UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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X
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number: 1-7182
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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13-2740599
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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4 World Financial Center,
New York, New York
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10080
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(Address of principal executive offices)
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(Zip Code)
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(212) 449-1000
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Registrants telephone number, including area code:
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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):
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Large
Accelerated Filer X
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Accelerated
Filer
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Non-Accelerated Filer
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Smaller
Reporting Company
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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
issuers 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
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Part I. Financial Information
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2
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3
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5
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6
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7
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20
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21
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22
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35
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43
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44
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47
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55
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58
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59
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62
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64
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68
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69
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70
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72
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72
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72
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73
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75
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76
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84
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88
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91
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91
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92
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94
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94
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95
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96
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EX-12 |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
1
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Item 1.
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Financial
Statements
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Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings/(Loss)
(Unaudited)
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Predecessor Company
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Successor Company
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For the Period from
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Three Months Ended
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December 27, 2008
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Three Months Ended
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(dollars in millions, except per share amounts)
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March 31, 2009
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to December 31, 2008
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March 28, 2008
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Revenues
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Principal transactions
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$
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5,778
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$
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(280
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)
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$
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(2,418
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)
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Commissions
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1,243
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22
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1,889
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Managed accounts and other fee-based revenues
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1,103
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22
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1,455
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Investment banking
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606
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12
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917
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Earnings from equity method investments
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40
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-
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431
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Other
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260
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19
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(1,449
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)
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Subtotal
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9,030
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(205
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)
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825
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Interest and dividend revenues
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4,379
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34
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11,861
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Less interest expense
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3,455
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-
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9,752
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Net interest profit
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924
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34
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2,109
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Revenues, net of interest expense
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9,954
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(171
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)
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2,934
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Non-interest expenses
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Compensation and benefits
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3,142
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64
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4,196
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Communications and technology
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397
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-
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555
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Occupancy and related depreciation
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255
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-
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309
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Brokerage, clearing, and exchange fees
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252
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10
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387
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Advertising and market development
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105
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-
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176
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Professional fees
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99
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-
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242
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Office supplies and postage
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40
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-
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57
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Other
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419
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-
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313
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Total non-interest expenses
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4,709
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74
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6,235
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Pre-tax earnings/(loss) from continuing operations
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5,245
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(245
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)
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(3,301
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)
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Income tax expense/(benefit)
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1,585
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(92
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)
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(1,332
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)
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Net earnings/(loss) from continuing operations
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3,660
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(153
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)
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(1,969
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)
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Discontinued operations:
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Pre-tax (loss) from discontinued operations
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-
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-
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(25
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)
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Income tax (benefit)
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-
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-
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(32
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)
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Net earnings from discontinued operations
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-
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-
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7
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Net earnings/(loss)
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3,660
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(153
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)
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(1,962
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)
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Preferred stock dividends
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15
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-
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174
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Net earnings/(loss) applicable to common stockholders
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$
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3,645
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$
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(153
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)
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$
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(2,136
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)
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Basic (loss) per common share from continuing operations
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N/A
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$
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(0.10
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)
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$
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(2.20
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)
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Basic earnings per common share from discontinued operations
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N/A
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-
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0.01
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Basic (loss) per common share
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N/A
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$
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(0.10
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)
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$
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(2.19
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)
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Diluted (loss) per common share from continuing operations
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N/A
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$
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(0.10
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)
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$
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(2.20
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)
|
Diluted earnings per common share from discontinued operations
|
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N/A
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-
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0.01
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|
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|
|
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Diluted (loss) per common share
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N/A
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$
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(0.10
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)
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$
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(2.19
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)
|
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Dividend paid per common share
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-
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$
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-
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$
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0.35
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Average shares used in computing (losses)/earnings per common
share
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Basic
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N/A
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1,600.3
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974.1
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Diluted
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N/A
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1,600.3
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|
974.1
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See Notes to Condensed
Consolidated Financial Statements.
