Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
     
X
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2009
 
OR
     
  
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to           
 
Commission file number: 1-7182
 
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
 
     
Delaware
  13-2740599
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
4 World Financial Center,
New York, New York
 
10080
(Address of principal executive offices)
  (Zip Code)
 
(212) 449-1000
Registrant’s telephone number, including area code:
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
       YES             NO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer  X Accelerated Filer     Non-Accelerated Filer     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
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
As of the close of business on May 7, 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 Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with a reduced disclosure format as permitted by Instruction H(2).


 

 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
TABLE OF CONTENTS
 
         
Part I. Financial Information
       
       
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 EX-12
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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Item 1.  Financial Statements
 
Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings/(Loss) (Unaudited)
 
                           
          Predecessor Company
    Successor Company     For the Period from
   
    Three Months Ended
    December 27, 2008
  Three Months Ended
(dollars in millions, except per share amounts)   March 31, 2009     to December 31, 2008   March 28, 2008
Revenues
                         
Principal transactions
  $ 5,778       $ (280 )   $ (2,418 )
Commissions
    1,243         22       1,889  
Managed accounts and other fee-based revenues
    1,103         22       1,455  
Investment banking
    606         12       917  
Earnings from equity method investments
    40         -       431  
Other
    260         19       (1,449 )
                           
Subtotal
    9,030         (205 )     825  
Interest and dividend revenues
    4,379         34       11,861  
Less interest expense
    3,455         -       9,752  
                           
Net interest profit
    924         34       2,109  
                           
Revenues, net of interest expense
    9,954         (171 )     2,934  
                           
Non-interest expenses
                         
Compensation and benefits
    3,142         64       4,196  
Communications and technology
    397         -       555  
Occupancy and related depreciation
    255         -       309  
Brokerage, clearing, and exchange fees
    252         10       387  
Advertising and market development
    105         -       176  
Professional fees
    99         -       242  
Office supplies and postage
    40         -       57  
Other
    419         -       313  
                           
Total non-interest expenses
    4,709         74       6,235  
                           
Pre-tax earnings/(loss) from continuing operations
    5,245         (245 )     (3,301 )
Income tax expense/(benefit)
    1,585         (92 )     (1,332 )
                           
Net earnings/(loss) from continuing operations
    3,660         (153 )     (1,969 )
                           
Discontinued operations:
                         
Pre-tax (loss) from discontinued operations
    -         -       (25 )
Income tax (benefit)
    -         -       (32 )
                           
Net earnings from discontinued operations
    -         -       7  
                           
Net earnings/(loss)
    3,660         (153 )     (1,962 )
                           
Preferred stock dividends
    15         -       174  
                           
Net earnings/(loss) applicable to common stockholders
  $ 3,645       $ (153 )   $ (2,136 )
                           
Basic (loss) per common share from continuing operations
    N/A       $ (0.10 )   $ (2.20 )
Basic earnings per common share from discontinued operations
    N/A         -       0.01  
                           
Basic (loss) per common share
    N/A       $ (0.10 )   $ (2.19 )
                           
Diluted (loss) per common share from continuing operations
    N/A       $ (0.10 )   $ (2.20 )
Diluted earnings per common share from discontinued operations
    N/A         -       0.01  
                           
Diluted (loss) per common share
    N/A       $ (0.10 )   $ (2.19 )
                           
Dividend paid per common share
    -       $ -     $ 0.35  
                           
Average shares used in computing (losses)/earnings per common share
                         
Basic
    N/A         1,600.3       974.1  
Diluted
    N/A         1,600.3       974.1  
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
                   
    Successor Company     Predecessor Company
(dollars in millions, except per share amounts)   March 31, 2009     December 26, 2008
ASSETS
                 
                   
Cash and cash equivalents
  $ 35,837       $ 68,403  
                   
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    28,798         32,923  
                   
Securities financing transactions
                 
Receivables under resale agreements (includes $41,462 in 2009 and $62,146 in 2008 measured at fair value in accordance with SFAS No. 159)
    55,628         93,247  
Receivables under securities borrowed transactions (includes $799 in 2009 and $853 in 2008 measured at fair value in accordance with SFAS No. 159)
    40,337         35,077  
                   
      95,965         128,324  
                   
Trading assets, at fair value (includes securities pledged as collateral that can be sold or repledged of $16,277 in 2009 and $18,663 in 2008):
                 
Derivative contracts
    83,330         89,477  
Corporate debt and preferred stock
    25,437         30,829  
Equities and convertible debentures
    20,808         26,160  
Non-U.S. governments and agencies
    9,782         6,107  
Mortgages, mortgage-backed, and asset-backed
    9,386         13,786  
U.S. Government and agencies
    3,500         5,253  
Municipals, money markets and physical commodities
    5,908         3,993  
                   
      158,151         175,605  
                   
Investment securities (includes $2,418 in 2009 and $2,770 in 2008 measured at fair value in accordance with SFAS No. 159) (includes securities pledged as collateral that can be sold or repledged of $0 in 2009 and $2,557 in 2008)
    47,048         57,007  
                   
Securities received as collateral, at fair value
    7,792         11,658  
                   
Receivables from Bank of America
    17,507         -  
                   
Other receivables
                 
Customers (net of allowance for doubtful accounts of $0 in 2009 and $143 in 2008)
    23,454         51,131  
Brokers and dealers
    5,075         12,410  
Interest and other
    29,115         26,331  
                   
      57,644         89,872  
                   
Loans, notes, and mortgages (net of allowances for loan losses of $10 in 2009 and $2,072 in 2008) (includes $6,570 in 2009 and $979 in 2008 measured at fair value in accordance with SFAS No. 159)
    88,197         69,190  
                   
Equipment and facilities (net of accumulated depreciation and amortization of $190 in 2009 and $5,856 in 2008)
    2,751         2,928  
                   
Goodwill and other intangible assets
    10,631         2,616  
                   
Other assets
    19,502         29,017  
                   
                   
Total Assets
  $ 569,823       $ 667,543  
                   


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
                   
    Successor Company     Predecessor Company
(dollars in millions, except per share amounts)   March 31, 2009     December 26, 2008
LIABILITIES
                 
                   
Securities financing transactions
                 
Payables under repurchase agreements (includes $27,905 in 2009 and $32,910 in 2008 measured at fair value in accordance with SFAS No. 159)
  $ 54,531       $ 92,654  
Payables under securities loaned transactions
    16,287         24,426  
                   
      70,818         117,080  
                   
Short-term borrowings (includes $946 in 2009 and $3,387 in 2008 measured at fair value in accordance with SFAS No. 159)
    4,680         37,895  
                   
Deposits
    97,288         96,107  
                   
Trading liabilities, at fair value
                 
Derivative contracts
    55,757         71,363  
Equities and convertible debentures
    9,467         7,871  
Non-U.S. governments and agencies
    5,687         4,345  
Corporate debt and preferred stock
    963         1,318  
U.S. Government and agencies
    538         3,463  
Municipals, money markets and other
    962         1,111  
                   
      73,374         89,471  
                   
Obligation to return securities received as collateral, at fair value
    7,792         11,658  
                   
Payables to Bank of America
    25,213         -  
                   
Other payables
                 
Customers
    37,103         44,924  
Brokers and dealers
    10,283         12,553  
Interest and other (includes $999 in 2009 measured at fair value in accordance with SFAS No. 159)
    36,673         32,918  
                   
      84,059         90,395  
                   
Long-term borrowings (includes $36,132 in 2009 and $49,479 in 2008 measured at fair value in accordance with SFAS No. 159)
    162,869         199,678  
Junior subordinated notes (related to trust preferred securities)
    3,536         5,256  
                   
Total Liabilities
    529,629         647,540  
                   
COMMITMENTS AND CONTINGENCIES
                 
                   
STOCKHOLDERS’ EQUITY
                 
                   
Preferred Stockholders’ Equity (liquidation preference of $100,000 per share; issued: 2009 — 17,000 shares; issued: 2008 — 115,000 shares)
    1,541         8,605  
Common Stockholders’ Equity
                 
Common stock (par value $1.331/3 per share; authorized: 3,000,000,000 shares; issued: 2009 — 1,000 shares; issued: 2008 — 2,031,995,436 shares)
    -         2,709  
Paid-in capital
    34,632         47,232  
Accumulated other comprehensive income/(loss) (net of tax)
    376         (6,318 )
Retained earnings/(Accumulated deficit)
    3,645         (8,603 )
                   
      38,653         35,020  
                   
Less: Treasury stock, at cost (2009 — None; 2008 — 431,742,565 shares)
    -         23,622  
                   
Total Common Stockholders’ Equity
    38,653         11,398  
                   
Total Stockholders’ Equity
    40,194         20,003  
                   
Total Liabilities and Stockholders’ Equity
  $ 569,823       $ 667,543  
                   
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
                   
    Successor Company     Predecessor Company
    Three Months Ended
    Three Months Ended
(dollars in millions)   March 31, 2009     March 28, 2008
Cash flows from operating activities:
                 
Net earnings/(loss)
  $ 3,660       $ (1,962 )
Adjustments to reconcile net earnings/(loss) to cash provided by operating activities
                 
Depreciation and amortization
    303         217  
Share-based compensation expense
    248         799  
Deferred taxes
    1,268         608  
Earnings from equity method investments
    (40 )       (226 )
Other
    2,815         1,429  
Changes in operating assets and liabilities:
                 
Trading assets
    11,320         2,586  
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    3,499         (2,834 )
Receivables from Bank of America
    (17,507 )       -  
Receivables under resale agreements
    48,119         9,298  
Receivables under securities borrowed transactions
    (5,260 )       (2,198 )
Customer receivables
    11,371         (14,145 )
Brokers and dealers receivables
    7,329         (2,966 )
Proceeds from loans, notes, and mortgages held for sale
    3,015         6,923  
Other changes in loans, notes, and mortgages held for sale
    (1,573 )       (2,127 )
Trading liabilities
    (15,935 )       1,285  
Payables under repurchase agreements
    (32,623 )       (3,228 )
Payables under securities loaned transactions
    (8,139 )       (12 )
Payables to Bank of America
    25,213         -  
Customer payables
    (7,821 )       15,974  
Brokers and dealers payables
    (2,270 )       3,530  
Trading investment securities
    298         (1,933 )
Other, net
    (2,520 )       3,572  
                   
Cash provided by operating activities
    24,770         14,590  
                   
Cash flows from investing activities:
                 
Proceeds from (payments for):
                 
Maturities of available-for-sale securities
    2,095         2,012  
Sales of available-for-sale securities
    2,329         11,633  
Purchases of available-for-sale securities
    (279 )       (13,773 )
Proceeds from the sale of discontinued operations
    -         12,581  
Equipment and facilities, net
    (13 )       (280 )
Loans, notes, and mortgages held for investment
    (2,418 )       (1,977 )
Other investments
    2,218         (528 )
                   
Cash provided by investing activities
    3,932         9,668  
                   
Cash flows from financing activities:
                 
Proceeds from (payments for):
                 
Commercial paper and short-term borrowings
    (33,215 )       (3,945 )
Issuance and resale of long-term borrowings
    1,602         23,754  
Settlement and repurchases of long-term borrowings
    (19,887 )       (33,010 )
Capital contributions from Bank of America
    6,850         -  
Deposits
    (819 )       832  
Derivative financing transactions
    16         750  
Issuance of common stock
    -         2,486  
Issuance of preferred stock, net
    -         6,610  
Other common stock transactions
    -         (866 )
Excess tax benefits related to share-based compensation
    -         35  
Dividends
    (15 )       (538 )
                   
Cash (used for) financing activities
    (45,468 )       (3,892 )
                   
(Decrease) increase in cash and cash equivalents
    (16,766 )       20,366  
Cash and cash equivalents, beginning of period(1)
    52,603         41,346  
                   
Cash and cash equivalents, end of period
  $ 35,837       $ 61,712  
                   
Supplemental Disclosure of Cash Flow Information:
                 
Income taxes paid
  $ 193       $ 372  
Interest paid
    4,273         10,371  
Non-cash investing and financing activities:
 
In connection with the acquisition of Merrill Lynch by Bank of America, Merrill Lynch recorded purchase accounting adjustments in the quarter ended March 31, 2009, which were recorded as non-cash capital contributions. See Note 2.
 
 
(1) Amount for Successor Company is as of January 1, 2009.
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income/(Loss) (Unaudited)
 
                   
    Successor Company     Predecessor Company
    Three Months Ended
    Three Months Ended
(dollars in millions)   March 31, 2009     March 28, 2008
Net earnings/(loss)
  $ 3,660       $ (1,962 )
Other comprehensive income/(loss), net of tax:
                 
Foreign currency translation adjustment
    229         (8 )
Net unrealized gain/(loss) on investment securities available-for-sale
    106         (2,276 )
Net deferred gain on cash flow hedges
    39         49  
Defined benefit pension and postretirement plans
    2         5  
                   
Total other comprehensive income/(loss), net of tax
    376         (2,230 )
                   
Comprehensive income/(loss)
  $ 4,036       $ (4,192 )
                   
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2009
 
Note 1.  Summary of Significant Accounting Policies
 
Description of Business
 
Merrill Lynch & Co. Inc. (“ML & Co.”) and together with its subsidiaries (“Merrill Lynch”), 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. For a complete discussion of significant accounting policies, refer to the Audited Consolidated Financial Statements included in Merrill Lynch’s Annual Report on Form 10-K for the year-ended December 26, 2008 (the “2008 Annual Report”).
 
Bank of America Acquisition
 
On January 1, 2009, Merrill Lynch (the “Predecessor Company”) 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. (the “Successor Company”) 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 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). 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.
 
Bank of America’s cost of acquiring Merrill Lynch has been pushed down to form a new accounting basis for Merrill Lynch. Accordingly, the accompanying Condensed Consolidated Financial Statements are presented for two periods, Predecessor and Successor, which respectively correspond to the periods preceding and succeeding the date of acquisition. The Predecessor and Successor periods have been separated by a vertical line on the face of the Condensed Consolidated Financial Statements to highlight the fact that the financial information for such periods has been prepared under two different cost bases of accounting. The components of the Predecessor Company’s shareholders’ equity (with the exception of $1.5 billion of convertible preferred stock discussed above) were reclassified to paid-in-capital on January 1, 2009.
 
Effective January 1, 2009, Merrill Lynch adopted calendar quarter-end and year-end reporting periods to coincide with those of Bank of America. The intervening period between Merrill Lynch’s previous fiscal year end (December 26, 2008) and the beginning of the current quarter (January 1, 2009) (the “stub period”) is presented separately on the accompanying Condensed Consolidated Statements of Earnings / (Loss).
 
Basis of Presentation
 
The Condensed Consolidated Financial Statements include the accounts of Merrill Lynch. The Condensed Consolidated Financial Statements are presented in accordance with U.S. Generally Accepted Accounting Principles. Intercompany transactions and balances within Merrill Lynch have


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been eliminated. Transactions and balances with Bank of America have not been eliminated. The interim Condensed Consolidated Financial Statements for the three month periods and the stub period are unaudited; however, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included.
 
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the 2008 Annual Report, while recognizing that two different bases of accounting are presented. The nature of Merrill Lynch’s business is such that the results of any interim period are not necessarily indicative of results for a full year. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. In addition, certain changes have been made to classifications in the financial statements as of and for the quarter ended March 31, 2009 to conform to Bank of America’s presentation of similar transactions. These changes include:
 
•  The reclassification of bifurcated embedded derivatives from the balance sheet classification of the host instrument (e.g., long-term borrowings for structured notes) to derivative contracts within trading assets and liabilities;
 
•  The reclassification of derivatives that had been used for asset and liability management hedging from other assets and other payables-interest and other to derivative contracts within trading assets and trading liabilities;
 
•  The reclassification of certain loans designated as held for trading, held for sale or held for investment to either held for sale or held for investment; and
 
•  The reclassification of the financing provided to Bloomberg, Inc. in connection with the sale of Merrill Lynch’s interest in Bloomberg, L.P. from investment securities to loans, notes and mortgages.
 
Merrill Lynch did not make any significant changes to its Predecessor Company accounting policies in order to conform with the accounting policies utilized by Bank of America.
 
Consolidation Accounting Policies
 
The Condensed Consolidated Financial Statements include the accounts of Merrill Lynch, whose subsidiaries are generally controlled through a majority voting interest. In certain cases, Merrill Lynch subsidiaries may also be consolidated based on a risks and rewards approach. Merrill Lynch does not consolidate those special purpose entities that meet the criteria of a qualified special purpose entity (“QSPE”).
 
Merrill Lynch determines whether it is required to consolidate an entity by first evaluating whether the entity qualifies as a voting rights entity (“VRE”), a variable interest entity (“VIE”), or a QSPE.
 
