,000,000,000 shares; issued:
2008 2,031,995,436 shares; 2007
1,354,309,819 shares)
|
|
|
2,709
|
|
|
|
1,805
|
|
Paid-in capital
|
|
|
47,232
|
|
|
|
27,163
|
|
Accumulated other comprehensive loss (net of tax)
|
|
|
(6,318
|
)
|
|
|
(1,791
|
)
|
(Accumulated deficit) / retained earnings
|
|
|
(8,603
|
)
|
|
|
23,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,020
|
|
|
|
50,953
|
|
|
|
|
|
|
|
|
|
|
Less: Treasury stock, at cost (2008
431,742,565 shares; 2007
418,270,289 shares)
|
|
|
23,622
|
|
|
|
23,404
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
|
11,398
|
|
|
|
27,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
20,003
|
|
|
|
31,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
667,543
|
|
|
$
|
1,020,050
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated
Financial Statements
54
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended Last Friday in December
|
|
|
Amounts
|
|
Shares
|
(dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
|
2006
|
|
Preferred Stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
4,383
|
|
|
$
|
3,145
|
|
|
$
|
2,673
|
|
|
|
257,134
|
|
|
|
104,928
|
|
|
|
89,685
|
|
Issuances
|
|
|
10,814
|
|
|
|
1,615
|
|
|
|
374
|
|
|
|
172,100
|
|
|
|
165,000
|
|
|
|
12,000
|
|
Redemptions
|
|
|
(6,600
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(66,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Shares (repurchased) re-issuances
|
|
|
8
|
|
|
|
(377
|
)
|
|
|
98
|
|
|
|
211
|
|
|
|
(12,794
|
)
|
|
|
3,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,605
|
|
|
$
|
4,383
|
|
|
$
|
3,145
|
|
|
|
363,445
|
|
|
|
257,134
|
|
|
|
104,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Exchangeable into Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
39
|
|
|
$
|
39
|
|
|
$
|
41
|
|
|
|
2,552,982
|
|
|
|
2,659,926
|
|
|
|
2,707,797
|
|
Exchanges
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(2,544,793
|
)
|
|
|
(106,944
|
)
|
|
|
(47,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
-
|
|
|
|
39
|
|
|
|
39
|
|
|
|
8,189
|
|
|
|
2,552,982
|
|
|
|
2,659,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
1,805
|
|
|
|
1,620
|
|
|
|
1,531
|
|
|
|
1,354,309,819
|
|
|
|
1,215,381,006
|
|
|
|
1,148,714,008
|
|
Capital issuance and
acquisition(1)(2)
|
|
|
648
|
|
|
|
122
|
|
|
|
-
|
|
|
|
486,166,666
|
|
|
|
91,576,096
|
|
|
|
-
|
|
Preferred stock conversion
|
|
|
236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,322,917
|
|
|
|
-
|
|
|
|
-
|
|
Shares issued to employees
|
|
|
20
|
|
|
|
63
|
|
|
|
89
|
|
|
|
14,196,034
|
|
|
|
47,352,717
|
|
|
|
66,666,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
2,709
|
|
|
|
1,805
|
|
|
|
1,620
|
|
|
|
2,031,995,436
|
|
|
|
1,354,309,819
|
|
|
|
1,215,381,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
27,163
|
|
|
|
18,919
|
|
|
|
13,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital issuance and
acquisition(1)(2)
|
|
|
11,544
|
|
|
|
4,643
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock conversion
|
|
|
6,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plan activity and other
|
|
|
(553
|
)
|
|
|
1,962
|
|
|
|
2,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of employee stock grants
|
|
|
2,108
|
|
|
|
1,639
|
|
|
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
47,232
|
|
|
|
27,163
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(441
|
)
|
|
|
(430
|
)
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
(304
|
)
|
|
|
(11
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(745
|
)
|
|
|
(441
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains (Losses) on Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(1,509