2
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
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Successor Company
|
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Predecessor Company
|
(dollars in millions, except per
share amounts)
|
|
March 31, 2009
|
|
|
December 26, 2008
|
ASSETS
|
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Cash and cash equivalents
|
|
$
|
35,837
|
|
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|
$
|
68,403
|
|
|
|
|
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|
|
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|
|
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
28,798
|
|
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32,923
|
|
|
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|
|
|
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|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
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|
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
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|
|
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35,077
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
95,965
|
|
|
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|
128,324
|
|
|
|
|
|
|
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|
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):
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|
|
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Derivative contracts
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|
|
83,330
|
|
|
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|
89,477
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|
Corporate debt and preferred stock
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|
25,437
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|
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30,829
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|
Equities and convertible debentures
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|
|
20,808
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|
|
|
|
26,160
|
|
Non-U.S.
governments and agencies
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|
|
9,782
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|
|
|
|
6,107
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|
Mortgages, mortgage-backed, and asset-backed
|
|
|
9,386
|
|
|
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|
13,786
|
|
U.S. Government and agencies
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|
|
3,500
|
|
|
|
|
5,253
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|
Municipals, money markets and physical commodities
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|
|
5,908
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|
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,151
|
|
|
|
|
175,605
|
|
|
|
|
|
|
|
|
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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
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|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
3
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.
4
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.
5
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.
6
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 Lynchs 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 Americas 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 Companys 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
Lynchs 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
7
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 Lynchs business is such
that the results of any interim period are not necessarily
indicative of results for a full year. Certain reclassifications
have been made to the prior period financial statements to
conform to the current period presentation. 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 Americas 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 Lynchs
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
8
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:
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The transferred assets have been legally isolated from the
transferor even in bankruptcy or other receivership;
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The transferee has the right to pledge or exchange the assets it
received, or if the entity is a QSPE the beneficial interest
holders have the right to pledge or exchange their beneficial
interests; and
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The transferor does not maintain effective control over the
transferred assets (e.g. the ability to unilaterally cause the
holder to return specific transferred assets).
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Revenue
Recognition
Principal transactions revenues include both realized and
unrealized gains and losses on trading assets and trading
liabilities, investment securities classified as trading
investments and fair value changes associated with structured
debt. These instruments are recorded at fair value. Fair value
is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between 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.
9
Managed accounts and other fee-based revenues primarily consist
of asset-priced portfolio service fees earned from the
administration of separately managed accounts and other
investment accounts for retail investors, annual account fees,
and certain other account-related fees.
Investment banking revenues include underwriting revenues and
fees for merger and acquisition advisory services, which are
accrued when services for the transactions are substantially
completed. Underwriting revenues are presented net of
transaction-related expenses. Transaction-related expenses,
primarily legal, travel and other costs directly associated with
the transaction, are deferred and recognized in the same period
as the related revenue from the investment banking transaction
to match revenue recognition.
Earnings from equity method investments include Merrill
Lynchs pro rata share of income and losses associated with
investments accounted for under the equity method.
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:
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Valuations of assets and liabilities requiring fair value
estimates;
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The allowance for credit losses;
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Determination of other-than-temporary impairments for
available-for-sale investment securities;
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The outcome of litigation;
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Assumptions and cash flow projections used in determining
whether VIEs should be consolidated and the determination of the
qualifying status of QSPEs;
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The realization of deferred taxes and the recognition and
measurement of uncertain tax positions;
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The carrying amount of goodwill and intangible assets;
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The amortization period of intangible assets with definite lives;
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Incentive-based compensation accruals and valuation of
share-based payment compensation arrangements; and
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Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements.
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10
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
counterpartys creditworthiness, or Merrill Lynchs
own creditworthiness, as appropriate. Determining the fair value
for OTC derivative contracts can require a significant level of
estimation and management judgment.
New and/or
complex instruments may have immature or limited markets. As a
result, the pricing models used for valuation often incorporate
significant estimates and assumptions that market participants
would use in pricing the instrument, which may impact the
results of operations reported in the Condensed Consolidated
Financial Statements. For instance, on long-dated and illiquid
contracts extrapolation methods are applied to observed market
data in order to estimate inputs and assumptions that are not
directly observable. This enables Merrill Lynch to mark to fair
value all positions consistently when only a subset of prices
are directly observable. Values for OTC derivatives are verified
using observed information about the costs of hedging the risk
and other trades in the market. As the markets for these
products develop, Merrill Lynch continually refines its pricing
models to correlate more closely to the market price of these
instruments. 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.