VREs — 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 Statement of Financial Accounting Standards (“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


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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 that they may hold, the derivatives into which they can enter and the level of discretion that they may exercise through servicing activities. In accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS No. 140”), and FIN 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 through holding tranches of the securitization. In accordance with SFAS No. 140, Merrill Lynch recognizes transfers of financial assets where it relinquishes control as sales to the extent of cash and any proceeds received. Control is considered to be relinquished when all of the following conditions have been met:
 
•  The transferred assets have been legally isolated from the transferor even in bankruptcy or other receivership;
 
•  The transferee has the right to pledge or exchange the assets it received, or if the entity is a QSPE the beneficial interest holders have the right to pledge or exchange their beneficial interests; and
 
•  The transferor does not maintain effective control over the transferred assets (e.g. the ability to unilaterally cause the holder to return specific transferred assets).
 
Revenue Recognition
 
Principal transactions revenues include both realized and unrealized gains and losses on trading assets and trading liabilities, investment securities classified as trading investments and fair value changes associated with structured debt. These instruments are recorded at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market 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.


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Managed accounts and other fee-based revenues primarily consist of asset-priced portfolio service fees earned from the administration of separately managed accounts and other investment accounts for retail investors, annual account fees, and certain other account-related fees.
 
Investment banking revenues include underwriting revenues and fees for merger and acquisition advisory services, which are accrued when services for the transactions are substantially completed. Underwriting revenues are presented net of transaction-related expenses. Transaction-related expenses, primarily legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same period as the related revenue from the investment banking transaction to match revenue recognition.
 
Earnings from equity method investments include Merrill Lynch’s pro rata share of income and losses associated with investments accounted for under the equity method.
 
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 Condensed Consolidated Financial Statements, management makes estimates regarding:
 
•  Valuations of assets and liabilities requiring fair value estimates;
 
•  The allowance for credit losses;
 
•  Determination of other-than-temporary impairments for available-for-sale investment securities;
 
•  The outcome of litigation;
 
•  Assumptions and cash flow projections used in determining whether VIEs should be consolidated and the determination of the qualifying status of QSPEs;
 
•  The realization of deferred taxes and the recognition and measurement of uncertain tax positions;
 
•  The carrying amount of goodwill and intangible assets;
 
•  The amortization period of intangible assets with definite lives;
 
•  Incentive-based compensation accruals and valuation of share-based payment compensation arrangements; and
 
•  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 Condensed Consolidated Financial Statements, and it is possible that such changes could occur in the near term.
 
Fair Value Measurement
 
Merrill Lynch accounts for a significant portion of its financial instruments at fair value or considers fair value in their measurement. Merrill Lynch accounts for certain financial assets and liabilities at fair value under various accounting literature, including SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”), SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), and SFAS No. 159, Fair Value Option for Certain Financial Assets and Liabilities (“SFAS No. 159”). Merrill Lynch also accounts for certain assets at fair value under applicable industry guidance, namely broker-dealer and investment company accounting guidance.
 
SFAS No. 157, Fair Value Measurements (“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.
 
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 counterparty’s creditworthiness, or Merrill Lynch’s own creditworthiness, as appropriate. Determining the fair value for OTC derivative contracts can require a significant level of estimation and management judgment.
 
New and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the Condensed Consolidated Financial Statements. For instance, on long-dated and illiquid contracts extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. This enables Merrill Lynch to mark to fair value all positions consistently when only a subset of prices are directly observable. Values for OTC derivatives are verified using observed information about the costs of hedging the risk and other trades in the market. As the markets for these products develop, Merrill Lynch continually refines its pricing models to correlate more closely to the market price of these instruments. 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.


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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 certain instruments, including OTC derivative instruments. The approach to measuring the impact of Merrill Lynch’s credit risk on an instrument is done in the same manner as for third party credit risk. The impact of Merrill Lynch’s 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 Condensed Consolidated Financial Statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). Accordingly, deferred taxes are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on 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. Pursuant to SFAS No. 109, Merrill Lynch may assess various sources of evidence in the conclusion as to the necessity of valuation allowances to reduce deferred tax assets to amounts more-likely-than-not to be realized including the following: 1) past and projected earnings, including losses, of Merrill Lynch and Bank of America, as certain tax attributes such as U.S. net operating losses (“NOLs”), U.S. capital loss carryforwards and foreign tax credit carryforwards can be utilized by Bank of America in certain income tax returns, 2) tax carryforward periods, and 3) tax planning strategies and other factors of the legal entities, such as the intercompany tax-allocation policy. Included within


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Merrill Lynch’s net deferred tax assets are carryforward amounts generated in the U.S. and U.K. that are deductible in the future as NOLs. Merrill Lynch has concluded that these deferred tax assets are more-likely-than-not to be fully utilized prior to expiration, based on the projected level of future taxable income of Merrill Lynch and Bank of America, which is relevant due to the tax-allocation policy. For this purpose, future taxable income was projected based on forecasts and historical earnings after adjusting for the past market disruptions and the anticipated impact of the differences between pre-tax earnings and taxable income.
 
Merrill Lynch recognizes and measures its unrecognized tax benefits in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). Merrill Lynch estimates the likelihood, based on their technical merits, that tax positions will be sustained upon examination considering 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. In accordance with Bank of America’s policy, any new or subsequent change in an unrecognized tax benefit related to a Bank of America state consolidated, combined or unitary return in which Merrill Lynch is a member will not be reflected in Merrill Lynch’s balance sheet. However, upon Bank of America’s resolution of the unrecognized state tax benefit, any material impact deemed to be attributable to Merrill Lynch will be reflected in Merrill Lynch’s balance sheet. Merrill Lynch accrues income-tax-related interest and penalties, if applicable, within income tax expense.
 
Beginning with the 2009 tax year, Merrill Lynch’s results of operations are included in the U.S. federal income tax return and certain state income tax returns of Bank of America. The method of allocating income tax expense is determined under the tax allocation policy of Bank of America. This allocation policy specifies that income tax expense will be computed for all Bank of America subsidiaries generally on a separate company method, taking into account the tax position of the consolidated group and the pro forma Merrill Lynch group. Under the policy, tax benefits associated with net operating losses (or other tax attributes) of Merrill Lynch are payable to Merrill Lynch upon the earlier of the utilization in the filing of Bank of America’s returns or the utilization in Merrill Lynch’s pro forma returns. See Note 15 for further discussion of income taxes.
 
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 6. 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 Lynch’s 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


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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 receivables and payables with the same counterparty. Merrill Lynch offsets certain repurchase and resale agreement balances with the same counterparty on the Condensed Consolidated Balance Sheets.
 
Merrill Lynch may use securities received as collateral for resale agreements to satisfy regulatory requirements such as Rule 15c3-3 of the SEC.
 
Securities borrowed and loaned transactions may be recorded at the amount of cash collateral advanced or received plus accrued interest or at fair value under the fair value option election in SFAS No. 159. Securities borrowed transactions require Merrill Lynch to provide the counterparty with collateral in the form of cash, letters of credit, or other securities. Merrill Lynch receives collateral in the form of cash or other securities for securities loaned transactions. For these transactions, the fees received or paid by Merrill Lynch are recorded as interest revenue or expense. On a daily basis, Merrill Lynch monitors the market value of securities borrowed or loaned against the collateral value, and Merrill Lynch may require counterparties to deposit additional collateral or may return collateral pledged, when appropriate. The carrying value of these instruments approximates fair value as these items are not materially sensitive to shifts in market interest rates because of their short-term nature and/or their variable interest rates.
 
All firm-owned securities pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the securities are disclosed parenthetically in trading assets or, if applicable, in investment securities on the Condensed Consolidated Balance Sheets.
 
In transactions where Merrill Lynch acts as the lender in a securities lending agreement and receives securities that can be pledged or sold as collateral, it recognizes an asset on the Condensed Consolidated Balance Sheets carried at fair value, representing the securities received (securities received as collateral), and a liability for the same amount, representing the obligation to return those securities (obligation to return securities received as collateral). The amounts on the Condensed Consolidated Balance Sheets result from non-cash transactions.
 
Trading Assets and Liabilities
 
Merrill Lynch’s 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. Trading assets and trading liabilities also include commodities inventory. See Note 5 for additional information on derivative instruments.
 
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.


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Investment Securities
 
Investment securities consist of marketable investment securities and non-qualifying investments. Refer to Note 7.
 
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 does not intend to sell 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 income/(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 based on the specific identification 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 security’s fair value is considered to be other-than-temporary if it is probable that all amounts contractually due will not be collected or Merrill Lynch either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. Beginning in 2009, for unrealized losses on debt securities that are deemed other-than-temporary, the credit component of an other-than-temporary impairment is recognized in earnings and the noncredit component in other comprehensive income (“OCI”) when Merrill Lynch does not intend to sell the security and it is more likely than not that Merrill Lynch will not be required to sell the security prior to recovery. Prior to January 1, 2009, unrealized losses (both the credit and non-credit components) on available-for-sale debt securities that were deemed other-than-temporary were included in current period earnings.
 
Merrill Lynch’s impairment review generally includes:
 
•  Identifying securities with indicators of possible impairment;
 
•  Analyzing individual securities with fair value less than amortized cost for specific factors including:
 
  •  The estimated length of time to recover from fair value to amortized cost;
 
  •  The severity and duration of the fair value decline from amortized cost;
 
  •  Deterioration in the financial condition of the issuer;
 
•  Discussing evidential matter, including an evaluation of the factors that could cause individual securities to have an other-than-temporary impairment;
 
•  Determining whether Merrill Lynch intends to sell the security or if it is more likely than not that Merrill Lynch will be required to sell the security before recovery of its amortized cost; and
 
•  Documenting the analysis and conclusions.


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Non-Qualifying Investments
 
Non-qualifying investments are those investments that are not within the scope of SFAS No. 115 and primarily include private equity investments accounted for at fair value and securities carried at cost or under the equity method of accounting.
 
Private equity investments that are held for capital appreciation and/or current income are accounted for under the American Institute of Certified Public Accountants’ (“AICPA”) Accounting and Auditing Guide, Investment Companies (the “Investment Company Guide”) and carried at fair value. Additionally, certain private equity investments that are not accounted for under the Investment Company Guide may be carried at fair value under the fair value option election in SFAS No. 159. The carrying value of private equity investments reflects expected exit values based upon market prices or other valuation methodologies including expected cash flows and market comparables of similar companies.
 
Merrill Lynch has non-controlling investments in the common shares of corporations and in partnerships that do not fall within the scope of SFAS No. 115 or the Investment Company Guide. Merrill Lynch accounts for these investments using either the cost or the equity method of accounting based on management’s ability to influence the investees. See the Consolidation Accounting Policies section of this Note for more information.
 
For investments accounted for using the equity method, income is recognized based on Merrill Lynch’s share of the earnings or losses of the investee. Dividend distributions are generally recorded as reductions in the investment balance. Impairment testing is based on the guidance provided in APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, and the investment is reduced when an impairment is deemed other-than-temporary.
 
For investments accounted for at cost, income is recognized as dividends are received. Impairment testing is based on the guidance provided in FASB Staff Positions Nos. SFAS 115-2 and SFAS 124-2, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and the cost basis is reduced when an impairment is deemed other-than-temporary.
 
Loans, Notes, and Mortgages, Net
 
Merrill Lynch’s lending and related activities include loan originations, syndications and securitizations. Loan originations include corporate and institutional loans, residential and commercial mortgages, asset-based loans, and other loans to individuals and businesses. Merrill Lynch also engages in secondary market loan trading (see the Trading Assets and Liabilities section within this Note) and margin lending. Loans included in loans, notes, and mortgages are classified for accounting purposes as loans held for investment and loans held for sale. Upon completion of the acquisition of Merrill Lynch by Bank of America, certain loans carried by Merrill Lynch were subject to the requirements of AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”). See Note 9.
 
Loans held for investment are carried at amortized cost, less an allowance for loan losses. The provision for loan losses is based on management’s estimate of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb probable incurred loan losses and is included in interest revenue in the Condensed Consolidated Statements of Earnings/(Loss). Management’s estimate of loan losses is influenced by many factors, including adverse situations that may affect the borrower’s ability to repay, current economic conditions, prior loan loss experience, and the estimated fair value of any underlying collateral. The fair value of collateral is generally determined by third-party appraisals


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in the case of residential mortgages, quoted market prices for securities, or other types of estimates for other assets.
 
Management’s estimate of loan losses includes judgment about collectibility based on available information at the balance sheet date, and the uncertainties inherent in those underlying assumptions.
 
While management has based its estimates on the best information available, future adjustments to the allowance for loan losses may be necessary as a result of changes in the economic environment or variances between actual results and the original assumptions.
 
In general, loans are evaluated for impairment when they are greater than 90 days past due or exhibit credit quality weakness. Loans are considered impaired when it is probable that Merrill Lynch will not be able to collect the contractual principal and interest due from the borrower. All payments received on impaired loans are applied to principal until the principal balance has been reduced to a level where collection of the remaining recorded investment is not in doubt. Typically, when collection of principal on an impaired loan is not in doubt, contractual interest will be credited to interest income when received.
 
Loans held for sale are carried at lower of cost or fair value. The fair value option in SFAS No. 159 has been elected for certain held for sale loans, notes and mortgages. Estimation is required in determining these fair values. The fair value of loans made in connection with commercial lending activity, consisting mainly of senior debt, is primarily estimated using the market value of publicly issued debt instruments or discounted cash flows. Merrill Lynch’s estimate of fair value for other loans, notes, and mortgages is determined based on the individual loan characteristics. For certain homogeneous categories of loans, including residential mortgages, automobile loans, and home equity loans, fair value is estimated using a whole loan valuation or an “as-if” securitized price based on market conditions. An “as-if” securitized price is based on estimated performance of the underlying asset pool collateral, rating agency credit structure assumptions and market pricing for similar securitizations previously executed. Declines in the carrying value of loans held for sale and loans accounted for at fair value under the fair value option are included in other revenues in the Condensed Consolidated Statements of Earnings/(Loss).
 
Nonrefundable loan origination fees, loan commitment fees, and “draw down” fees received in conjunction with held for investment loans are generally deferred and recognized over the contractual life of the loan as an adjustment to the yield. If, at the outset, or any time during the term of the loan, it becomes probable that the repayment period will be extended, the amortization is recalculated using the expected remaining life of the loan. When the loan contract does not provide for a specific maturity date, management’s best estimate of the repayment period is used. At repayment of the loan, any unrecognized deferred fee is immediately recognized in earnings. If the loan is accounted for as held for sale, the fees received are deferred and recognized as part of the gain or loss on sale in other revenues. If the loan is accounted for under the fair value option, the fees are included in the determination of the fair value and included in other revenue.
 
New Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, (“FSP FAS 157-4”). FSP FAS 157-4 provides guidance for determining whether a market is inactive and a transaction is distressed in order to apply the existing fair value measurement guidance in SFAS No. 157. Merrill Lynch elected to early adopt FSP FAS 157-4 effective January 1, 2009. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.


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In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, (“FSP FAS 115-2 and FAS 124-2”). This FSP requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income (“OCI”) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. FSP FAS 115-2 and FAS 124-2 also require expanded disclosures. Merrill Lynch elected to early adopt FSP FAS 115-2 and FAS 124-2 effective January 1, 2009 and the adoption did not have a material impact on the Condensed Consolidated Financial Statements, as any OCI that Merrill Lynch previously recorded was eliminated upon Bank of America’s acquisition of Merrill Lynch. FSP FAS 115-2 and FAS 124-2 do not change the recognition of other-than-temporary impairment for equity securities.
 
In April 2009, the FASB issued FSP No. FAS 107-1 and APB Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1”). FSP FAS 107-1 requires expanded disclosures for all financial instruments as defined by SFAS No. 107, Disclosures about Fair Value of Financial Instruments such as loans that are not measured at fair value through earnings. The expanded disclosure requirements for FSP FAS 107-1 are effective for Merrill Lynch’s quarterly financial statements for the three months ending June 30, 2009. Since FSP FAS 107-1 only requires certain additional disclosures, it will not affect Merrill Lynch’s consolidated financial position, results of operations or cash flows.
 
In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, (“FSP FAS 141(R)-1”) whereby assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. FSP 141(R)-1 is effective for new acquisitions consummated on or after January 1, 2009. Bank of America applied FSP 141(R)-1 to its January 1, 2009 acquisition of Merrill Lynch, and the effects of the adoption were not material to these Condensed Consolidated Financial Statements.
 
In September 2008, the FASB released exposure drafts that would amend SFAS No. 140 and FIN 46(R). As written, the proposed amendments would, among other things, eliminate the concept of a QSPE and change the standards for consolidation of VIEs. The changes would be effective for both existing and newly-created entities as of January 1, 2010. If adopted as written, the amendments would likely result in the consolidation of certain QSPEs and VIEs that are not currently recorded on the Condensed Consolidated Balance Sheet of Merrill Lynch (e.g., certain mortgage and municipal bond securitizations). Merrill Lynch is continuing to evaluate the impact that the exposure drafts would have on its financial condition and results of operations if adopted as written.
 