|
)
|
|
|
(192
|
)
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on available-for-sale securities
|
|
|
(7,617
|
)
|
|
|
(2,460
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply
SFAS 159(3)
|
|
|
-
|
|
|
|
172
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
adjustments(4)
|
|
|
3,088
|
|
|
|
971
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(6,038
|
)
|
|
|
(1,509
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Gains (losses) on Cash Flow Hedges (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
83
|
|
|
|
2
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred (losses) gains on cash flow hedges
|
|
|
(2
|
)
|
|
|
81
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
81
|
|
|
|
83
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and postretirement plans (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
76
|
|
|
|
(164
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains
|
|
|
306
|
|
|
|
240
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to apply SFAS 158 change in measurement
date(3)
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply
SFAS 158(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
384
|
|
|
|
76
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(6,318
|
)
|
|
|
(1,791
|
)
|
|
|
(784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated deficit) Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
23,737
|
|
|
|
33,217
|
|
|
|
26,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(27,612
|
)
|
|
|
(7,777
|
)
|
|
|
7,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends declared
|
|
|
(2,869
|
)
|
|
|
(270
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends declared
|
|
|
(1,853
|
)
|
|
|
(1,235
|
)
|
|
|
(918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS 157
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to apply SFAS 158 change in measurement date
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS 159
|
|
|
-
|
|
|
|
(185
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply FIN 48
|
|
|
-
|
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(8,603
|
)
|
|
|
23,737
|
|
|
|
33,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(23,404
|
)
|
|
|
(17,118
|
)
|
|
|
(7,945
|
)
|
|
|
(418,270,289
|
)
|
|
|
(350,697,271
|
)
|
|
|
(233,112,271
|
)
|
Shares repurchased
|
|
|
-
|
|
|
|
(5,272
|
)
|
|
|
(9,088
|
)
|
|
|
-
|
|
|
|
(62,112,876
|
)
|
|
|
(116,610,876
|
)
|
Shares reacquired from employees and
other(5)
|
|
|
(363
|
)
|
|
|
(1,014
|
)
|
|
|
(89
|
)
|
|
|
(16,017,069
|
)
|
|
|
(5,567,086
|
)
|
|
|
(1,021,995
|
)
|
Share exchanges
|
|
|
145
|
|
|
|
-
|
|
|
|
4
|
|
|
|
2,544,793
|
|
|
|
106,944
|
|
|
|
47,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(23,622
|
)
|
|
|
(23,404
|
)
|
|
|
(17,118
|
)
|
|
|
(431,742,565
|
)
|
|
|
(418,270,289
|
)
|
|
|
(350,697,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
$
|
11,398
|
|
|
$
|
27,549
|
|
|
$
|
35,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
$
|
20,003
|
|
|
$
|
31,932
|
|
|
$
|
39,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The 2008 activity relates to the
July 28, 2008 public offering and additional shares issued
to Davis Selected Advisors and Temasek Holdings. |
(2) |
|
The 2007 activity relates to the
acquisition of First Republic Bank and to additional shares
issued to Davis Selected Advisors and Temasek
Holdings. |
(3) |
|
This adjustment is not reflected
on the Statement of Comprehensive (Loss)/Income. |
(4) |
|
Other adjustments primarily
relate to income taxes, policyholder liabilities and deferred
policy acquisition costs. |
(5) |
|
Share amounts are net of