11
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 Lynchs credit
risk on an instrument is done in the same manner as for third
party credit risk. The impact of Merrill Lynchs credit
risk is incorporated into the fair value, even when credit risk
is not readily observable, of an instrument such as in OTC
derivatives contracts. OTC derivative liabilities are valued
based on the net counterparty exposure as described above.
Legal
Reserves
Merrill Lynch is a party in various actions, some of which
involve claims for substantial amounts. Amounts are accrued for
the financial resolution of claims that have either been
asserted or are deemed probable of assertion if, in the opinion
of management, it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
In many cases, it is not possible to determine whether a
liability has been incurred or to estimate the ultimate or
minimum amount of that liability until the case is close to
resolution, in which case no accrual is made until that time.
Accruals are subject to significant estimation by management
with input from outside counsel.
Income
Taxes
Merrill Lynch provides for income taxes on all transactions that
have been recognized in the 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
12
Merrill Lynchs 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
Americas 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 Lynchs
balance sheet. However, upon Bank of Americas resolution
of the unrecognized state tax benefit, any material impact
deemed to be attributable to Merrill Lynch will be reflected in
Merrill Lynchs balance sheet. Merrill Lynch accrues
income-tax-related interest and penalties, if applicable, within
income tax expense.
Beginning with the 2009 tax year, Merrill Lynchs 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
Americas returns or the utilization in Merrill
Lynchs 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 Lynchs policy is to obtain possession of
collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. To ensure that
the market value of the underlying
13
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 Lynchs trading activities consist primarily of
securities brokerage and trading; derivatives dealing and
brokerage; commodities trading and futures brokerage; and
securities financing transactions. Trading assets and trading
liabilities consist of cash instruments (e.g., securities and
loans) and derivative instruments used for trading purposes or
for managing risk exposures in other trading inventory. 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.
14
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
securitys 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 Lynchs impairment review generally includes:
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Identifying securities with indicators of possible impairment;
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Analyzing individual securities with fair value less than
amortized cost for specific factors including:
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The estimated length of time to recover from fair value to
amortized cost;
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The severity and duration of the fair value decline from
amortized cost;
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Deterioration in the financial condition of the issuer;
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Discussing evidential matter, including an evaluation of the
factors that could cause individual securities to have an
other-than-temporary impairment;
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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
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Documenting the analysis and conclusions.
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15
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 managements ability to influence the investees. See the
Consolidation Accounting Policies section of this Note for more
information.
For investments accounted for using the equity method, income is
recognized based on Merrill Lynchs share of the earnings
or losses of the investee. Dividend distributions are generally
recorded as reductions in the investment balance. Impairment
testing is based on the guidance provided in APB Opinion
No. 18, The Equity Method of Accounting for Investments
in Common Stock, and the investment is reduced when an
impairment is deemed other-than-temporary.
For investments accounted for at cost, income is recognized as
dividends are received. Impairment testing is based on the
guidance provided in FASB Staff 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 Lynchs lending and related activities include loan
originations, syndications and securitizations. Loan
originations include corporate and institutional loans,
residential and commercial mortgages, asset-based loans, and
other loans to individuals and businesses. Merrill Lynch also
engages in 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 managements estimate of the amount necessary to
maintain the allowance for loan losses at a level adequate to
absorb probable incurred loan losses and is included in interest
revenue in the Condensed Consolidated Statements of
Earnings/(Loss). Managements estimate of loan losses is
influenced by many factors, including adverse situations that
may affect the borrowers ability to repay, current
economic conditions, prior loan loss experience, and the
estimated fair value of any underlying collateral. The fair
value of collateral is generally determined by third-party
appraisals
16
in the case of residential mortgages, quoted market prices for
securities, or other types of estimates for other assets.