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 applies to all derivative instruments within the scope of SFAS No. 133. It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS No. 133. SFAS No. 161 amends the current qualitative and quantitative disclosure requirements for derivative instruments and hedging activities set forth in SFAS No. 133 and generally increases the level of disaggregation that will be required in an entity’s financial statements. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements.


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Merrill Lynch adopted SFAS No. 161 on January 1, 2009, effective prospectively. Since SFAS No. 161 only requires certain additional disclosures, it did not have an effect on Merrill Lynch’s consolidated financial position, results of operations or cash flows. See Note 5 for further information regarding these disclosures.
 
In February 2008, the FASB issued FSP FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP FAS 140-3”). Under the guidance in FSP FAS 140-3, there is a presumption that the initial transfer of a financial asset and subsequent repurchase financing involving the same asset are considered part of the same arrangement (i.e. a linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing will be evaluated as two separate transactions under SFAS No. 140. FSP FAS 140-3 is effective for new transactions entered into in fiscal years beginning after November 15, 2008. Early adoption was prohibited. The adoption of FSP FAS 140-3 did not have a material impact on the Condensed Consolidated Financial Statements.
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 requires noncontrolling interests in subsidiaries (formerly known as “minority interests”) initially to be measured at fair value and classified as a separate component of equity. Under SFAS No. 160, gains or losses on sales of noncontrolling interests in subsidiaries are not recognized, instead sales of noncontrolling interests are accounted for as equity transactions. However, in a sale of a subsidiary’s shares that results in the deconsolidation of the subsidiary, a gain or loss is recognized for the difference between the proceeds of that sale and the carrying amount of the interest sold and a new fair value basis is established for any remaining ownership interest. SFAS No. 160 is effective for Merrill Lynch beginning in 2009; earlier application is prohibited. SFAS No. 160 is required to be adopted prospectively, with the exception of certain presentation and disclosure requirements (e.g., reclassifying noncontrolling interests to appear in equity), which are required to be adopted retrospectively. The adoption of SFAS No. 160 did not have a material impact on the Condensed Consolidated Financial Statements.
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”), which significantly changes the financial accounting and reporting for business combinations. SFAS No. 141(R) requires, for example: (i) more assets and liabilities to be measured at fair value as of the acquisition date, (ii) liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period with changes reflected in earnings and not goodwill, and (iii) all acquisition-related costs to be expensed as incurred by the acquirer. Bank of America applied SFAS No. 141(R) to its January 1, 2009 acquisition of Merrill Lynch, the effects of which are included in these Condensed Consolidated Financial Statements.


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Note 2.  Acquisition and Subsequent Transactions with Bank of America Corporation
 
As a result of the acquisition of Merrill Lynch by Bank of America, Merrill Lynch recorded the following preliminary purchase accounting adjustments:
 
         
(dollars in billions)    
 
 
Purchase Price
       
Merrill Lynch common shares exchanged (in millions)
    1,600  
Exchange ratio
    0.8595  
         
Bank of America’s common stock issued
    1,375  
Purchase price per share of Bank of America’s common stock(1)
  $ 14.08  
         
Total value of Bank of America’s common stock and cash exchanged for fractional shares
  $ 19.4  
Merrill Lynch preferred stock(2)
    8.6  
Fair value of outstanding employee stock awards
    1.1  
         
Total purchase price
  $ 29.1  
         
Preliminary allocation of the purchase price
       
Merrill Lynch stockholders’ equity
  $ 19.9  
Merrill Lynch goodwill and intangible assets
    (2.6 )
Pre-tax adjustments to reflect acquired assets and liabilities at fair value:
       
Securities and derivatives
    (1.1 )
Loans
    (6.4 )
Intangible assets(3)
    5.7  
Other assets
    (1.4 )
Long-term borrowings
    15.5  
         
Pre-tax total adjustments
    12.3  
Deferred income taxes
    (5.5 )
         
After-tax total adjustments
    6.8  
         
Fair value of net assets acquired
  $ 24.1  
         
Preliminary goodwill resulting from the acquisition by Bank of America
  $ 5.0  
         
 
 
(1) The value of the shares of common stock exchanged with Merrill Lynch shareholders was based upon the closing price of Bank of America’s common stock at December 31, 2008, the last trading day prior to the date of acquisition.
(2) Represents Merrill Lynch’s preferred stock exchanged for Bank of America preferred stock having substantially identical terms and also includes $1.5 billion of convertible preferred stock.
(3) Consists of trade name of $1.2 billion and customer relationship and core deposit intangibles of $4.5 billion. The amortization life is 10 years for the customer relationship and core deposit intangibles, which will be primarily amortized on a straight-line basis.
 
Subsequent to the Bank of America acquisition, certain assets and liabilities were transferred at fair value between Merrill Lynch and Bank of America. These transfers were made in connection with efforts to manage risk in a more effective and efficient manner at the consolidated Bank of America level. The assets and liabilities transferred related to sales and trading activities and included positions associated with the rates and currency, equity and mortgage products trading businesses. These transfers included approximately $47 billion each of assets and liabilities transferred from Merrill Lynch to Bank of America, primarily U.S. matched book repurchase positions and mortgage positions. In addition, approximately $2 billion of commercial mortgage-backed securities were transferred to Bank of America. Approximately $16 billion of assets were transferred from Bank of America to Merrill Lynch, primarily equity-related positions. See Note 19 for additional information on related party transactions.


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Note 3.  Segment and Geographic Information
 
Segment Information
 
Prior to the acquisition by Bank of America, Merrill Lynch’s operations were organized and reported as two operating segments in accordance with the criteria in SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information (“SFAS No. 131”): Global Markets and Investment Banking (“GMI”) and Global Wealth Management (“GWM”).
 
As a result of the acquisition by Bank of America, Merrill Lynch reevaluated the provisions of SFAS No. 131 in the first quarter of 2009. Pursuant to SFAS No. 131, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. Based upon how the chief operating decision maker of Merrill Lynch reviews results in terms of allocating resources and assessing performance, it was determined that Merrill Lynch does not contain any identifiable operating segments under SFAS No. 131. As a result, the financial information of Merrill Lynch is presented as a single segment.
 
Geographic Information
 
Merrill Lynch conducts its business activities through offices in the following five regions:
 
•  United States;
 
•  Europe, Middle East, and Africa (“EMEA”);
 
•  Pacific Rim;
 
•  Latin America; and
 
•  Canada.
 
The principal methodologies used in preparing the geographic information below are as follows:
 
•  Revenues and expenses are generally recorded based on the location of the employee generating the revenue or incurring the expense without regard to legal entity;
 
•  Pre-tax earnings or loss from continuing operations include the allocation of certain shared expenses among regions; and
 
•  Intercompany transfers are based primarily on service agreements.


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The information that follows, in management’s judgment, provides a reasonable representation of each region’s contribution to the consolidated net revenues and pre-tax earnings/(loss) from continuing operations:
 
                   
    Successor Company     Predecessor Company
    Three Months Ended
    Three Months Ended
(dollars in millions)   March 31, 2009     March 28, 2008
 
Net revenues
                 
Europe, Middle East, and Africa
  $ 1,935       $ 1,006  
Pacific Rim
    806         839  
Latin America
    235         459  
Canada
    52         72  
                   
Total Non-U.S. 
    3,028         2,376  
United States(1)
    6,926         558  
                   
Total net revenues
  $ 9,954       $ 2,934  
                   
Pre-tax earnings from continuing operations(2)
                 
Europe, Middle East, and Africa
  $ 1,257       $ (340 )
Pacific Rim
    319         202  
Latin America
    85         159  
Canada
    26         13  
                   
Total Non-U.S. 
    1,687         34  
United States(1)
    3,558         (3,335 )
                   
Total pre-tax earnings/(loss) from continuing operations(2)
  $ 5,245       $ (3,301 )
                   
 
 
(1) U.S. results for the three months ended March 31, 2009 included gains of $2.2 billion, which resulted from the widening of Merrill Lynch’s credit spreads on the carrying values of certain long-term liabilities. The U.S. results for the three months ended March 28, 2008 include write-downs of $6.4 billion related to U.S. ABS CDOs, U.S. sub-prime and Alt-A residential mortgage positions, leveraged finance commitments, and credit valuation adjustments related to hedges with financial guarantors. These losses were partially offset by gains of $2.1 billion that resulted from the widening of Merrill Lynch’s credit spreads on the carrying values of certain long-term debt liabilities.
(2) See Note 17 for further information on discontinued operations.
 
Note 4.  Fair Value
 
Fair Value Measurements
 
Fair Value Hierarchy
 
In accordance with SFAS No. 157, Merrill Lynch has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
 
Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
 
Level 1.   Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Merrill Lynch has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, U.S. Government securities, and certain other sovereign government obligations).


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Level 2.   Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
 
  a)  Quoted prices for similar assets or liabilities in active markets (examples include restricted stock and U.S. agency securities);
 
  b)  Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
 
  c)  Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
 
  d)  Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities and derivatives).
 
Level 3.   Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets (including loans, securities and derivatives), and long-dated or complex derivatives (including certain equity and currency derivatives and long-dated options on gas and power)).
 
As required by SFAS No. 157, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore gains and losses for such assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, the following tables do not take into consideration the effect of offsetting Level 1 and 2 financial instruments entered into by Merrill Lynch that economically hedge certain exposures to the Level 3 positions.
 
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Level 3 gains and losses represent amounts incurred during the period in which the instrument was classified as Level 3. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. Refer to the recurring and non-recurring sections within this Note for further information on net transfers in and out.


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Recurring Fair Value
 
The following tables present Merrill Lynch’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 and December 26, 2008, respectively.
 
                                         
    Fair Value Measurements on a Recurring Basis
    Successor Company as of March 31, 2009
                Netting
   
(dollars in millions)   Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Assets:
                                       
Securities segregated for regulatory purposes or deposited with clearing organizations:
                                       
Mortgages, mortgage-backed and asset-backed
  $ -     $ 8,528     $ -     $ -     $ 8,528  
Corporate debt
    -       127       -       -       127  
Non-U.S. governments and agencies
    -       715       -       -       715  
U.S. government and agencies
    -       1,687       -       -       1,687  
Municipals and money markets
    53       -       -       -       53  
                                         
Total securities segregated for regulatory purposes or deposited with clearing organizations
    53       11,057       -       -       11,110  
                                         
Receivables under resale agreements
    -       41,462       -       -       41,462  
Receivables under securities borrowed transactions
    -       799       -       -       799  
Trading assets, excluding derivative contracts:
                                       
Equities
    12,525       4,757       379       -       17,661  
Convertible debentures
    -       3,147       -       -       3,147  
Mortgages, mortgage-backed and asset-backed
    -       1,987       7,399       -       9,386  
Corporate debt
    -       13,012       5,499       -       18,511  
Preferred stock
    160       7       6,759       -       6,926  
Non-U.S. governments and agencies
    7,734       1,447       601       -       9,782  
U.S. government and agencies
    3,062       438       -       -       3,500  
Municipals and money markets
    316       4,162       1,046       -       5,524  
Commodities and related contracts
    -       384       -       -       384  
                                         
Total trading assets, excluding derivative contracts
    23,797       29,341       21,683       -       74,821  
                                         
Derivative contracts
    8,702       1,208,490       31,733       (1,165,595 )     83,330  
Investment securities trading:
                                       
Equities
    -       15       -       -       15  
Mortgages, mortgage-backed and asset-backed
    -       27       38       -       65  
Corporate debt
    -       225       146       -       371  
Non-U.S. governments and agencies
    410       89       -       -       499  
Municipals and money markets
    92       403       -       -       495  
                                         
Total investment securities trading
    502       759       184       -       1,445  
                                         
Investment securities available-for-sale:
                                       
Mortgage-backed securities — agency collateralized mortgage obligations
    -       12,628       -       -       12,628  
Mortgage-backed securities — non-agency MBSs
    -       6,209       3,193       -       9,402  
Corporate/agency bonds
    -       151       -       -       151  
Other taxable securities
    -       55       -       -       55  
                                         
Total investment securities available-for-sale
    -       19,043       3,193       -       22,236  
                                         
Investment securities non-qualifying
    1,138       2,907       2,494       -       6,539  
                                         
Total investment securities
    1,640       22,709       5,871       -       30,220  
                                         
Securities received as collateral
    7,587       205       -       -       7,792  
Loans, notes and mortgages
    -       523       6,144       -       6,667  


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    Fair Value Measurements on a Recurring Basis
    Successor Company as of March 31, 2009
                Netting
   
(dollars in millions)   Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Liabilities:
                                       
Payables under repurchase agreements
  $ -     $ 27,905     $ -     $ -     $ 27,905  
Short-term borrowings
    -       946       -       -       946  
Trading liabilities, excluding derivative contracts:
                                       
Equities
    8,345       1,091       -       -       9,436  
Convertible debentures
            31       -       -       31  
Mortgages, mortgage-backed and asset-backed
    -       142       -       -       142  
Corporate debt
    -       963       -       -       963  
Non-U.S. governments and agencies
    5,048       313       326       -       5,687  
U.S. government and agencies
    493       45       -       -       538  
Municipals and money markets
    223       597       -       -       820  
                                         
Total trading liabilities, excluding derivative contracts
    14,109       3,182       326       -       17,617  
                                         
Derivative contracts
    9,879       1,202,192       27,865       (1,184,179 )     55,757  
Obligation to return securities received as collateral
    7,587       205       -       -       7,792  
Other payables - interest and other
    -       -       999       -       999  
Long-term borrowings
    -       28,083       8,049       -       36,132  
 
 
(1) Represents counterparty and cash collateral netting.
 
Level 3 derivative contracts (assets) primarily relate to derivative positions on U.S. ABS CDOs of $4.7 billion, $20.7 billion of other credit derivatives that incorporate unobservable correlation, and $6.3 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have an unobservable model valuation input(s).
 
Level 3 non-qualifying investment securities primarily relate to private equity and principal investment positions.
 
Level 3 loans, notes and mortgages primarily relate to mortgage loans, corporate loans and leveraged loans whose fair value incorporates significant unobservable inputs.
 
Level 3 derivative contracts (liabilities) primarily relate to derivative positions on U.S. ABS CDOs of $4.6 billion, $18.2 billion of other credit derivatives that incorporate unobservable correlation, and $5.1 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable correlation.
 
Level 3 other payables - interest and other relate to loan commitments whose fair value incorporates significant unobservable inputs.
 
Level 3 long-term borrowings primarily relate to equity-linked structured notes of $5.9 billion that are long-dated and/or have unobservable correlation.
 

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(dollars in millions)
    Fair Value Measurements on a Recurring Basis
    Predecessor Company as of December 26, 2008
                Netting
   
    Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Assets:
                                       
Securities segregated for regulatory purposes or deposited with clearing organizations
  $ 1,421     $ 10,156     $ -     $ -     $ 11,577  
Receivables under resale agreements
    -       62,146       -       -       62,146  
Receivables under securities borrowed transactions
    -       853       -       -       853  
Trading assets, excluding derivative contracts
    30,106       33,902       22,120       -       86,128  
Derivative contracts
    8,538       1,239,225       37,325       (1,195,611 )     89,477  
Investment securities
    2,280       29,254       3,279       -       34,813  
Securities received as collateral
    9,430       2,228       -       -       11,658  
Loans, notes and mortgages
    -       690       359       -       1,049  
Other assets(2)
    -       8,046       -       -       8,046  
Liabilities:
                                       
Payables under repurchase agreements
    -       32,910       -       -       32,910  
Short-term borrowings
    -       3,387       -       -       3,387  
Trading liabilities, excluding derivative contracts
    14,098       4,010       -       -       18,108  
Derivative contracts
    8,438       1,254,158       35,018       (1,226,251 )     71,363  
Obligation to return securities received as collateral
    9,430       2,228       -       -       11,658  
Long-term borrowings(3)
    -       41,575       7,480       -       49,055  
Other payables - interest and other(2)
    10       741       -       (79 )     672  
 
 
(1) Represents counterparty and cash collateral netting.
(2) Primarily represents certain derivatives used for non-trading purposes.
(3) Includes bifurcated embedded derivatives carried at fair value.
 
Level 3 trading assets primarily include U.S. asset-backed collateralized debt obligations (“U.S. ABS CDOs”) of $9.4 billion, corporate bonds and loans of $5.0 billion and auction rate securities of $3.9 billion.
 
Level 3 derivative contracts (assets) primarily relate to derivative positions on U.S. ABS CDOs of $5.8 billion, $23.6 billion of other credit derivatives that incorporate unobservable correlation, and $7.9 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable correlation.
 