reacquisitions from employees of 19,057,068,
12,490,283 shares and 6,622,887 shares, in 2008, 2007
and 2006, respectively. |
See Notes to Consolidated
Financial Statements
55
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss)/Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended Last Friday in December
|
(dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Net (Loss)/Earnings
|
|
$
|
(27,612
|
)
|
|
$
|
(7,777
|
)
|
|
$
|
7,499
|
|
Other Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses)
|
|
|
694
|
|
|
|
(282
|
)
|
|
|
(366
|
)
|
Income tax (expense) benefit
|
|
|
(998
|
)
|
|
|
271
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(304
|
)
|
|
|
(11
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses arising during the period
|
|
|
(11,916
|
)
|
|
|
(2,291
|
)
|
|
|
(16
|
)
|
Reclassification adjustment for realized losses/(gains) included
in net (loss)/earnings
|
|
|
4,299
|
|
|
|
(169
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on investment securities available-for-sale
|
|
|
(7,617
|
)
|
|
|
(2,460
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder liabilities
|
|
|
-
|
|
|
|
4
|
|
|
|
1
|
|
Income tax benefit
|
|
|
3,088
|
|
|
|
967
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(4,529
|
)
|
|
|
(1,489
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gains (losses) on cash flow hedges
|
|
|
240
|
|
|
|
162
|
|
|
|
9
|
|
Reclassification adjustment for realized losses (gains) included
in net earnings
|
|
|
(241
|
)
|
|
|
(30
|
)
|
|
|
(2
|
)
|
Income tax (expense) benefit
|
|
|
(1
|
)
|
|
|
(51
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(2
|
)
|
|
|
81
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
(110
|
)
|
Net actuarial gains
|
|
|
489
|
|
|
|
353
|
|
|
|
|
|
Prior service cost
|
|
|
(4
|
)
|
|
|
6
|
|
|
|
|
|
Reclassification adjustment for realized losses included in
|
|
|
|
|
|
|
|
|
|
|
|
|
net (loss)/earnings
|
|
|
(5
|
)
|
|
|
23
|
|
|
|
-
|
|
Income tax (expense) benefit
|
|
|
(174
|
)
|
|
|
(142
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
306
|
|
|
|
240
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Loss
|
|
|
(4,529
|
)
|
|
|
(1,179
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (Loss)/Income
|
|
$
|
(32,141
|
)
|
|
$
|
(8,956
|
)
|
|
$
|
7,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated
Financial Statements
56
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended Last Friday in December
|
(dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings
|
|
$
|
(27,612
|
)
|
|
$
|
(7,777
|
)
|
|
$
|
7,499
|
|
Adjustments to reconcile net (loss)/earnings to cash provided by
(used for) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on merger
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,969
|
)
|
Gain on sale of MLIG
|
|
|
-
|
|
|
|
(316
|
)
|
|
|
-
|
|
Depreciation and amortization
|
|
|
886
|
|
|
|
901
|
|
|
|
523
|
|
Share-based compensation expense
|
|
|
2,044
|
|
|
|
1,795
|
|
|
|
3,156
|
|
Payment related to price reset on common stock offering
|
|
|
2,500
|
|
|
|
-
|
|
|
|
-
|
|
Goodwill impairment charge
|
|
|
2,300
|
|
|
|
-
|
|
|
|
-
|
|
Deferred taxes
|
|
|
(16,086
|
)
|
|
|
(4,924
|
)
|
|
|
(360
|
)
|
Gain on sale of Bloomberg L.P. interest
|
|
|
(4,296
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss (earnings) from equity method investments
|
|
|
306
|
|
|
|
(1,409
|
)
|
|
|
(421
|
)
|
Other
|
|
|
13,556
|
|
|
|
160
|
|
|
|
1,045
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
59,064
|
|
|
|
(29,650
|
)
|
|
|
(55,392
|
)
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
(6,214
|
)
|
|
|
(8,886
|
)
|
|
|
(1,019
|
)
|
Receivables under resale agreements