Managements estimate of loan losses includes judgment
about collectibility based on available information at the
balance sheet date, and the uncertainties inherent in those
underlying assumptions.
While management has based its estimates on the best information
available, future adjustments to the allowance for loan losses
may be necessary as a result of changes in the economic
environment or variances between actual results and the original
assumptions.
In general, loans are evaluated for impairment when they are
greater than 90 days past due or exhibit credit quality
weakness. Loans are considered impaired when it is probable that
Merrill Lynch will not be able to collect the contractual
principal and interest due from the borrower. All payments
received on impaired loans are applied to principal until the
principal balance has been reduced to a level where collection
of the remaining recorded investment is not in doubt. Typically,
when collection of principal on an impaired loan is not in
doubt, contractual interest will be credited to interest income
when received.
Loans held for sale are carried at lower of cost or fair value.
The fair value option in SFAS No. 159 has been elected
for certain held for sale loans, notes and mortgages. Estimation
is required in determining these fair values. The fair value of
loans made in connection with commercial lending activity,
consisting mainly of senior debt, is primarily estimated using
the market value of publicly issued debt instruments or
discounted cash flows. Merrill Lynchs estimate of fair
value for other loans, notes, and mortgages is determined based
on the individual loan characteristics. For certain homogeneous
categories of loans, including residential mortgages, automobile
loans, and home equity loans, fair value is estimated using a
whole loan valuation or an as-if securitized price
based on market conditions. An as-if securitized
price is based on estimated performance of the underlying asset
pool collateral, rating agency credit structure assumptions and
market pricing for similar securitizations previously executed.
Declines in the carrying value of loans held for sale and loans
accounted for at fair value under the fair value option are
included in other revenues in the Condensed Consolidated
Statements of 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, managements best estimate of the
repayment period is used. At repayment of the loan, any
unrecognized deferred fee is immediately recognized in earnings.
If the loan is accounted for as held for sale, the fees received
are deferred and recognized as part of the gain or loss on sale
in other revenues. If the loan is accounted for under the fair
value option, the fees are included in the determination of the
fair value and included in other revenue.
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.
17
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 Americas 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 Lynchs 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 Lynchs 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 entitys derivative
instruments and hedging activities and their effects on the
entitys financial position, financial performance, and
cash flows. SFAS No. 161 applies to all derivative
instruments within the scope of SFAS No. 133. It also
applies to non-derivative hedging instruments and all hedged
items designated and qualifying as hedges under
SFAS No. 133. SFAS No. 161 amends the
current qualitative and quantitative disclosure requirements for
derivative instruments and hedging activities set forth in
SFAS No. 133 and generally increases the level of
disaggregation that will be required in an entitys
financial statements. SFAS No. 161 requires
qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments, and
disclosures about credit-risk related contingent features in
derivative agreements.
18
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 Lynchs 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 subsidiarys
shares that results in the deconsolidation of the subsidiary, a
gain or loss is recognized for the difference between the
proceeds of that sale and the carrying amount of the interest
sold and a new fair value basis is established for any remaining
ownership interest. SFAS No. 160 is effective for
Merrill Lynch beginning in 2009; earlier application is
prohibited. SFAS No. 160 is required to be adopted
prospectively, with the exception of certain presentation and
disclosure requirements (e.g., reclassifying noncontrolling
interests to appear in equity), which are required to be adopted
retrospectively. 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.
19
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 Americas common stock issued
|
|
|
1,375
|
|
Purchase price per share of Bank of Americas common
stock(1)
|
|
$
|
14.08
|
|
|
|
|
|
|
Total value of Bank of Americas 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 Americas common stock at
December 31, 2008, the last trading day prior to the date
of acquisition. |
(2) |
|
Represents Merrill Lynchs
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.