Level 3 investment securities primarily relate to certain private equity and principal investment positions of $2.6 billion.
 
Level 3 derivative contracts (liabilities) primarily relate to derivative positions on U.S. ABS CDOs of $6.1 billion, $22.3 billion of other credit derivatives that incorporate unobservable correlation, and $4.8 billion of equity derivatives that are long-dated and/or have unobservable correlation.
 
Level 3 long-term borrowings primarily relate to structured notes with embedded equity derivatives of $6.3 billion that are long-dated and/or have unobservable correlation.
 

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(dollars in millions)
    Level 3 Financial Assets and Liabilities
    Successor Company
    Three Months Ended March 31, 2009
        Total Realized and Unrealized Gains or (Losses)
  Total Realized and
      Purchases,
       
       
included in Income
  Unrealized Gains
  Unrealized
  Issuances
       
    Beginning
  Principal
  Other
      or (Losses)
  Gains to
  and
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   included in Income   OCI   Settlements   in (out)   Balance
 
 
Assets:
                                                                       
Trading assets, excluding derivative contracts:
                                                                       
Equities
  $ 231     $ (18 )   $ -     $ -     $ (18 )   $ -     $ 184     $ (18 )   $ 379  
Mortgages, mortgage-backed and asset-backed
    7,568       (250 )     -       -       (250 )     -       (589 )     670       7,399  
Corporate debt
    10,149       (475 )     -       -       (475 )     -       (394 )     (3,781 )     5,499  
Preferred stock
    3,344       (109 )     -       -       (109 )     -       3,419       105       6,759  
Non-U.S. governments and agencies
    30       (15 )     -       -       (15 )     -       (1 )     587       601  
Municipals and money markets
    798       64       -       -       64       -       197       (13 )     1,046  
                                                                         
Total trading assets, excluding derivative contracts
    22,120       (803 )     -       -       (803 )     -       2,816       (2,450 )     21,683  
                                                                         
Derivative contracts, net
    2,307       913       -       -       913       -       441       207       3,868  
Investment securities trading:
                                                                    -  
Mortgages, mortgage-backed and asset-backed
    22       (11 )     -       -       (11 )     -       (2 )     29       38  
Corporate debt
    146       (9 )     -       -       (9 )     -       -       9       146  
                                                                         
Total investment securities trading
    168       (20 )     -       -       (20 )     -       (2 )     38       184  
                                                                         
Investment securities available-for-sale:
                                                                       
Mortgage-backed securities - non- agency MBSs
    350       -       -       178       178       649       (92 )     2,108       3,193  
                                                                         
Total investment securities available-for-sale
    350       -       -       178       178       649       (92 )     2,108       3,193  
                                                                         
Investment securities non-qualifying
    2,761       -       (179 )     -       (179 )     -       (23 )     (65 )     2,494  
                                                                         
Total investment securities
    3,279       (20 )     (179 )     178       (21 )     649       (117 )     2,081       5,871  
                                                                         
Loans, notes and mortgages
    359       -       (466 )     -       (466 )     -       266       5,985       6,144  
Liabilities:
                                                                       
Trading liabilities, excluding derivative contracts:
                                                                       
Non-U.S. governments and agencies
    -       22       -       -       22       -       -       348       326  
                                                                         
Total trading liabilities, excluding derivative contracts
    -       22       -       -       22       -       -       348       326  
                                                                         
Other payables - interest and other
    -       -       392       -       392       -       54       1,337       999  
Long-term borrowings
    7,480       (499 )     7       -       (492 )     -       403       (326 )     8,049  
 
 
 
Net gains in principal transactions related to net derivative contracts were primarily due to $1.2 billion of gains on credit derivatives that incorporate unobservable correlation.
 
Increases in purchases, issuances and settlements of preferred stock were primarily attributable to the purchase of auction rate securities.
 
Net transfers out for corporate debt primarily relates to the reclassification of certain loans from trading assets to loans, notes and mortgages held for investment, which are not measured at fair value. Net transfers in for available-for-sale mortgage-backed securities - non-agency MBSs is the result of reduced price transparency. Net transfers in for loans, notes, and mortgages relate to the fair value option election for certain mortgage loans,corporate loans and leveraged loans by Merrill Lynch as a result of the acquisition by Bank of America. Net transfers in for other payables - interest and other relates to the fair value option election for certain loan commitments by Merrill Lynch as a result of the acquisition by Bank of America.
 

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(dollars in millions)
    Level 3 Financial Assets and Liabilities
    Predecessor Company
    Three Months Ended March 28, 2008
        Total Realized and Unrealized Gains
  Total Realized and
  Purchases,
       
       
or (Losses) included in Income
  Unrealized Gains
  Issuances
       
    Beginning
  Principal
  Other
      or (Losses)
  and
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   included in Income   Settlements   in (out)   Balance
 
 
Assets:
                                                               
Securities segregated for regulatory purposes or deposited with clearing organizations
  $ 84     $ -     $ -     $ 1     $ 1     $ 1     $ (6 )   $ 80  
Trading assets
    9,773       (423 )     -       44       (379 )     8,265       566       18,225  
Derivative contracts, net
    (9,069 )     65       -       5       70       7,994       (1,998 )     (3,003 )
Investment securities
    5,491       (405 )     (57 )     -       (462 )     151       (248 )     4,932  
Loans, notes and mortgages
    63       -       2       -       2       131       9       205  
Liabilities:
                                                               
Long-term borrowings
    4,765       (448 )     -       -       (448 )     1,065       1,840       8,118  
 
 
 
Net losses in principal transactions were due primarily to $3.2 billion of write-downs related to U.S. ABS CDOs that are classified as Level 3, offset by $1.0 billion in gains on credit derivatives on corporate and other non-mortgage underlyings that incorporate unobservable correlation.
 
The increase in Level 3 trading assets due to purchases, issuances and settlements was primarily attributable to the recording of assets for which the exposure was previously recognized as derivative liabilities (total return swaps) at December 28, 2007. In the first quarter of 2008, Merrill Lynch recorded certain of these positions as trading assets as a result of consolidating certain SPEs that held the underlying assets on which the total return swaps were referenced. As a result of the consolidation of the SPEs the total return swaps were eliminated in consolidation. The decrease in Level 3 derivative contracts due to purchases, issuances and settlements is attributable to the decrease in derivative liabilities discussed above as well as payments made to reduce ABS CDO derivative liabilities.
 
The net transfers on Level 3 derivative contracts include the impact of the counterparty credit valuation adjustments to ABS CDO positions. The net transfers on Level 3 long-term borrowings were primarily due to decreased observability of inputs on certain equity linked notes.

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The following tables provide the portion of gains or losses included in income for the three months ended March 31, 2009 and March 28, 2008 attributable to unrealized gains or losses relating to those Level 3 assets and liabilities held at March 31, 2009 and March 28, 2008, respectively.
 
                                 
(dollars in millions)
    Unrealized Gains or (Losses) for Level 3
    Assets and Liabilities Still Held
    Successor Company
    Three Months Ended March 31, 2009
    Principal
  Other
       
    Transactions   Revenue   Interest   Total
 
 
Assets:
                               
Trading assets, excluding derivative contracts:
                               
Equities
  $ (18 )   $ -     $ -     $ (18 )
Mortgages, mortgage-backed and asset-backed
    (267 )     -       -       (267 )
Corporate debt
    (478 )     -       -       (478 )
Preferred stock
    (109 )     -       -       (109 )
Non-U.S. governments and agencies
    (15 )     -       -       (15 )
Municipals and money markets
    64       -       -       64  
                                 
Total trading assets, excluding derivative contracts
    (823 )     -       -       (823 )
                                 
Derivative contracts, net
    991       -       -       991  
Investment securities trading:
                               
Mortgages, mortgage-backed and asset-backed
    (11 )     -       -       (11 )
Corporate debt
    (9 )     -       -       (9 )
                                 
Total investment securities trading
    (20 )     -       -       (20 )
                                 
Investment securities available-for-sale:
                               
Mortgage-backed securities - non-agency MBSs
    -       -       178       178  
                                 
Total investment securities available-for-sale
    -       -       178       178  
                                 
Investment securities non-qualifying
    -       (179 )     -       (179 )
                                 
Total investment securities
    (20 )     (179 )     178       (21 )
                                 
Loans, notes and mortgages
    -       (466 )     -       (466 )
Liabilities:
                               
Trading liabilities, excluding derivative contracts:
                               
Non-U.S. governments and agencies
    22       -       -       22  
                                 
Total trading liabilities, excluding derivative contracts
    22       -       -       22  
                                 
Other payables - interest and other
    -       392       -       392  
Long-term borrowings
    (533 )     7       -       (526 )
 
 
 
Net unrealized gains in principal transactions related to net derivative contracts were primarily due to $1.2 billion of gains on credit derivatives that incorporate unobservable correlation.
 


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Table of Contents

                                 
(dollars in millions)
    Unrealized Gains or (Losses) for Level 3
    Assets and Liabilities Still Held
    Predecessor Company
    Three Months Ended March 28, 2008
    Principal
  Other
       
    Transactions   Revenue   Interest   Total
 
 
Assets:
                               
Securities segregated for regulatory purposes or deposited with clearing organizations
  $ -     $ -     $ 1     $ 1  
Trading assets
    (424 )     -       44       (380 )
Derivative contracts, net
    94       -       5       99  
Investment securities
    (405 )     (57 )     -       (462 )
Other assets
    -       -       -       -  
Loans, notes, and mortgages
    -       6       -       6  
Liabilities:
                               
Trading liabilities
    -       -       -       -  
Long-term borrowings
    (448 )     -       -       (448 )
 
 
 
Total net unrealized losses were primarily due to $3.2 billion of write-downs related to U.S. ABS CDOs that are classified as Level 3, offset by $1.0 billion in gains on credit derivatives on corporate and other non-mortgage underlyings that incorporate unobservable correlation.
 
Non-recurring Fair Value
 
Certain assets and liabilities are measured at fair value on a non-recurring basis and are not included in the tables above. These assets and liabilities primarily include loans and loan commitments held for sale and reported at lower of cost or fair value and loans held for investment that were initially measured at cost and have been written down to fair value as a result of an impairment. The following table shows the fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2009 and December 26, 2008, respectively.
 
                                                 
(dollars in millions)
    Non-Recurring Basis   Gains/(Losses)   Gains/(Losses)
    Successor Company
  Three Months
  Three Months
    as of March 31, 2009   Ended
  Ended
    Level 1   Level 2   Level 3   Total   Mar. 31, 2009   Mar. 28, 2008
 
 
Assets:
                                               
Loans, notes, and mortgages
  $   -       914     $ 3,728     $ 4,642     $ (226 )     (1,091 )
Other assets
    -       -       -       -       -       (15 )
Liabilities:
                                               
Other payables - interest and other
    -       -       57       57       -       (66 )
 
 
 
 

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Table of Contents

                                 
(dollars in millions)
    Predecessor Company
    as of December 26, 2008
    Level 1   Level 2   Level 3   Total
 
 
Assets:
                               
Loans, notes, and mortgages
  $   -     $ 4,386     $ 6,727     $ 11,113  
Liabilities:
                               
Other payables - interest and other
    -       1,258       67       1,325  
 
 
 
Loans, notes, and mortgages includes held for sale loans that are carried at the lower of cost or fair value and for which the fair value was below the cost basis at March 31, 2009 and December 26, 2008. It also includes certain impaired held for investment loans where an allowance for loan losses has been calculated based upon the fair value of the loans or collateral. Level 3 assets as of March 31, 2009 primarily relate to residential and commercial real estate loans that are classified as held for sale where there continues to be significant illiquidity in the loan trading and securitization markets. The fair value of certain Level 3 loans was calculated primarily by a fundamental cash flow valuation analysis. This cash flow analysis includes cumulative loss and prepayment assumptions derived from multiple inputs including mortgage remittance reports, property prices and other market data. In addition, independent third party bids received on loans are also considered for valuation purposes. Level 3 assets as of December 26, 2008 primarily related to U.K. and other European residential and commercial real estate loans that are classified as held for sale of $4.6 billion.
 
Other payables - interest and other include amounts recorded for loan commitments at lower of cost or fair value where the funded loan will be held for sale.
 
Fair Value Option
 
SFAS No. 159 provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. SFAS No. 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. As discussed above, certain of Merrill Lynch’s financial instruments are required to be accounted for at fair value under SFAS No. 115 and SFAS No. 133, as well as industry level guidance. For certain financial instruments that are not accounted for at fair value under other applicable accounting guidance, the fair value option has been elected.
 

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Table of Contents

The following tables provide information about where in the Condensed Consolidated Statements of Earnings/(Loss) changes in fair values of assets and liabilities, for which the fair value option has been elected, are included for the three months ended March 31, 2009 and March 28, 2008, respectively.
 
                                                   
(dollars in millions)
    Successor Company     Predecessor Company
    Changes in Fair Value for the Three Months Ended March 31, 2009, for Items Measured at Fair Value Pursuant to Fair Value Option     Changes in Fair Value for the Three Months Ended March 28, 2008, for Items Measured at Fair Value Pursuant to Fair Value Option
    Gains/
  Gains/
  Total
    Gains/
  Gains/
  Total
    (losses)
  (losses)
  Changes
    (losses)
  (losses)
  Changes
    Principal
  Other
  in Fair
    Principal
  Other
  in Fair
    Transactions   Revenues   Value     Transactions   Revenues   Value
 
Assets:
                                                 
Receivables under resale agreements
  $ (168 )   $ -     $ (168 )     $ (31 )   $ -     $ (31 )
Investment securities
    5       (103 )     (98 )       (330 )     (38 )     (368 )
Loans, notes and mortgages
    -       (412 )     (412 )       (8 )     12       4  
Liabilities:
                                                 
Payables under repurchase agreements
    92       -       92         (15 )     -       (15 )
Short-term borrowings
    (16 )     6       (10 )       (197 )     -       (197 )
Other payables — interest and other
    -       392       392         -       -       -  
Long-term borrowings(1)
    2,104       7       2,111         3,246       499       3,745  
 
 
(1) Other revenues primarily represent fair value changes on non-recourse long-term borrowings issued by consolidated SPEs.
 
The following describes the rationale for electing to account for certain financial assets and liabilities at fair value, as well as the impact of instrument-specific credit risk on the fair value.
 
Resale and repurchase agreements:
 
Merrill Lynch elected the fair value option for certain resale and repurchase agreements. The fair value option election was made based on the tenor of the resale and repurchase agreements, which reflects the magnitude of the interest rate risk. The majority of resale and repurchase agreements collateralized by U.S. government securities were excluded from the fair value option election as these contracts are generally short-dated and therefore the interest rate risk is not considered significant. Amounts loaned under resale agreements require collateral with a market value equal to or in excess of the principal amount loaned resulting in minimal credit risk for such transactions.
 
Securities borrowed transactions:
 
Merrill Lynch elected the fair value option for certain Japanese government bond borrowing transactions during the second quarter of 2008. Fair value changes related to such transactions were immaterial for the first three months of 2009.
 
Investment securities:
 
Investment securities primarily represents non-marketable convertible preferred shares for which Merrill Lynch has economically hedged a majority of the position with derivatives.


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Table of Contents

Loans, notes and mortgages and loan commitments:
 
Merrill Lynch elected the fair value option for automobile and certain corporate loans because the loans are risk managed on a fair value basis. Upon the acquisition of Merrill Lynch by Bank of America, Merrill Lynch also elected the fair value option for certain mortgage loans, corporate loans, and leveraged loans and loan commitments. The change in the fair value of loans, notes and mortgages and loan commitments for which the fair value option was elected was primarily attributable to changes in borrower-specific credit risk for the three months ended March 31, 2009. The change in the fair value of loans, notes and mortgages for which the fair value option was elected that was attributable to changes in borrower-specific credit risk was not material for the three months ended March 28, 2008.
 
For those loans, notes and mortgages for which the fair value option has been elected, the aggregate fair value of loans that are 90 days or more past due and in non-accrual status is not material to the Condensed Consolidated Financial Statements.
 
Short-term and long-term borrowings:
 
Merrill Lynch elected the fair value option for certain short-term and long-term borrowings that are risk managed on a fair value basis, including structured notes, and for which hedge accounting under SFAS No. 133 had been difficult to obtain. The majority of the fair value changes on long-term borrowings is from structured notes with coupon or repayment terms that are linked to the performance of debt and equity securities, indices, currencies or commodities. Except for gains related to changes in Merrill Lynch’s credit spreads, the majority of gains for the three months ended March 31, 2009 and March 28, 2008 are offset by losses on derivatives that economically hedge these borrowings and that are accounted for at fair value under SFAS No. 133. The changes in the fair value of liabilities for which the fair value option was elected that were attributable to changes in Merrill Lynch credit spreads were gains of approximately $2.2 billion and $2.1 billion for the three months ended March 31, 2009 and March 28, 2008, respectively. Changes in Merrill Lynch specific credit risk are derived by isolating fair value changes due to changes in Merrill Lynch’s credit spreads as observed in the secondary cash market.
 