|
|
|
128,370
|
|
|
|
(43,247
|
)
|
|
|
(15,346
|
)
|
Receivables under securities borrowed transactions
|
|
|
98,063
|
|
|
|
(14,530
|
)
|
|
|
(26,126
|
)
|
Customer receivables
|
|
|
19,561
|
|
|
|
(21,280
|
)
|
|
|
(9,562
|
)
|
Brokers and dealers receivables
|
|
|
10,236
|
|
|
|
(3,744
|
)
|
|
|
(6,825
|
)
|
Proceeds from loans, notes, and mortgages held for sale
|
|
|
21,962
|
|
|
|
72,054
|
|
|
|
41,317
|
|
Other changes in loans, notes, and mortgages held for sale
|
|
|
2,700
|
|
|
|
(86,894
|
)
|
|
|
(47,670
|
)
|
Trading liabilities
|
|
|
(34,338
|
)
|
|
|
23,878
|
|
|
|
9,554
|
|
Payables under repurchase agreements
|
|
|
(143,071
|
)
|
|
|
13,101
|
|
|
|
29,557
|
|
Payables under securities loaned transactions
|
|
|
(31,480
|
)
|
|
|
12,414
|
|
|
|
24,157
|
|
Customer payables
|
|
|
(18,658
|
)
|
|
|
14,135
|
|
|
|
13,795
|
|
Brokers and dealers payables
|
|
|
(11,946
|
)
|
|
|
113
|
|
|
|
4,791
|
|
Trading investment securities
|
|
|
3,216
|
|
|
|
9,333
|
|
|
|
(867
|
)
|
Other, net
|
|
|
(31,588
|
)
|
|
|
2,411
|
|
|
|
6,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) operating activities
|
|
|
39,475
|
|
|
|
(72,362
|
)
|
|
|
(23,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of available-for-sale securities
|
|
|
7,250
|
|
|
|
13,362
|
|
|
|
13,222
|
|
Sales of available-for-sale securities
|
|
|
29,537
|
|
|
|
39,327
|
|
|
|
16,176
|
|
Purchases of available-for-sale securities
|
|
|
(31,017
|
)
|
|
|
(58,325
|
)
|
|
|
(31,357
|
)
|
Proceeds from the sale of discontinued operations
|
|
|
12,576
|
|
|
|
1,250
|
|
|
|
-
|
|
Equipment and facilities, net
|
|
|
(630
|
)
|
|
|
(719
|
)
|
|
|
(1,174
|
)
|
Loans, notes, and mortgages held for investment
|
|
|
(13,379
|
)
|
|
|
5,113
|
|
|
|
(681
|
)
|
Other investments
|
|
|
1,336
|
|
|
|
(5,049
|
)
|
|
|
(6,543
|
)
|
Transfer of cash balances related to merger
|
|
|
-
|
|
|
|
-
|
|
|
|
(651
|
)
|
Acquisitions, net of cash
|
|
|
-
|
|
|
|
(2,045
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) investing activities
|
|
|
5,673
|
|
|
|
(7,086
|
)
|
|
|
(11,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and short-term borrowings
|
|
|
12,981
|
|
|
|
6,316
|
|
|
|
9,123
|
|
Issuance and resale of long-term borrowings
|
|
|
70,194
|
|
|
|
165,107
|
|
|
|
87,814
|
|
Settlement and repurchases of long-term borrowings
|
|
|
(109,731
|
)
|
|
|
(93,258
|
)
|
|
|
(42,545
|
)
|
Deposits
|
|
|
(7,880
|
)
|
|
|
9,884
|
|
|
|
4,108
|
|
Derivative financing transactions
|
|
|
543
|
|
|
|
848
|
|
|
|
608
|
|
Issuance of common stock
|
|
|
9,899
|
|
|
|
4,787
|
|
|
|
1,838
|
|
Issuance of preferred stock, net
|
|
|
9,281
|
|
|
|
1,123
|
|
|
|
472
|
|
Common stock repurchases
|
|
|
-
|
|
|
|
(5,272
|
)
|
|
|
(9,088
|
)
|
Other common stock transactions
|
|
|
(833
|
)
|
|
|
(60
|
)
|
|
|
539
|
|
Excess tax benefits related to share-based compensation
|
|
|
39
|
|
|
|
715
|
|
|
|
531
|
|
Dividends
|
|
|
(2,584
|
)
|
|
|
(1,505
|
)
|
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used for) provided by financing activities
|
|
|
(18,091
|
)
|
|
|
88,685
|
|
|
|
52,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
27,057
|
|
|
|
9,237
|
|
|
|
17,523
|
|
Cash and cash equivalents, beginning of period
|
|
|
41,346
|
|
|
|
32,109
|
|
|
|
14,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
68,403
|
|
|
$
|
41,346
|
|
|
$
|
32,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,518
|
|
|
$
|
1,846
|
|
|
$
|
2,638
|
|
Interest paid
|
|
|
30,397
|
|
|
|
49,881
|
|
|
|
35,685
|
|
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 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 Consolidated
Balance Sheets.