20
Note 3. Segment
and Geographic Information
Segment
Information
Prior to the acquisition by Bank of America, Merrill
Lynchs 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.
|
21
The information that follows, in managements judgment,
provides a reasonable representation of each regions
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
Lynchs 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 Lynchs credit spreads on the carrying values of
certain long-term debt liabilities. |
(2) |
|
See Note 17 for further
information on discontinued operations. |
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).
|
22
|
|
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 managements own
assumptions about the assumptions a market participant would use
in pricing the asset or liability (examples include certain
private equity investments, certain residential and commercial
mortgage-related assets (including loans, securities and
derivatives), and long-dated or complex derivatives (including
certain equity and currency derivatives and long-dated options
on gas and power)).
|
As required by SFAS No. 157, when the inputs used to
measure fair value fall within different levels of the
hierarchy, the level within which the fair value measurement is
categorized is based on the lowest level input that is
significant to the fair value measurement in its entirety. For
example, a Level 3 fair value measurement may include
inputs that are observable (Levels 1 and 2) and
unobservable (Level 3). Therefore gains and losses for such
assets and liabilities categorized within the Level 3 table
below may include changes in fair value that are attributable to
both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3). Further, 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.
23
Recurring
Fair Value
The following tables present Merrill Lynchs fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis as of 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
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
28
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.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
Lynchs financial instruments are required to be accounted
for at fair value under SFAS No. 115 and
SFAS No. 133, as well as industry level guidance. For
certain financial instruments that are not accounted for at fair
value under other applicable accounting guidance, the fair value
option has been elected.
31
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.
32
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 Lynchs 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 Lynchs credit spreads as
observed in the secondary cash market.
The fair value option was also elected for certain non-recourse
long-term borrowings issued by consolidated SPEs. The fair value
of these long-term borrowings is unaffected by changes in
Merrill Lynchs creditworthiness.
The following tables present the difference between fair values
and the aggregate contractual principal amounts of receivables
under resale agreements, receivables under securities borrowed
transactions, loans, notes, and mortgages 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
|
)
|
|
|
33
|
|
|
(1) |
|
The majority of the difference
relates to the impact of the widening of Merrill Lynchs
credit spreads, the change in fair value of non-recourse debt,
and zero coupon notes issued at a substantial discount from the
principal amount. |
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
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 Lynchs
credit spreads, the change in fair value of non-recourse debt,
and zero coupon notes issued at a substantial discount from the
principal amount. |
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
Lynchs investment securities portfolio;
|
|
|
Net exposure of $8.4 billion in Merrill Lynchs
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 Lynchs ability to mitigate its risk by
selling or hedging its exposures is also limited by the market
environment. Merrill Lynchs future results may continue to
be materially impacted by the valuation adjustments applied to
these positions.
34
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.
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.
35
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 Lynchs 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.
|
36
|
|
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 hedges 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
|
|
|
|
37
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.
38
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. |
39
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 Lynchs 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 Lynchs 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, Guarantors 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.
40
Merrill Lynchs 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. |
41
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 Lynchs 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
Lynchs 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
42
Merrill Lynchs 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 Lynchs
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 Lynchs 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
Lynchs 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.
43
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.
|
44
|
|
|
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 Lynchs 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 Lynchs
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 Lynchs accounting policies
regarding
other-than-temporary-impairment
of investment securities.
45
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. |
46
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.
47
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 VIEs 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.
|
48
|
|
|
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.
49
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 VIEs expected losses, receive a majority of the
VIEs 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.
50
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 Lynchs
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.
51
The following table summarizes Merrill Lynchs 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 Lynchs involvement with the VIE. |
(2) |
|
Assets and Liabilities on
Merrill Lynchs 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 Lynchs 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 Lynchs 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
52
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 Lynchs 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.
53
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 managements best
estimates of credit losses, prepayment rates, forward yield
curves, and discount rates, commensurate with the risks
involved. Retained interests are either held as trading assets,
with changes in fair value recorded in the Condensed
Consolidated Statements of 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 Lynchs 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
54
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 Lynchs
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. |
55
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
investors 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 managements best estimate of certain key
assumptions, such as
56
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 Lynchs 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
|
|
|
|
57
Note 10. Goodwill
and Intangible Assets
In connection with the acquisition of Merrill Lynch by Bank of
America, the carrying value of Merrill Lynchs 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
Lynchs 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,