The fair value option was also elected for certain non-recourse long-term borrowings issued by consolidated SPEs. The fair value of these long-term borrowings is unaffected by changes in Merrill Lynch’s creditworthiness.
 
The following tables present the difference between fair values and the aggregate contractual principal amounts of receivables under resale agreements, receivables under securities borrowed transactions, loans, notes, and mortgages and long-term borrowings for which the fair value option has been elected as of March 31, 2009 and December 26, 2008, respectively.
 
                         
(dollars in millions)
    Successor Company
    Fair Value
  Principal
   
    at
  Amount
   
    March 31,
  Due Upon
   
    2009   Maturity   Difference
 
 
Assets:
                       
Receivables under resale agreements
  $ 41,462     $ 40,953     $ 509  
Receivables under securities borrowed transactions
    799       799       -  
Loans, notes and mortgages
    6,570       11,291       (4,721 )
Liabilities:
                       
Long-term borrowings(1)
    36,132       50,521       (14,389 )
 
 


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(1) The majority of the difference relates to the impact of the widening of Merrill Lynch’s credit spreads, the change in fair value of non-recourse debt, and zero coupon notes issued at a substantial discount from the principal amount.
 
                         
(dollars in millions)
    Predecessor Company
    Fair Value
  Principal
   
    at
  Amount
   
    December 26,
  Due Upon
   
    2008   Maturity   Difference
 
 
Assets:
                       
Receivables under resale agreements
  $ 62,146     $ 61,466     $ 680  
Receivables under securities borrowed transactions
    853       853       -  
Loans, notes and mortgages
    979       1,326       (347 )
Liabilities:
                       
Long-term borrowings(1)
    49,521       62,244       (12,723 )
 
 
(1) The majority of the difference relates to the impact of the widening of Merrill Lynch’s credit spreads, the change in fair value of non-recourse debt, and zero coupon notes issued at a substantial discount from the principal amount.
 
Concentration of risk to the mortgage markets
 
At March 31, 2009, Merrill Lynch had sizeable exposure to the mortgage market through securities, derivatives, loans and loan commitments. This included:
 
•  Net exposures of $33.0 billion in U.S. Prime residential mortgage-related positions and $2.4 billion in other residential mortgage-related positions, excluding Merrill Lynch’s investment securities portfolio;
 
•  Net exposure of $8.4 billion in Merrill Lynch’s investment securities portfolio; and
 
•  Net exposure of $7.0 billion in commercial real estate related positions, excluding First Republic, and $4.9 billion in First Republic commercial real estate related positions
 
In September 2008, Merrill Lynch sold $30.6 billion gross notional amount of U.S. super senior ABS CDOs (the “Portfolio”) to an affiliate of Lone Star Funds for a sales price of $6.7 billion. In connection with this sale, Merrill Lynch provided financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan is limited to the assets of the purchaser, which consist solely of the Portfolio. All cash flows and distributions from the Portfolio (including sale proceeds) will be applied in accordance with a specified priority of payments. The loan had a carrying value of $4.6 billion at March 31, 2009. Events of default under the loan are customary events of default, including failure to pay interest when due and failure to pay principal at maturity.
 
Valuation of these exposures will continue to be impacted by external market factors including default rates, rating agency actions, and the prices at which observable market transactions occur. Merrill Lynch’s ability to mitigate its risk by selling or hedging its exposures is also limited by the market environment. Merrill Lynch’s future results may continue to be materially impacted by the valuation adjustments applied to these positions.


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Concentration of risk to financial guarantors
 
To economically hedge certain ABS CDO and U.S. sub-prime mortgage positions, Merrill Lynch entered into credit derivatives with various counterparties, including monolines and other financial guarantors. At March 31, 2009, the carrying value of our hedges with financial guarantors related to U.S. super senior ABS CDOs was $1.4 billion.
 
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 Collateralized Debt Obligations (“CDOs”), Collateralized Loan Obligations (“CLOs”), Residential Mortgage-Backed Securities (“RMBS”) and Commercial Mortgage-Backed Securities (“CMBS”). At March 31, 2009, the carrying value of our hedges with financial guarantors related to these types of exposures was $8.3 billion.
 
Note 5.  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, or option contracts, or 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).
 
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 and measure those instruments at fair value. The fair value of all derivatives is recorded on a net-by-counterparty basis on the Condensed Consolidated Balance Sheets where management believes a legal right of setoff exists under an enforceable netting agreement. All derivatives, including bifurcated embedded derivatives within structured notes, are reported on the Condensed Consolidated Balance Sheets as trading assets and liabilities.
 
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.
 
Trading derivatives
 
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. Changes in fair value for these derivatives are reported in current period earnings as principal transactions revenues.


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Non-trading derivatives
 
Merrill Lynch also enters into derivatives in order to manage risk exposures arising from assets and liabilities not carried at fair value as follows:
 
1.  Merrill Lynch’s debt was issued in a variety of maturities and currencies to achieve the lowest cost financing possible. Merrill Lynch enters into derivative transactions to hedge these liabilities. Derivatives used most frequently include swap agreements that:
 
  •  Convert fixed-rate interest payments into variable payments;
 
  •  Change the underlying interest rate basis or reset frequency; and
 
  •  Change the settlement currency of a debt instrument.
 
Changes in the fair value of interest rate derivatives are reported in interest expense when hedge accounting is applied; otherwise changes in fair value are reported in other revenue. Changes in the fair value of foreign currency derivatives are reported in other revenue.
 
2.  Merrill Lynch uses foreign-exchange forward contracts, foreign-exchange options, and currency swaps to hedge its net investments in foreign operations, as well as other foreign currency exposures (e.g., non-U.S. dollar denominated debt and expenses). These derivatives are used to mitigate the impact of changes in exchange rates. Changes in the fair value of these derivatives are reported in other revenue, unless net investment hedge accounting is applied.
 
3.  Merrill Lynch enters into futures, swaps, options and forward contracts to manage the price risk of certain commodity inventory and forecasted commodity purchases and sales. Changes in fair value of these derivatives are reported in principal transaction revenues, unless cash flow hedge accounting is applied.
 
4.  Merrill Lynch enters into credit default swaps to manage the credit risk on certain loans that are not part of trading activities. Changes in the fair value of these derivatives are reported in other revenue.
 
Derivatives that qualify as accounting hedges under the guidance in SFAS No. 133 are designated as one of the following:
 
1.  A hedge of the fair value of a recognized asset or liability (“fair value hedge”). Changes in the fair value of derivatives that are designated and qualify as fair value hedges of interest rate risk, along with the gain or loss on the hedged liability that is attributable to the hedged risk, are recorded in current period earnings as interest expense. Changes in the fair value of derivatives that are designated and qualify as fair value hedges of commodity price risk, along with the gain or loss on the hedged asset that is attributable to the hedged risk, are recorded in current period earnings in principal transactions.
 
2.  A hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Changes in the fair value of derivatives that are designated and qualify as effective cash flow hedges are recorded in accumulated other comprehensive income/(loss) until earnings are affected by the variability of cash flows of the hedged asset or liability. For commodity hedges, the amount is reclassified out of accumulated other comprehensive income/(loss) and recorded in principal transactions when the forecasted purchase or sale of the commodity occurs or when Merrill Lynch believes the forecasted transaction is not probable of occurring, in which case it is released over the life of the forecasted transaction.


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3.  A hedge of a net investment in a foreign operation. Changes in the fair value of derivatives that are designated and qualify as hedges of a net investment in a foreign operation are recorded in the foreign currency translation adjustment account within accumulated other comprehensive income/(loss). Changes in the fair value of the hedge instruments that are associated with the difference between the spot translation rate and the forward translation rate are recorded in current period earnings in other revenues.
 
Merrill Lynch formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives are highly effective in offsetting changes in fair value or cash flows of hedged items. Merrill Lynch uses regression analysis at the hedge’s inception and for each reporting period thereafter to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. When assessing hedge effectiveness on interest rate hedges and fair value hedges of commodity price risk, there are no attributes of the derivatives used to hedge the fair value exposure that are excluded from the assessment. For cash flow hedges of commodity price risk, 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. When it is determined that a derivative is not highly effective as a hedge, Merrill Lynch discontinues hedge accounting.
 
Hedge accounting activity for the period ended March 31, 2009 included the following:
 
Fair value hedges of interest rate risk on long-term borrowings
 
             
(dollars in millions)
    Account location   Amount
 
 
Gain/(loss) recognized in income on the derivative
  Interest expense   $ (370 )
Gain/(loss) recognized in income on the long-term borrowing
  Interest expense   $ 245  
Hedge ineffectiveness
  Interest expense   $ (125 )
Carrying value of hedging derivatives
           
    Trading assets   $ 6,290  
    Trading liabilities   $ -  
Notional amount of hedging derivatives
           
in an asset position
      $ 47,687  
in a liability position
      $ 15  
 
 
 
Fair value hedges of commodity price risk on commodity inventory
 
             
(dollars in millions)
    Account location   Amount
 
 
Gain/(loss) recognized in income on the derivative
  Principal transactions   $ 55  
Gain/(loss) recognized in income on the commodity inventory
  Principal transactions   $ (57 )
Gain/(loss) recognized in income due to hedge ineffectiveness
  Principal transactions   $ (2 )
Carrying value of hedging derivatives
           
    Trading assets   $ 95  
    Trading liabilities   $ 1  
Notional amount of hedging derivatives
           
in an asset position
      $ 206  
in a liability position
      $ 3  
 
 


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Cash flow hedges of commodity price risk on forecasted purchases and sales
 
             
(dollars in millions)
    Account location   Amount
 
 
Gain/(loss) on the derivative deferred in equity
 
Accumulated other
comprehensive income
  $ 48  
Gain/(loss) reclassified into earnings in the current period
  Principal transactions   $ 3  
Amount that is expected to be reclassified into earnings in the next 12 months
  Principal transactions   $ 15  
Amount recognized in income due to hedge ineffectiveness
  Principal transactions   $ -  
Carrying value of hedging derivatives
           
    Trading assets   $ 132  
    Trading liabilities   $ 113  
Notional amount of hedging derivatives
           
in an asset position
      $ 515  
in a liability position
      $ 449  
 
 
 
Net investment hedges of foreign operations
 
             
(dollars in millions)
    Account location   Amount
 
 
Gain/(loss) on the derivative and non-derivative hedges deferred in equity
 
Accumulated other
comprehensive income
  $ 718  
Gain/(loss) recognized in income due to hedge ineffectiveness
  Other revenue   $ (10 )
Gain/(loss) recognized in income from the unused portion (time value) of the hedging derivative
  Other revenue   $ (55 )
Carrying value of hedging derivatives
  Trading assets   $ 372  
    Trading liabilities   $ 202  
Carrying value of non-derivative hedges
  Long-term borrowings   $ 532  
Notional amount of hedging derivatives
           
in an asset position
      $ 10,914  
in a liability position
      $ 9,330  
 
 
 
Gains and (losses) on non-trading derivatives not in SFAS No. 133 hedge relationships
 
             
(dollars in millions)
    Account location   Amount
 
 
Interest rate risk
  Interest expense   $ (460 )
Foreign currency risk
  Other revenue   $ 784  
Credit risk
  Other revenue   $ 69  
 
 
 
The above amounts represent net gains on derivatives that are not used for trading purposes and are not used in SFAS No. 133 hedging relationships. Interest rate risk primarily relates to derivatives used to hedge long-term debt where SFAS No. 133 is not applied and derivatives with third parties that are recorded by Merrill Lynch and utilized by Bank of America at the consolidated level for hedge accounting purposes. As the hedged item is not held by Merrill Lynch, hedge accounting is not applied by Merrill Lynch. Foreign currency risk primarily relates to economic hedges of foreign currency denominated transactions that generate earnings upon remeasurement in accordance with SFAS No. 52, Foreign Currency Translation. As both the remeasurement of the foreign currency risk on the transaction and the changes in fair value of the derivative are recorded in earnings, hedge accounting is not applied. Credit risk relates to credit default swaps used to economically manage the credit risk on certain loans not included in trading activities.


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Derivative balances by primary risk
 
Derivative instruments contain numerous market risks. In particular, most derivatives have interest rate risk, as they contain an element of financing risk which is affected by changes in interest rates. Additionally, derivatives expose Merrill Lynch to counterparty credit risk, although this is generally mitigated by collateral margining and netting arrangements. For disclosure purposes below, the primary risk of a derivative is largely determined by the business that is engaging in the derivative activity. For instance, a derivative that is initiated by an equities derivative desk will generally have equity price risk as its primary underlying market risk and is classified as such for the purposes of this disclosure, despite the fact that there may be other market risks that affect the value of the instrument.
 
The following table identifies the primary risk for derivative instruments at March 31, 2009. The primary risk is provided on a gross basis, prior to the application of the impact of counterparty and cash collateral netting.
 
                                 
(dollars in millions)
    Contract/
  Trading Assets-
  Contract/
  Trading Liabilities-
    Notional(1)   Derivative Contracts   Notional(1)   Derivative Contracts
 
 
Interest rate contracts
                               
Swaps
  $ 12,835,755     $ 760,727     $ 11,682,252     $ 737,625  
Futures and forwards
    1,883,670       7,067       1,649,009       5,857  
Written options
    -       -       1,399,704       58,280  
Purchased options
    1,361,349       64,117       -       -  
Foreign exchange contracts
                               
Swaps
    118,126       17,677       127,653       21,928  
Spot, futures and forwards
    428,765       21,737       408,847       21,677  
Written options
    -       -       474,567       25,519  
Purchased options
    481,680       26,342       -       -  
Equity contracts
                               
Swaps
    24,233       3,263       18,044       1,974  
Futures and forwards
    970,648       6,200       87,588       5,016  
Written options
    -       -       431,967       43,069  
Purchased options
    210,084       29,899       -       -  
Commodity contracts
                               
Swaps
    66,665       36,017       57,471       32,932  
Futures and forwards
    719,428       12,139       781,882       11,447  
Written options
    -       -       66,957       12,924  
Purchased options
    139,285       13,275       -       -  
Credit derivatives
                               
Purchased protection:
                               
Credit default swaps
    1,806,048       243,788       143,515       4,761  
Total return swaps
    4,934       524       -       -  
Other Credit Derivatives
    12,411       138       287       8  
Written protection:
                               
Credit default swaps
    124,268       6,015       1,795,229       245,744  
Total return swaps
    -       -       24,439       11,088  
Other Credit Derivatives
    -       -       12,310       87  
                                 
Gross derivative assets/liabilities
  $ 21,187,349     $ 1,248,925     $ 19,161,721     $ 1,239,936  
Less: Legally enforceable master netting
            (1,123,693 )             (1,123,693 )
Less: Cash collateral applied
            (41,902 )             (60,486 )
                                 
Total derivative assets and liabilities
          $ 83,330             $ 55,757  
                                 
 
 
(1) These amounts include trading derivatives, non-trading derivatives and bifurcated embedded derivatives, and exclude derivative contracts with Merrill Lynch affiliate entities within Bank of America.


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Trading revenues
 
Merrill Lynch enters into trading derivatives and non-derivative cash instruments to facilitate client transactions, for proprietary trading purposes, and to manage risk exposures arising from trading assets and liabilities. The resulting risk from derivative and non-derivative cash instruments is managed on a portfolio basis as part of Merrill Lynch’s sales and trading activities and the related revenue is recorded on different income statement line items including principal transactions, commissions, other revenues and net interest profit/(loss). The following table identifies the amounts in the income statement line items attributable to trading activities including both derivatives and non-derivative cash instruments categorized by primary risk for the three months ended March 31, 2009.
 
                                         
(dollars in millions)
    Principal
          Net Interest
   
For The Quarter Ended March 31, 2009   Transactions   Commissions   Other Revenues   Profit/(Loss)   Total
 
 
Interest Rate Risk
  $ 1,362     $ 13     $ (2 )   $ 203     $ 1,576  
Foreign Exchange Risk
    190       -       1       (12 )     179  
Equity Risk
    826       753       24       92       1,695  
Commodity Risk
    598       -       1       (51 )     548  
Credit Risk
    558       16       (110 )     311       775  
                                         
Total trading — related
  $ 3,534     $ 782     $ (86 )   $ 543     $ 4,773  
Non-trading related
    2,244       461       346       381       3,432  
                                         
Total
  $ 5,778     $ 1,243     $ 260     $ 924     $ 8,205  
                                         
 
 
 
Non-trading amounts relate to activities in connection with principal investment, wealth management, and certain lending activities; economic hedging activity discussed in the Non-trading derivatives section above, and the impact of changes in Merrill Lynch’s own creditworthiness on borrowings accounted for at fair value.
 