See Notes to Consolidated
Financial Statements
57
Description
of Business
Merrill Lynch & Co., Inc. (ML &
Co.) and together with its subsidiaries, (Merrill
Lynch or the Company) provide investment,
financing, insurance, and related services to individuals and
institutions on a global basis through its broker, dealer,
banking, and other financial services subsidiaries. Its
principal subsidiaries include:
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Merrill Lynch, Pierce, Fenner & Smith Incorporated
(MLPF&S), a
U.S.-based
broker-dealer in securities and futures commission merchant;
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Merrill Lynch International (MLI), a U.K.-based
broker-dealer in securities and dealer in equity and credit
derivatives;
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Merrill Lynch Government Securities Inc. (MLGSI), a
U.S.-based
dealer in U.S. Government securities;
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Merrill Lynch Capital Services, Inc., a
U.S.-based
dealer in interest rate, currency, credit derivatives and
commodities;
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Merrill Lynch Bank USA (MLBUSA), a
U.S.-based,
state chartered, Federal Deposit Insurance Corporation
(FDIC)-insured depository institution;
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Merrill Lynch Bank & Trust Co., FSB
(MLBT-FSB), a
U.S.-based,
federally chartered, FDIC-insured depository institution;
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Merrill Lynch International Bank Limited (MLIB), an
Ireland-based bank;
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Merrill Lynch Mortgage Capital, Inc., a
U.S.-based
dealer in syndicated commercial loans;
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Merrill Lynch Japan Securities Co., Ltd. (MLJS), a
Japan-based broker-dealer;
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Merrill Lynch Derivative Products, AG, a Switzerland-based
derivatives dealer; and
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ML IBK Positions Inc., a
U.S.-based
entity involved in private equity and principal investing.
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Services provided to clients by Merrill Lynch and other
activities include:
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Securities brokerage, trading and underwriting;
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Investment banking, strategic advisory services (including
mergers and acquisitions) and other corporate finance activities;
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Wealth management products and services, including financial,
retirement and generational planning;
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Investment management and advisory and related record-keeping
services;
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Origination, brokerage, dealer, and related activities in swaps,
options, forwards, exchange-traded futures, other derivatives,
commodities and foreign exchange products;
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Securities clearance, settlement financing services and prime
brokerage;
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Private equity and other principal investing activities;
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Proprietary trading of securities, derivatives and loans;
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Banking, trust, and lending services, including deposit-taking,
consumer and commercial lending, including mortgage loans, and
related services;
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Insurance and annuities sales; and
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Research services on a global basis
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Bank of
America Acquisition
On January 1, 2009, Merrill Lynch was acquired by Bank of
America Corporation (Bank of America) through the
merger of a wholly owned subsidiary of Bank of America with and
into ML & Co. with ML & Co. continuing as
the surviving corporation and a wholly owned subsidiary of Bank
of America. Upon completion of the acquisition, each outstanding
share of ML & Co. common stock was
58
converted into 0.8595 shares of Bank of America common
stock. As of the completion of the acquisition, ML &
Co. Series 1 through Series 8 preferred stock were
converted into Bank of America preferred stock with
substantially identical terms of the corresponding series of
Merrill Lynch preferred stock (except for additional voting
rights provided to the Bank of America securities). The Merrill
Lynch 9.00% Non-Voting Mandatory Convertible Non-Cumulative
Preferred Stock, Series 2, and 9.00% Non-Voting Mandatory
Convertible Non-Cumulative Preferred Stock, Series 3 that
was outstanding immediately prior to the completion of the
acquisition remained issued and outstanding subsequent to the
acquisition, but are now convertible into Bank of America common
stock.
Basis of
Presentation
The Consolidated Financial Statements include the accounts of
ML & Co. and subsidiaries (collectively, Merrill
Lynch). The 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.
Certain reclassifications have been made to the prior period
financial statements to conform to the current period
presentation.