Derivatives as guarantees
 
Merrill Lynch enters into certain derivative contracts that meet the definition of a guarantee under FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 defines guarantees to include derivative contracts that contingently require a guarantor to make payment to a guaranteed party based on changes in an underlying (such as changes in the value of interest rates, security prices, currency rates, commodity prices, indices, etc.), that relate to an asset, liability or equity security of a guaranteed party. Derivatives that meet the FIN 45 definition of guarantees include certain written options (e.g., written interest rate and written currency options). Merrill Lynch does not track, for accounting purposes, whether its clients enter into these derivative contracts for speculative or hedging purposes. Accordingly, Merrill Lynch has disclosed information about all credit derivatives and certain types of written options that can potentially be used by clients to protect against changes in an underlying, regardless of how the contracts are actually used by the client.


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Merrill Lynch’s derivatives that act as guarantees at March 31, 2009 are summarized below:
 
                                                 
(dollars in millions)
    Maximum
                   
    Payout /
                  Carrying
    Notional   Less than 1 year   1+ - 3 years   3+ - 5 years   Over 5 years   Value(1)
 
 
Derivative contracts:
                                               
Credit derivatives:
                                               
Investment grade(2)
  $ 1,113,846     $ 56,038     $ 172,359     $ 511,748     $ 373,701     $ 108,206  
Non-investment grade(2)
    705,822       55,711       172,583       233,554       243,974       148,626  
                                                 
Total credit derivatives
    1,819,668       111,749       344,942       745,302       617,675       256,832  
Other derivatives
    1,589,334       550,221       469,946       190,026       379,141       67,595  
                                                 
Total derivative contracts
  $ 3,409,002     $ 661,970     $ 814,888     $ 935,328     $ 996,816     $ 324,427  
                                                 
 
 
(1) Derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting.
(2) Refers to the creditworthiness of the underlying reference obligations.
 
Credit derivatives
 
Credit derivatives derive value based on an underlying third party referenced obligation or a portfolio of referenced obligations. Merrill Lynch is both a seller and a buyer of credit protection. A seller of credit protection is required to make payments to a buyer upon the occurrence of a predefined credit event. Such credit events generally include bankruptcy of the referenced credit entity and failure to pay under their credit obligations, as well as acceleration of indebtedness and payment repudiation or moratorium. Merrill Lynch considers credit derivatives to be guarantees where it is the seller of credit protection. For credit derivatives based on a portfolio of referenced credits or credit indices, Merrill Lynch as a seller of credit protection may not be required to make payment until a specified amount of loss has occurred and/or may only be required to make payment up to a specified amount.
 
For most credit derivatives, the notional value represents the maximum amount payable by Merrill Lynch as a seller of credit protection. However, Merrill Lynch does not exclusively monitor its exposure to credit derivatives based on notional value. Instead, a risk framework is used to define risk tolerances and establish limits to help to ensure that certain credit risk-related losses occur within acceptable, predefined limits. Merrill Lynch discloses internal categorizations (i.e., investment grade, non-investment grade) consistent with how risk is managed to evaluate the payment status of its freestanding credit derivative instruments.
 
Merrill Lynch economically hedges its exposure to credit derivatives by entering into a variety of offsetting derivative contracts and security positions. For example, in certain instances, Merrill Lynch purchases credit protection with identical underlying referenced names to offset its exposure. At March 31, 2009, the notional value and carrying value of credit protection purchased and credit protection sold by Merrill Lynch with identical underlying referenced names was:
 
                                                 
(dollars in millions)
    Maximum
                   
    Payout /
                  Carrying
    Notional   Less than 1 year   1+ - 3 years   3+ - 5 years   Over 5 years   Value(1)
 
 
Credit derivatives purchased
  $ 1,777,922     $ 110,803     $ 304,841     $ 774,968     $ 587,310     $ 237,813  
Credit derivatives sold
    1,783,509       110,315       337,253       745,152       590,789       235,549  
 
 
(1) Derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting.


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Other derivative contracts
 
Other derivative contracts in the guarantees table above primarily represent written interest rate options and written currency options. For such contracts the maximum payout could theoretically be unlimited, because, for example, the rise in interest rates or changes in foreign exchange rates could theoretically be unlimited. Merrill Lynch does not monitor its exposure to derivatives based on the theoretical maximum payout because that measure does not take into consideration the probability of the occurrence. As such, rather than including the maximum payout, the notional value of these contracts has been included to provide information about the magnitude of involvement with these types of contracts. However, it should be noted that the notional value is not a reliable indicator of Merrill Lynch’s exposure to these contracts. Instead, as previously noted, a risk framework is used to define risk tolerances and establish limits to help ensure that certain risk-related losses occur within acceptable, predefined limits.
 
As the fair value and risk of payment under these derivative contracts are based upon market factors, such as changes in interest rates or foreign exchange rates, the carrying values in the table above reflect the best estimate of Merrill Lynch’s performance risk under these transactions at March 31, 2009. Merrill Lynch economically hedges its exposure to these contracts by entering into a variety of offsetting derivative contracts and security positions.
 
Credit risk management of derivatives
 
Merrill Lynch defines 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. Merrill Lynch mitigates its credit risk to counterparties through a variety of techniques, including, 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.
 
Merrill Lynch enters into International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements or their equivalent (“master netting agreements”) with almost all 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 accounting and risk management purposes. Netting agreements are generally negotiated bilaterally and can require complex terms. While Merrill Lynch makes 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 Merrill Lynch to additional credit risk. The enforceability of master 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.
 
Where Merrill Lynch has entered into legally enforceable netting agreements with counterparties, it reports derivative assets and liabilities, and any related cash collateral, net in the Condensed Consolidated Balance Sheets in accordance with FIN No. 39, Offsetting Amounts Related to Certain Contracts (“FIN 39”). At March 31, 2009, cash collateral received of $41.9 billion and cash collateral paid of $60.5 billion was netted against derivative inventory.
 
Merrill Lynch considers the impact of counterparty credit risk on the valuation of derivative contracts. During the three months ended March 31, 2009, valuation adjustments of approximately $0.7 billion were recognized as losses in principal transactions for counterparty credit risk. At March 31, 2009, the cumulative counterparty credit risk valuation adjustment that was reflected in derivative assets was $10.0 billion. In addition, the fair value of derivative liabilities is adjusted to reflect the impact of


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Merrill Lynch’s credit quality. During the three months ended March 31, 2009, valuation adjustments of approximately $0.9 billion were recognized as gains in principal transactions for changes in Merrill Lynch’s credit risk. At March 31, 2009, the cumulative credit risk valuation adjustment that was reflected in the derivative liabilities balance was $1.8 billion.
 
Credit-risk related contingent features
 
The majority of Merrill Lynch’s derivative contracts contain credit-risk-related contingent features, primarily within the ISDA agreements, that help to reduce the credit risk of these instruments as compared to other obligations of the respective counterparty with whom Merrill Lynch has transacted (e.g., other debt or equity). These contingent features may be for the benefit of Merrill Lynch or may benefit Merrill Lynch’s counterparties in respect of changes in Merrill Lynch creditworthiness. At March 31, 2009, Merrill Lynch posted collateral of $73.6 billion under derivative contracts that were in a liability position, of which $60.5 billion represented cash collateral, as noted above.
 
In connection with certain OTC derivatives transactions and other trading agreements, Merrill Lynch could be required to provide additional collateral to or terminate transactions with certain counterparties in the 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 or an amount related to the market value of the exposure. At March 31, 2009, the amount of additional collateral and termination payments that would be required for such derivatives transactions and trading agreements was approximately $1.8 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 BBB+ or an equivalent level would require approximately an additional $713 million.
 
Note 6.  Securities Financing Transactions
 
Merrill Lynch enters into secured borrowing and lending transactions in order to meet customers’ needs and earn residual interest rate spreads, obtain securities for settlement and finance trading inventory positions.
 
Under these transactions, Merrill Lynch either receives or provides collateral, including U.S. Government and agency securities, asset-backed, corporate debt, equity, and non-U.S. government and agency securities. Merrill Lynch receives collateral in connection with resale agreements, securities borrowed transactions, customer margin loans and other loans. Under most agreements, Merrill Lynch is permitted to sell or repledge the securities received (e.g., use the securities to secure repurchase agreements, enter into securities lending transactions, or deliver to counterparties to cover short positions). At March 31, 2009 and December 26, 2008, the fair value of securities received as collateral where Merrill Lynch is permitted to sell or repledge the securities was $243 billion and $327 billion, respectively, and the fair value of the portion that has been sold or repledged was $191 billion and $251 billion, respectively. Merrill Lynch may use securities received as collateral for resale agreements to satisfy regulatory requirements such as Rule 15c3-3 of the SEC.
 
Merrill Lynch additionally receives securities as collateral in connection with certain securities transactions in which Merrill Lynch is the lender. In instances where Merrill Lynch is permitted to sell or repledge securities received, Merrill Lynch reports the fair value of such securities received as collateral and the related obligation to return securities received as collateral in the Condensed Consolidated Balance Sheets.


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The carrying value and classification of securities owned by Merrill Lynch that have been pledged to counterparties where those counterparties do not have the right to sell or repledge at March 31, 2009 and December 26, 2008 are as follows:
 
                 
(dollars in millions)
    Successor Company
  Predecessor Company
    March 31,
  December 26,
    2009   2008
 
 
Trading asset category
               
Corporate debt and preferred stock
  $ 9,190     $ 15,024  
Equities and convertible debentures
    6,614       10,995  
Mortgages, mortgage-backed, and asset-backed securities
    5,859       12,462  
U.S. Government and agencies
    2,318       4,982  
Non-U.S. governments and agencies
    1,843       587  
Municipals and money markets
    -       1,320  
                 
Total
  $ 25,824     $ 45,370  
 
 
 
Additionally, Merrill Lynch has pledged approximately $14.7 billion and $18.6 billion of loans, and $4.3 billion and $4.4 billion of investment securities to counterparties at March 31, 2009 and December 26, 2008, respectively, where those counterparties do not have the right to sell or repledge those assets. In some cases, Merrill Lynch has transferred assets to consolidated VIEs where those restricted assets serve as collateral for the interests issued by the VIEs. These restricted assets are included in the amounts above. These transactions are also described in Note 8.
 
Generally, when Merrill Lynch transfers financial instruments that are not recorded as sales (i.e., secured borrowing transactions), the liability is recorded as either payables under repurchase agreements or payables under securities loaned transactions; however, in instances where Merrill Lynch transfers financial assets to a consolidated VIE, the liabilities of the consolidated VIE will be reflected in long or short term borrowings (see Note 8). In either case, at the time of transfer, the related liability is equal to the cash received in the transaction. In most cases the lenders in secured borrowing transactions have full recourse to Merrill Lynch (i.e., recourse beyond the assets pledged). Instances where the lenders do not have full recourse to Merrill Lynch are described in Note 8. These instances generally relate to failed securitization transactions where residential and commercial mortgages are transferred to VIEs that do not meet QSPE conditions (typically as a result of derivatives entered into by the VIE that pertain to interests held by Merrill Lynch).
 
Note 7.  Investment Securities
 
Investment securities on the Condensed Consolidated Balance Sheets include:
 
•  SFAS No. 115 investments held by ML & Co. and certain of its non-broker-dealer entities, including Merrill Lynch banks, and consist of:
 
  •  Debt securities, including debt held-for-investment and liquidity and collateral management purposes that are classified as available-for-sale, debt securities held for trading purposes, and debt securities that Merrill Lynch intends to hold until maturity;
 
  •  Marketable equity securities, which are generally classified as available-for-sale.


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•  Non-qualifying investments are those that are not within the scope of SFAS No. 115 and consist principally of equity investments, including investments in partnerships and joint ventures. Included in equity investments are investments accounted for under the equity method of accounting, which consist of investments in (i) partnerships and certain limited liability corporations where Merrill Lynch has more than a minor influence (generally defined as greater than a three percent interest) and (ii) corporate entities where Merrill Lynch has the ability to exercise significant influence over the investee (generally defined as ownership and voting interest of 20% to 50%). Also included in equity investments are private equity investments that Merrill Lynch holds for capital appreciation and/or current income and which are accounted for at fair value in accordance with the Investment Company Guide, as well as private equity investments accounted for at fair value under the fair value option election in SFAS No. 159. The carrying value of such private equity investments reflects expected exit values based upon market prices or other valuation methodologies, including discounted expected cash flows and market comparables of similar companies.
 
Investment securities reported on the Condensed Consolidated Balance Sheets at March 31, 2009 and December 26, 2008 are as follows:
 
                 
(dollars in millions)
    Successor Company
  Predecessor Company
    March 31,
  December 26,
    2009   2008
 
 
Investment securities
               
Available-for-sale(1)
  $ 30,764     $ 34,103  
Trading
    1,445       1,745  
Held-to-maturity(2)
    260       4,576  
Non-qualifying(3)
               
Equity investments(4)
    21,741       24,306  
Investments in trust preferred securities and other investments
    1,366       1,432  
                 
Total
  $ 55,576     $ 66,162  
 
 
(1) At March 31, 2009 and December 26, 2008, includes $8.5 billion and $9.2 billion, respectively, of investment securities reported in cash and securities segregated for regulatory purposes or deposited with clearing organizations.
(2) The 2008 balance primarily relates to notes issued by Bloomberg, Inc. in connection with the sale of Merrill Lynch’s 20% stake in Bloomberg L.P., which was reclassified to loans held for investment in 2009 pursuant to the acquisition by Bank of America.
(3) Non-qualifying for SFAS No. 115 purposes.
(4) Includes Merrill Lynch’s investment in BlackRock, Inc.
 
As a result of the acquisition of Merrill Lynch by Bank of America, all SFAS No. 115 securities have a new cost basis as of January 1, 2009. There were no other-than-temporary impairments related to available-for-sale securities during the quarter ended March 31, 2009. In the quarter ended March 28, 2008, Merrill Lynch recorded an other-than-temporary impairment charge of $421 million, primarily related to certain mortgage and asset-backed securities. Refer to Note 1 for Merrill Lynch’s accounting policies regarding other-than-temporary-impairment of investment securities.


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Information regarding investment securities subject to SFAS No. 115 follows:
 
                                 
(dollars in millions)
 
    Successor Company
    March 31, 2009
 
        Gross
  Gross
   
    Amortized
  Unrealized
  Unrealized
  Fair
    Cost   Gains   Losses   Value
 
 
Available-for-sale Securities
                               
Mortgage-backed securities:
                               
Agency collateralized mortgage obligations
  $ 20,842     $ 365     $ (51 )   $ 21,156  
Non-agency
    9,559       1,015       (1,172 )     9,402  
Corporate/Agency bonds
    181       2       (32 )     151  
Other taxable securities
    58       -       (3 )     55  
                                 
Total Available-for-sale Securities
  $ 30,640     $ 1,382     $ (1,258 )   $ 30,764  
 
 
 
As a result of the acquisition of Merrill Lynch by Bank of America, and the new cost bases established on January 1, 2009, there were no available-for-sale securities in an unrealized loss position for greater than one year. The following table presents fair value and unrealized losses, after hedges, for available-for-sale securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 26, 2008.
 
                                                 
(dollars in millions)
    Less than 1 Year   More than 1 Year   Total
        Unrealized
      Unrealized
      Unrealized
Asset category   Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
 
 
Predecessor Company
                                               
December 26, 2008
                                               
Mortgage- and asset-backed
  $ 8,449     $ (4,132 )   $ 22,291     $ (5,910 )   $ 30,740     $ (10,042 )
U.S. Government and agencies
    3       -       -       -       3       -  
Corporate debt
    2       (2 )     192       (78 )     194       (80 )
                                                 
Total debt securities
    8,454       (4,134 )     22,483       (5,988 )     30,937       (10,122 )
Equity securities
    1       (2 )     55       (20 )     56       (22 )
                                                 
Total temporarily impaired securities
  $ 8,455     $ (4,136 )   $ 22,538     $ (6,008 )   $ 30,993     $ (10,144 )
 
 
 
The amortized cost and fair value of available-for-sale debt securities by expected maturity for mortgage-backed securities and contractual maturity for other debt securities at March 31, 2009 are as follows:
 
                 
(dollars in millions)
    Available-for-Sale
    Amortized
  Fair
    Cost   Value
 
 
Due in one year or less
  $ 526     $ 493  
Due after one year through five years
    13,842       13,810  
Due after five years through ten years
    14,575       14,732  
Due after ten years
    1,697       1,729  
                 
Total(1)
  $ 30,640     $ 30,764  
 
 
(1) Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay their obligations with or without prepayment penalties.


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The proceeds and gross realized gains/(losses) from the sale of available-for-sale securities during the three months ended March 31, 2009 are as follows:
 
         
(dollars in millions)
 
Proceeds
  $ 2,329  
Gross realized gains
    15  
Gross realized losses
    (40 )
 
 
 
Note 8.  Securitization Transactions and Transactions with Variable Interest Entities (“VIEs”)
 
FSP FAS 140-4 and FIN 46(R)-8, which was adopted by Merrill Lynch on December 26, 2008, provides the disclosure requirements for transactions with VIEs or special purpose entities (“SPEs”) and transfers of financial assets in securitizations or asset-backed financing arrangements. Under this guidance, Merrill Lynch is required to disclose information for consolidated VIEs, for VIEs in which Merrill Lynch is the sponsor as defined below or is a significant variable interest holder (“Sponsor/Significant VIH”) and for VIEs that are established for securitizations and asset-backed financing arrangements. FSP FAS 140-4 and FIN 46(R)-8 has expanded the population of VIEs for which disclosure is required.
 
Merrill Lynch has defined “sponsor” to include all transactions where Merrill Lynch has transferred assets to a VIE and/or structured the VIE, regardless of whether or not the asset transfer has met the sale conditions in SFAS No. 140. Merrill Lynch discloses all instances where continued involvement with the assets exposes it to potential economic gain/(loss), regardless of whether or not that continued involvement is considered to be a variable interest in the VIE.
 
Continued involvement includes:
 
•  Retaining or holding an interest in the VIE,
 
•  Providing liquidity or other support to the VIE or directly to the investors in the VIE. This includes liquidity facilities, guarantees, and derivatives that absorb the risk of the assets in the VIE, including total return swaps and written credit default swaps,
 
•  Servicing the assets in the VIE, and
 
•  Acting as counterparty to derivatives that do not absorb the risk of the assets in the VIE. These include derivatives that introduce risk into the VIE such as credit default swaps where the VIE takes credit risk (generally found in credit-linked note structures) or equity derivatives where the VIE takes equity risk (generally found in equity-linked note structures); however, Merrill Lynch excludes transactions where it only acts as counterparty to interest rate or foreign exchange derivatives.
 
Merrill Lynch has not provided financial support to any VIE beyond that which is contractually required. Quantitative information on contractually required support is reflected in the tables provided below and in Note 13.
 
Transactions with VIEs are categorized as follows:
 
Primary Beneficiary — Includes transactions where Merrill Lynch is the primary beneficiary and consolidates the VIE.


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Sponsor/Significant VIH — Includes transactions where Merrill Lynch is the sponsor and has continued involvement with the VIE or is a significant variable interest holder in the VIE. This category excludes most transactions where Merrill Lynch transferred financial assets and the transfer was accounted for as a sale (these transactions are included in securitization transactions as described below). However, unconsolidated credit linked note VIEs (CLNs) and CDOs/CLOs are included in this category, regardless of whether or not Merrill Lynch transferred financial assets and accounted for the transfer as a sale.
 
Securitization transactions — Securitization transactions include transactions where Merrill Lynch transferred financial assets and accounted for the transfer as a sale (with the exception noted above). These transactions also include asset-backed financing arrangements. This category includes both QSPEs and non-QSPEs and is reflected in the securitization section of this Note. QSPEs are commonly used by Merrill Lynch in mortgage and municipal bond securitization transactions as described below. In accordance with SFAS No. 140 and FIN 46(R), Merrill Lynch does not consolidate QSPEs.
 
Merrill Lynch has entered into transactions with different types of VIEs which are described as follows:
 
Loan and Real Estate VIEs
 
•  Merrill Lynch has involvement with VIEs that hold mortgage related loans or real estate. These VIEs include entities that are primarily designed to obtain exposure to mortgage related assets or invest in real estate for both clients and Merrill Lynch. Loan and real estate VIEs include failed securitization transactions where residential and commercial mortgages are transferred to VIEs that do not meet QSPE conditions (typically as a result of derivatives entered into by the VIE that pertain to interests held by Merrill Lynch) and loan VIEs that hold mortgage loans where Merrill Lynch holds most or all of the issued financing but does not have voting control. Loan and real estate VIEs are reported in the Consolidated VIEs table and the Sponsor/Significant VIH table. In addition, many loan VIEs, specifically those related to residential and commercial mortgages, are securitization VIEs that meet the QSPE criteria in SFAS No. 140. Transactions where Merrill Lynch is the transferor of loans to a VIE or QSPE and accounts for the transaction as a sale are reflected in the Securitization table of this Note.
 
•  Merrill Lynch generally consolidates failed securitization VIEs where it retains the residual interests in the VIE and therefore absorbs the majority of the VIE’s expected losses, gains or both. As a result of the illiquidity in the securitization markets, Merrill Lynch has been unable to sell certain securities, which has prohibited these VIEs from being considered QSPEs. Depending upon the liquidity in the securitization market, these transactions and future transactions could continue to fail QSPE status and may require consolidation and related disclosures. Given that these VIEs have been designed to meet the QSPE requirements, Merrill Lynch has no control over the assets held by these VIEs. These assets have been pledged to the noteholders in the VIEs, and these assets are included in the firm-owned assets pledged balance reported in Note 6. In most instances, the beneficial interest holders in these VIEs have no recourse to the general credit of Merrill Lynch; rather their investments are paid exclusively from the assets in the VIE. Securitization VIEs that hold loan assets are typically financed through the issuance of several classes of debt (i.e., tranches) with ratings that range from AAA to unrated residuals.
 
•  Loan VIEs that hold mortgage loans and are not securitization VIEs are typically wholly owned or have a small amount of financing provided by investors (which may include the investment manager) through different classes of loans or securities. Where Merrill Lynch consolidates these VIEs, Merrill Lynch has the ability to use the assets to fund operations.


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•  Real estate VIEs that hold property are typically financed through the issuance of one or more classes of loans or securities (e.g. senior, junior, and mezzanine) and an equity tranche. The investors have recourse only to the real estate assets held by these VIEs. In most real estate entities, the equity tranche is considered sufficient to finance the activities of the entity, and the entity would meet the conditions to be considered a VRE. The real estate entities included in this disclosure are VIEs because generally they do not have sufficient equity to finance their activities.
 
Equity Funds
 
Merrill Lynch has made certain investments in equity funds that are VIEs. Merrill Lynch may be the primary beneficiary of these funds as a result of a majority investment in the fund. In instances where Merrill Lynch is not the primary beneficiary, it is considered the sponsor and generally has continued involvement through equity derivatives with these VIEs. VIEs where Merrill Lynch is the sponsor and has continued involvement are reflected in the Sponsor/Significant VIH table. These VIEs are typically financed by a single tranche of limited life preferred shares or similar debt instruments that pass through the economics of the underlying assets and derivative contracts.
 
Merrill Lynch sponsors a limited number of equity funds that provide a guaranteed return to investors at the maturity of the fund. The guarantees may include a guarantee of the return of an initial investment or the initial investment plus an agreed upon return depending on the terms of the VIE. Investors in certain of these VIEs have recourse to Merrill Lynch to the extent that the value of the assets held by the VIEs at maturity is less than the guaranteed amount. In these instances, Merrill Lynch is the primary beneficiary and consolidates the VIEs. These VIEs are typically financed by a single tranche of limited life preferred shares or similar debt instruments that pass through the economics of the underlying assets and derivative contracts.
 
Credit-Linked Note and Other VIEs
 
Merrill Lynch has entered into transactions with VIEs where Merrill Lynch typically purchases credit protection from the VIE in the form of a credit default swap in order to provide investors exposure to a specific credit risk. These are commonly known as CLNs. Merrill Lynch may also enter into interest rate swaps and/or cross currency swaps with these CLNs. The assets held by the VIE provide collateral for the derivatives that Merrill Lynch has entered into with the VIE. Most CLNs issue a single credit-linked note, which is often held by a single investor. Typically the assets held by the CLNs can be substituted for other assets by the investors. For these transactions, Merrill Lynch generally transfers the financial assets to the VIE and accounts for that transfer as a sale.
 
In certain transactions Merrill Lynch takes exposure through total return swaps to the underlying collateral held in the CLNs, including super senior U.S. sub-prime ABS CDOs. Generally, the assets held by these VIEs were not transferred into these VIEs by Merrill Lynch. Unconsolidated CLN transactions are reported in the Sponsor/Significant VIH table.
 
Merrill Lynch is the primary beneficiary of two VIEs that invest in alternative investment funds which are controlled by third party fund managers. These entities are considered VIEs because the equity holders do not have control through voting rights.


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Collateralized Debt Obligations/Collateralized Loan Obligations (CDO/CLOs)
 
Merrill Lynch has entered into transactions with CDOs, synthetic CDOs and CLOs. These entities are generally considered VIEs. CDOs hold pools of corporate debt or asset-backed securities and issue various classes of rated debt and an unrated equity tranche. Synthetic CDOs purchase assets and enter into a portfolio of credit default swaps to synthetically create exposure to corporate or asset-backed securities. CLOs hold pools of loans (corporate, commercial mortgages and residential mortgages) and issue various classes of rated debt and an unrated equity tranche. CDOs, synthetic CDOs and CLOs are typically managed by third party portfolio managers. Merrill Lynch transfers assets to these VIEs, holds interests in the issuances of the VIEs and may be derivative counterparty to the VIEs (including credit default swap counterparty for synthetic CDOs). Merrill Lynch typically owns less than half of any tranche issued by the VIE and is therefore not the primary beneficiary. Where Merrill Lynch holds more than half of any tranche issued by a VIE, a quantitative analysis is performed to determine whether or not Merrill Lynch is the primary beneficiary. Most transactions with these VIEs are reflected in the Sponsor/Significant VIH table. Transactions with CDO/CLOs where Merrill Lynch is the primary beneficiary are reported in the Consolidated VIEs table.
 
Municipal Bond Securitizations
 
Municipal Bond Securitizations are transactions where Merrill Lynch transfers municipal bonds to SPEs and those SPEs issue puttable floating rate instruments and a residual interest in the form of an inverse floater. These SPEs are QSPEs and are therefore not consolidated by Merrill Lynch. Merrill Lynch reports these SPEs in the securitization table below.
 
In the normal course of dealer market-making activities, Merrill Lynch acts as liquidity provider for municipal bond securitization SPEs. Specifically, the holders of beneficial interests issued by municipal bond securitization SPEs have the right to tender their interests for purchase by Merrill Lynch on specified dates at a specified price. Beneficial interests that are tendered are then sold by Merrill Lynch to investors through a best efforts remarketing where Merrill Lynch is the remarketing agent. If the beneficial interests are not successfully remarketed, the holders of beneficial interests are paid from funds drawn under a standby liquidity facility issued by Merrill Lynch.
 
In addition to standby liquidity facilities, Merrill Lynch also provides default protection or credit enhancement to investors in securities issued by certain municipal bond securitization SPEs. Interest and principal payments on beneficial interests issued by these SPEs are secured by a guarantee issued by Merrill Lynch. In the event that the issuer of the underlying municipal bond defaults on any payment of principal and/or interest when due, the payments on the bonds will be made to beneficial interest holders from an irrevocable guarantee by Merrill Lynch. Additional information regarding these commitments is provided in Note 13.
 
Variable Interest Entities
 
FIN 46(R) requires an entity to consolidate a VIE if that entity holds a variable interest that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. The entity required to consolidate a VIE is known as the primary beneficiary. VIEs are reassessed for consolidation when reconsideration events occur. Reconsideration events include, changes to the VIEs’ governing documents that reallocate the expected losses/returns of the VIE between the primary beneficiary and other variable interest holders or sales and purchases of variable interests in the VIE. Refer to Note 1 for further information.


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The table below provides the disclosure information required by FSP FAS 140-4 and FIN 46(R)-8 for VIEs that are consolidated by Merrill Lynch. The table excludes consolidated VIEs where Merrill Lynch also holds a majority of the voting interests in the entity unless the activities of the VIE are primarily related to securitization or other forms of asset-backed financings.
 
                                         
(dollars in millions)
        Assets after intercompany
  Liabilities after
   
Consolidated VIEs
      eliminations   intercompany
  Recourse to
Type of VIE   Total Assets   Unrestricted   Restricted(1)   eliminations   Merrill Lynch(2)
 
 
Successor Company
                                       
March 31, 2009
                                       
Loan and real estate VIEs(3)
  $ 7,908     $ 1,061     $ 2,949     $ 5,009     $ 3,471  
Equity funds(4)
    324       45       61       151       120  
CLNs and other VIEs(5)
    1,754       376       772       165       165  
CDOs/CLOs(6)
    570       -       346       449       223  
 
 
Predecessor Company
                                       
December 26, 2008
                                       
Loan and real estate VIEs(3)
  $ 9,080     $ 2,475     $ 2,680     $ 4,769     $ 3,479  
Equity funds(4)
    473       3       119       230       116  
CLNs and other VIEs(5)
    1,643       1,221       -       45       45  
CDOs/CLOs(6)
    693       -       360       489       237  
 
 
(1) Assets are considered restricted when they cannot be freely pledged or sold by Merrill Lynch.
(2) This column reflects the extent to which investors have recourse to Merrill Lynch beyond the assets held by the VIE and assumes a total loss of the assets held by the VIE.
(3) For Loan and real estate VIEs, assets are primarily recorded in loans, notes and mortgages. Assets related to VIEs that hold real estate investments are included in other assets. Liabilities are primarily recorded in short-term borrowings. Recourse relates to derivative contracts entered into with the VIEs that provide the liability holders of the VIEs general recourse to Merrill Lynch.
(4) For Equity funds, assets are reflected in trading assets and liabilities are reflected in long-term borrowings. Recourse relates to Merrill Lynch’s maximum exposure to loss associated with derivative contracts that provide a minimum return to investors.
(5) For CLNs and other VIEs, assets are reflected in trading assets and investment securities and liabilities are recorded in long-term borrowings.
(6) For CDOs/CLOs, assets are primarily recorded in loans, notes and mortgages and liabilities are recorded in long-term borrowings. Certain consolidated CDOs are established to provide full recourse secured financing to Merrill Lynch. The recourse associated with CDOs/CLOs relates to these consolidated transactions.
 
Merrill Lynch may also be a Sponsor/Significant VIH in VIEs. Where Merrill Lynch has involvement as a Sponsor/Significant VIH, it is required to disclose the size of the VIE, the assets and liabilities on its balance sheet related to transactions with the VIE, and its maximum exposure to loss as a result of its interest in the VIE.


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The following table summarizes Merrill Lynch’s involvement with Sponsor/Significant VIH VIEs as of March 31, 2009 and December 26, 2008.
 
                                 
(dollars in millions)
                Maximum
Sponsor/Significant VIH
      Assets on
  Liabilities on
  Exposure
Type of VIE   Size of VIE(1)   Balance Sheet(2)   Balance Sheet(2)   to Loss(3)
 
 
Successor Company
                               
March 31, 2009
                               
Loan and real estate VIEs(4)
  $ 1,717     $ 559     $ 89     $ 559  
Equity funds(5)
    2,688       371       448       371  
CLNs and other VIEs(6)
    12,627       6,853       1,004       10,416  
CDOs/CLOs(7)
    53,223       2,916       419       6,729  
 
 
Predecessor Company
                               
December 26, 2008
                               
Loan and real estate VIEs(4)
  $ 1,761     $ 712     $ 61     $ 712  
Equity funds(5)
    2,898       312       537       312  
CLNs and other VIEs(6)
    13,257       6,889       986       10,452  
CDOs/CLOs(7)
    59,475       3,584       344       8,155  
 
 
(1) Size generally reflects the estimated principal of securities issued by the VIE or the principal of the underlying assets held by the VIE and serves to provide information on the relative size of the VIE as compared to Merrill Lynch’s involvement with the VIE.
(2) Assets and Liabilities on Merrill Lynch’s Balance Sheet reflect the effect of FIN 39 balance sheet netting, if applicable.
(3) The maximum exposure to loss includes: the assets held by Merrill Lynch — including the value of derivatives that are in an asset position, and the notional amount of liquidity and other support provided to VIEs generally through total return swaps over the assets of the VIE. The maximum exposure to loss for liquidity and other support assumes a total loss on the referenced assets held by the VIE.
(4) Loan and real estate VIE assets primarily include loans recorded in loans, notes and mortgages and derivatives recorded in trading assets. Liabilities include derivatives recorded in trading liabilities.
(5) Equity fund assets include cash instruments and derivatives recorded in trading assets. Liabilities are recorded in payables under repurchase agreements in instances where assets were transferred but the transfer did not meet the sale requirements of SFAS No. 140, or trading liabilities for derivatives.
(6) CLN and other VIE assets include derivatives and are recorded in trading assets. Liabilities are recorded in payables under repurchase agreements in instances where assets were transferred but the transfer did not meet the sale requirements of SFAS No. 140, or trading liabilities for derivatives. In certain transactions, Merrill Lynch enters into total return swaps over assets held by the VIEs. Maximum exposure to loss represents the sum of the notional amount of these derivatives and the value of any assets on Merrill Lynch’s balance sheet.
(7) CDO/CLO assets and liabilities are primarily derivatives recorded in trading assets/liabilities.
 