The Consolidated Financial Statements are presented in
U.S. dollars. Many
non-U.S. subsidiaries
have a functional currency (i.e., the currency in which
activities are primarily conducted) that is other than the
U.S. dollar, often the currency of the country in which a
subsidiary is domiciled. Subsidiaries assets and
liabilities are translated to U.S. dollars at year-end
exchange rates, while revenues and expenses are translated at
average exchange rates during the year. Adjustments that result
from translating amounts in a subsidiarys functional
currency and related hedging, net of related tax effects, are
reported in stockholders equity as a component of
accumulated other comprehensive loss. All other translation
adjustments are included in earnings. Merrill Lynch uses
derivatives to manage the currency exposure arising from
activities in
non-U.S. subsidiaries.
See the Derivatives section for additional information on
accounting for derivatives.
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 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.
59
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 16 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 16 for
additional information.
Consolidation
Accounting Policies
The 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 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 into which they can enter and the
level of discretion that they may exercise through
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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 46(R),
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 by holding issuances of the securitization. In
accordance with SFAS No. 140, where Merrill Lynch
relinquishes control, it recognizes transfers of financial
assets 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:
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The transferred assets have been legally isolated from the
transferor even in bankruptcy or other receivership;
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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
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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).
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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 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. In addition, until the
merger of the Merrill Lynch Investment Management
(MLIM) business with BlackRock, Inc.
(BlackRock) at the end of the third quarter of 2006
(the BlackRock Merger), managed accounts and other
fee-based revenues also included fees earned from the management
and administration of retail mutual funds and institutional
funds, such as pension assets, and performance fees earned on
certain separately managed accounts and institutional money
management arrangements.
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 year ended
December 26, 2008 included a gain of $4.3 billion
associated with the sale of Bloomberg, L.P. (see Note 5).
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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 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, if
any, on structured notes is recorded as a component of interest
expense.
Use of
Estimates
In presenting the Consolidated Financial Statements, management
makes estimates regarding:
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Valuations of assets and liabilities requiring fair value
estimates;
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The allowance for credit losses;
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Determination of other-than-temporary impairments for
available-for-sale investment securities;
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The outcome of litigation;
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Assumptions and cash flow projections used in determining
whether VIEs should be consolidated and the determination of the
qualifying status of QSPEs;
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The realization of deferred taxes and the recognition and
measurement of uncertain tax positions;
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The carrying amount of goodwill and other intangible assets;
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The amortization period of intangible assets with definite lives;
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Incentive-based compensation accruals and valuation of
share-based payment compensation arrangements; and
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Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements.
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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 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 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 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.
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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 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 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
derivatives 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
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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.
Income
Taxes
Merrill Lynch provides for income taxes on all transactions that
have been recognized in the 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 based on past and projected
earnings, tax carryforward periods, tax planning strategies and
other factors of the legal entities through which the deferred
tax assets will be realized as discussed in
SFAS No. 109. Deferred tax assets of approximately
$10.0 billion, which were previously classified as interest
and other receivables at December 28, 2007, have been
restated to other assets in the Consolidated Balance Sheets.
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 the 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. See Note 14 for a further discussion of
income taxes.
Goodwill
and Intangibles
Merrill Lynch makes certain complex judgments with respect to
its goodwill and intangible assets. These include assumptions
and estimates used to determine the fair value of its reporting
units. Reporting unit fair value is determined using
market-multiple and discounted cash flow analyses. Merrill Lynch
also makes assumptions and estimates in valuing its intangible
assets and determining the useful lives of its intangible assets
with definite lives. Refer to Note 8 for further
information.
Employee
Stock Options
The fair value of stock options with vesting based solely on
service requirements is estimated as of the grant date based on
a Black-Scholes option pricing model. The fair value of stock
options with vesting that is partially dependent on
pre-determined increases in the price of Merrill Lynchs
common stock is estimated as of the grant date using a lattice
option pricing model. These models take into account the
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exercise price and expected life of the option, the current
price of the underlying stock and its expected volatility,
expected dividends and the risk-free interest rate for the
expected term of the option. Judgment is required in determining
certain of the inputs to the model. The expected life of the
option is based on an analysis of historical employee exercise
behavior. The expected volatility is based on Merrill
Lynchs implied stock price volatility for the same number
of months as the expected life of the option. The fair value of
the option estimated at grant date is not adjusted for
subsequent changes in assumptions.