Securitizations
 
In the normal course of business, Merrill Lynch securitizes commercial and residential mortgage loans, municipal, government, and corporate bonds, and other types of financial assets (as described above). In addition, Merrill Lynch sells financial assets to entities that are controlled and consolidated by third parties and provides financing to these entities under asset-backed financing arrangements (these transactions are reflected in Non-QSPEs Loans and real estate entities below). Merrill Lynch’s involvement with VIEs that are used to securitize financial assets includes: structuring and/or establishing VIEs; selling assets to VIEs; managing or servicing assets held by VIEs; underwriting, distributing, and making loans to VIEs; making markets in securities issued by VIEs; engaging in derivative transactions with VIEs; owning notes or certificates issued by VIEs; and/or providing liquidity facilities and other guarantees to, or for the benefit of, VIEs. In many instances Merrill Lynch


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has continued involvement with the transferred assets, including servicing, retaining or holding an interest in the issuances of the VIE, providing liquidity and other support to the VIEs or investors in the VIEs, and entering into derivative contracts with the VIEs.
 
The table below categorizes securitization transactions between QSPEs and non-QSPEs. Transactions with CLNs and CDO/CLOs, which have been accounted for as sales under SFAS No. 140 are reflected in the Sponsor/Significant VIH table above.
 
                                                 
(dollars in millions)
                Maximum
  Year-to-date
Securitization Transactions
  Size/Principal
  Assets on
  Liabilities on
  Exposure to
  (Loss)
  Cash
Type of Entity   Outstanding(1)   Balance Sheet(2)   Balance Sheet(2)   Loss(3)   on Sale   Flows
 
 
Successor Company
                                               
March 31, 2009
                                               
QSPEs:
                                               
Residential mortgage loans(4)
  $ 47,956     $ 1,278     $ 146     $ 1,286     $ -     $ 227  
Municipal bonds(5)
    8,153       1,291       583       7,901       -       111  
Commercial loans and other(6)
    9,640       271       4       307       -       5  
Non-QSPEs:
                                               
Loan and real estate entities(7)
    10,106       6,650       -       6,696       -       114  
 
 
Predecessor Company
                                               
December 26, 2008
                                               
QSPEs:
                                               
Residential mortgage loans(4)
  $ 78,162     $ 1,667     $ 207     $ 1,654     $ -     $ 10,141  
Municipal bonds(5)
    9,377       487       674       8,644       -       5,824  
Commercial loans and other(6)
    18,366       288       -       288       -       1,091  
Non-QSPEs:
                                               
Loan and real estate entities(7)
    10,182       6,757       -       6,757       (22 )     3,035  
 
 
(1) Size/Principal Outstanding reflects the estimated principal of the underlying assets held by the VIE/SPEs.
(2) Assets and Liabilities on Merrill Lynch’s Balance Sheet reflect the effect of FIN 39 balance sheet netting, if applicable.
(3) The maximum exposure to loss includes the following: the assets held by Merrill Lynch — including the value of derivatives that are in an asset position and retained interests in the VIEs/SPEs; and the notional amount of liquidity and other support generally provided through total return swaps. The maximum exposure to loss for liquidity and other support assumes a total loss on the referenced assets held by the VIE.
(4) Residential mortgage loan QSPE assets primarily include servicing advances recorded in other assets and derivatives recorded in trading assets. Liabilities include derivatives recorded in trading liabilities.
(5) Municipal bond QSPE assets include cash instruments recorded in trading assets and investment securities. Liabilities include derivatives recorded in trading liabilities. At March 31, 2009 and December 26, 2008, the carrying value of the liquidity and other support related to these transactions was $583 million and $674 million, respectively.
(6) Commercial loans and other QSPEs primarily include commercial mortgage securitizations. Assets include cash instruments and derivatives, primarily recorded in trading assets. Liabilities include derivatives recorded in trading liabilities.
(7) Loan and real estate entity assets are recorded in loans, notes and mortgages and relate to asset-backed financing arrangements, which include the sale of U.S. super senior ABS CDOs in 2008 to an affiliate of Lone Star Funds.
 
In certain instances, Merrill Lynch retains interests in the senior tranche, subordinated tranche, and/or residual tranche of securities issued by VIEs that are created to securitize assets. The gain or loss on the sale of the assets is determined with reference to the previous carrying amount of the financial assets transferred, which is allocated between the assets sold and the retained interests, if any, based on their relative fair values at the date of transfer.


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Generally, retained interests and contracts that are used to provide support to the VIE or the investors are recorded in the Condensed Consolidated Balance Sheets at fair value. To obtain fair values, observable market prices are used if available. Where observable market prices are unavailable, Merrill Lynch generally estimates fair value based on the present value of expected future cash flows using management’s best estimates of credit losses, prepayment rates, forward yield curves, and discount rates, commensurate with the risks involved. Retained interests are either held as trading assets, with changes in fair value recorded in the Condensed Consolidated Statements of Earnings/(Loss), or as investment securities available-for-sale, with changes in fair value included in accumulated other comprehensive income/( loss).
 
Retained interests held as available-for-sale securities are reviewed periodically for impairment. In certain cases liquidity facilities are accounted for as guarantees under FIN 45 (refer to Note 13 for more information) and a liability is recorded at fair value at the inception of the transaction.
 
Retained interests in securitized assets were approximately $1.5 billion and $1.8 billion at March 31, 2009 and December 26, 2008, respectively, which primarily relates to municipal bond securitization transactions. Retained interests in securitized assets do not include loans made to entities under asset-backed financing arrangements.
 
The following table presents information on retained interests excluding the offsetting benefit of financial instruments used to hedge risks, held by Merrill Lynch as of March 31, 2009,which arise from Merrill Lynch’s municipal bond securitization transactions. The pre-tax sensitivities of the current fair value of the retained interests to immediate 10% and 25% favorable and adverse changes in assumptions and parameters are also shown.
 
         
(dollars in millions)
    Municipal
    Bonds
 
 
Retained interest amount
  $ 1,291  
Weighted average credit losses (rate per annum)(1)
    0 %
Impact on fair value of 10% favorable change
    -  
Impact on fair value of 25% favorable change
    -  
Impact on fair value of 10% adverse change
    -  
Impact on fair value of 25% adverse change
    -  
Weighted average discount rate
    6.9 %
Impact on fair value of 10% favorable change
  $ 35  
Impact on fair value of 25% favorable change
  $ 97  
Impact on fair value of 10% adverse change
  $ (21 )
Impact on fair value of 25% adverse change
  $ (82 )
Weighted average life (in years)
    8.5  
Weighted average prepayment speed (CPR)(2)
    0 %
Impact on fair value of 10% favorable change
  $ -  
Impact on fair value of 25% favorable change
  $ 1  
Impact on fair value of 10% adverse change
  $ -  
Impact on fair value of 25% adverse change
  $ (1 )
 
 
CPR=Constant Prepayment Rate
(1) Credit losses are computed only on positions for which expected credit loss is either a key assumption in the determination of fair value or is not reflected in the discount rate.
(2) Relates to select securitization transactions where assets are prepayable.
 
The preceding sensitivity analysis is hypothetical and should be used with caution. In particular, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independent of changes in any other assumption; in practice, changes in one factor may result in


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changes in another, which might magnify or counteract the sensitivities. Further, changes in fair value based on a 10% or 25% variation in an assumption or parameter generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the sensitivity analysis does not include the offsetting benefit of financial instruments that Merrill Lynch utilizes to hedge risks, including credit, interest rate, and prepayment risk, that are inherent in the retained interests. These hedging strategies are structured to take into consideration the hypothetical stress scenarios above, such that they would be effective in principally offsetting Merrill Lynch’s exposure to loss in the event that these scenarios occur.
 
Note 9.  Loans, Notes, Mortgages and Related Commitments to Extend Credit
 
Loans, notes, mortgages and related commitments to extend credit include:
 
  •  Consumer loans, which are substantially secured, including residential mortgages, home equity loans, and other loans to individuals for household, family, or other personal expenditures; and
 
  •  Commercial loans including corporate and institutional loans (including corporate and financial sponsor, non-investment grade lending commitments), commercial mortgages, asset-based loans, small- and middle-market business loans, and other loans to businesses.
 
Loans, notes, mortgages and related commitments to extend credit at March 31, 2009 and December 26, 2008, are presented below. This disclosure includes commitments to extend credit that, if drawn upon, will result in loans held for investment or loans held for sale.
 
                                 
(dollars in millions)
    Loans   Commitments(1)
    Successor
  Predecessor
  Successor
  Predecessor
    Company   Company   Company   Company
    March 31,
  December 26,
  March 31,
  December 26,
    2009   2008   2009(2)(3)   2008(3)
 
 
Consumer:
                               
Mortgages
  $ 27,845     $ 29,397     $ 9,477     $ 8,269  
Other
    16,922       1,360       235       2,582  
Commercial and small- and middle-market business:
                               
Investment grade
    19,132       17,321       24,146       28,269  
Non-investment grade
    24,308       23,184       13,103       9,291  
                                 
      88,207       71,262       46,961       48,411  
Allowance for loan losses
    (10 )     (2,072 )     -       -  
Reserve for lending-related commitments(4)
    -       -       (1,896 )     (2,471 )
                                 
Total, net
  $ 88,197     $ 69,190     $ 45,065     $ 45,940  
                                 
 
 
(1) Commitments are outstanding as of the date the commitment letter is issued and are comprised of closed and contingent commitments. Closed commitments represent the unfunded portion of existing commitments available for draw down. Contingent commitments are contingent on the borrower fulfilling certain conditions or upon a particular event, such as an acquisition. A portion of these contingent commitments may be syndicated among other lenders or replaced with capital markets funding.
(2) See Note 13 for a maturity profile of these commitments.
(3) In addition to the loan origination commitments included in the table above, at March 31, 2009, Merrill Lynch entered into agreements to purchase $458 million of loans that, upon settlement of the commitment, will be classified in loans held for investment and loans held for sale. See Note 13 for additional information.
(4) Amounts are included within other payables on the Condensed Consolidated Balance Sheets.


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Activity in the allowance for loan losses is presented below:
 
                 
(dollars in millions)
    Successor Company   Predecessor Company
    Three Months Ended
  Three Months Ended
    March 31,
  March 28,
    2009   2008
 
 
Allowance for loan losses, at beginning of period(1)
  $ -     $ 533  
Provision for loan losses
    12       106  
Charge-offs
          (23 )
Recoveries
    2       3  
                 
Net recoveries (charge-offs)
    2       (20 )
Other
    (4 )     3  
                 
Allowance for loan losses, at end of period
  $ 10     $ 622  
                 
 
 
(1) The allowance for loan losses as of December 26, 2008 was eliminated as of January 1, 2009 as a result of purchase accounting adjustments.
 
Consumer loans, which are substantially secured, consisted of approximately 350,000 individual loans at March 31, 2009. Commercial loans consisted of approximately 11,000 separate loans. The principal balance of non-accrual loans was $3.0 billion at March 31, 2009 and $2.5 billion at December 26, 2008. The investment grade and non-investment grade categorization is determined using the credit rating agency equivalent of internal credit ratings. Non-investment grade counterparties are those rated lower than the BBB- category. In some cases Merrill Lynch enters into single name and index credit default swaps to mitigate credit exposure related to funded and unfunded commercial loans. The notional value of these swaps totaled $12.8 billion and $13.2 billion at March 31, 2009 and December 26, 2008, respectively.
 
The above amounts include $8.4 billion and $11.5 billion of loans held for sale at March 31, 2009 and December 26, 2008, respectively. Loans held for sale are loans that management expects to sell prior to maturity. At March 31, 2009, such loans consisted of $3.7 billion of consumer loans, primarily residential mortgages and automobile loans, and $4.7 billion of commercial loans, approximately 12% of which are to investment grade counterparties. At December 26, 2008, such loans consisted of $4.0 billion of consumer loans, primarily residential mortgages and automobile loans, and $7.5 billion of commercial loans, approximately 15% of which were to investment grade counterparties.
 
Effect of the Acquisition of Merrill Lynch by Bank of America
 
Upon completion of the acquisition of Merrill Lynch by Bank of America, Merrill Lynch adjusted the carrying value of its loans to fair value. Certain of these loans were subject to the requirements of SOP 03-3, which addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans if those differences are attributable, at least in part, to credit quality. SOP 03-3 requires impaired loans to be recorded at estimated fair value and prohibits “carrying over” or the creation of valuation allowances in the initial accounting for loans acquired in a transfer that are within the scope of this SOP.
 
The estimated fair values for loans within the scope of SOP 03-3 are determined by discounting cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value. Cash flows expected to be collected at acquisition are estimated using internal prepayment, interest rate and credit risk models that incorporate management’s best estimate of certain key assumptions, such as


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default rates, loss severity and prepayment speeds. All other loans were remeasured at the present value of contractual payments discounted to the prevailing interest rates on the date of acquisition.
 
Under SOP 03-3, the excess of cash flows expected at acquisition over the estimated fair value at purchase is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Changes in the expected cash flows from the date of acquisition will either affect the accretable yield or result in a charge to the provision for credit losses. Subsequent decreases to expected principal cash flows will result in a charge to provision for credit losses and a corresponding increase to allowance for loan losses. Subsequent increases in expected principal cash flows will result in recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield for any remaining increase. All changes in expected interest cash flows will result in reclassifications to/from nonaccretable differences.
 
In connection with Merrill Lynch’s acquisition by Bank of America, loans within the scope of SOP 03-3 had an unpaid principal balance of $5.6 billion ($2.7 billion consumer and $2.9 billion commercial) and a carrying value of $4.4 billion ($2.3 billion consumer and $2.1 billion commercial) as of January 1, 2009. These loans had an unpaid principal balance of $5.5 billion ($2.6 billion consumer and $2.9 billion commercial) and a carrying value of $4.4 billion ($2.3 billion consumer and $2.1 billion commercial) as of March 31, 2009. The following table provides details of these loans.
 
         
SOP 03-3 LOANS
   
(dollars in millions)   As of January 1, 2009
 
 
Contractually required payments including interest
  $ 6,205  
Less: Nonaccretable difference
    (1,158 )
         
Cash flows expected to be collected(1)
    5,047  
Less: Accretable yield
    (627 )
         
Fair value of loans acquired
  $ 4,420  
 
 
(1) Represents undiscounted expected principal and interest cash flows at the acquisition date (January 1, 2009).
 
The following table provides activity for the accretable yield of loans within the scope of SOP 03-3 for the three months ended March 31, 2009.
 
         
(dollars in millions)
    Three Months
    Ended
    March 31,
    2009
 
 
Accretable yield, January 1, 2009
  $ 627  
Accretions
    (56 )
Disposals
    (5 )
         
Accretable yield, March 31, 2009
  $ 566  
 
 


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Note 10.  Goodwill and Intangible Assets
 
In connection with the acquisition of Merrill Lynch by Bank of America, the carrying value of Merrill Lynch’s goodwill as of December 26, 2008 was eliminated. New goodwill was recorded on January 1, 2009. In addition, as of January 1, 2009, certain intangible assets were adjusted to their fair value and new intangible assets (e.g. trade name) were recorded. Refer to Note 2 for further information.
 
Goodwill
 
Goodwill is the cost of an acquired company in excess of the fair value of identifiable net assets at acquisition date. Goodwill is tested annually (or more frequently under certain conditions) for impairment at the reporting unit level in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. If the fair value of the reporting unit exceeds the carrying value, goodwill is not deemed to be impaired. If the fair value is less than the carrying value, a further analysis is required to determine the amount of impairment, if any.
 
The following table sets forth the carrying amount of Merrill Lynch’s goodwill:
 
         
(dollars in millions)
 
Predecessor Company -
       
Goodwill, December 26, 2008(1)
  $ 2,221  
         
Successor Company -
       
Goodwill, March 31, 2009(2)
  $ 5,044  
         
 
 
(1) Predecessor Company goodwill as of December 26, 2008 was eliminated as of January 1, 2009 as a result of purchase accounting adjustments.
(2) Refer to Note 2 for further information.
 
Intangible Assets
 
Intangible assets with definite lives at March 31, 2009 and December 26, 2008 consist primarily of value assigned to customer relationships and core deposits. Intangible assets with definite lives are tested for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,