Balance
Sheet
Cash and
Cash Equivalents
Merrill Lynch defines cash equivalents as short-term, highly
liquid securities, federal funds sold, and interest-earning
deposits with maturities, when purchased, of 90 days or
less, that are not used for trading purposes. The amounts
recognized for cash and cash equivalents in the Consolidated
Balance Sheets approximate fair value.
Cash and
Securities Segregated for Regulatory Purposes or Deposited with
Clearing Organizations
Merrill Lynch maintains relationships with clients around the
world and, as a result, it is subject to various regulatory
regimes. As a result of its client activities, Merrill Lynch is
obligated by rules mandated by its primary regulators, including
the Securities and Exchange Commission (SEC) and the
Commodities Futures Trading Commission (CFTC) in the
United States and the Financial Services Authority
(FSA) in the United Kingdom to segregate or set
aside cash
and/or
qualified securities to satisfy these regulations, which have
been promulgated to protect customer assets. In addition,
Merrill Lynch is a member of various clearing organizations at
which it maintains cash
and/or
securities required for the conduct of its day-to-day clearance
activities. The amounts recognized for cash and securities
segregated for regulatory purposes or deposited with clearing
organizations in the Consolidated Balance Sheets approximate
fair value.
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
and/or
variable interest rates 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 repurchase agreements that give Merrill
Lynch the right, in the event of default, to liquidate
collateral held and to offset
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receivables and payables with the same counterparty. Merrill
Lynch offsets certain repurchase and resale agreement balances
with the same counterparty on the Consolidated Balance Sheets.
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
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
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 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 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
security prices, currencies, commodity prices 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 buy or sell securities or currencies). Derivative
activity is subject to Merrill Lynchs overall risk
management policies and procedures.
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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 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 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 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:
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Merrill Lynch issued 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:
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Convert fixed-rate interest payments into variable-rate interest
payments;
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Change the underlying interest rate basis or reset
frequency; and
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Change the settlement currency of a debt instrument.
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2.
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Merrill Lynch entered into hedges on marketable investment
securities to manage the interest rate risk, currency risk, and
net duration of its investment portfolios. As of
December 26, 2008 these hedges had been discontinued.
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3.
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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.
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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.
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5.
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Merrill Lynch enters into futures, swaps, options and forward
contracts to manage the price risk of certain commodity
inventory.
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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 Consolidated Balance Sheets.
Derivatives used to hedge commodity inventory are included in
trading assets and trading liabilities on the Consolidated
Balance Sheets.
Derivatives that qualify as accounting hedges under the guidance
in SFAS No. 133 are designated as one of the following:
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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
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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.
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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).
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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 hedging 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.
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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. As of December 26,
2008, Merrill Lynch had discontinued its cash flow hedges on
marketable investment securities. The cash flows that had been
hedged were still expected to occur, therefore, amounts remained
in accumulated other comprehensive loss in the Consolidated
Balance Sheets in relation to these hedges. Of the deferred net
gains from cash flow hedges that were in accumulated other
comprehensive loss on the Consolidated Balance Sheet at
December 26, 2008, $31 million are expected to be
reclassified into earnings during 2009.
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.
For hedges of net investments in foreign operations, gains of
$1,649 million and losses of $432 million related to
non-U.S. dollar
hedges of investments in
non-U.S. dollar
subsidiaries were included in accumulated other comprehensive
loss on the Consolidated Balance Sheets for the years ended 2008
and 2007, respectively. In 2008, hedging gains were
substantially offset by net losses on translation of the foreign
investments. Conversely, in 2007, the hedge losses were
substantially offset by net gains on the translation of the
foreign investments.
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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 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 $50.2 billion and $65.5 billion,
respectively, at December 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
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.
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
held-to-maturity and 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.
Merrill Lynchs impairment review generally includes:
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Identifying securities with indicators of possible impairment;
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Analyzing individual securities with fair value less than
amortized cost for specific factors including:
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An adverse change in cash flows
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The estimated length of time to recover from fair value to
amortized cost
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The severity and duration of the fair value decline from
amortized cost
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