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
September 30,
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
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina
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28255
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(Address of principal executive offices)
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(Zip Code)
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(704) 386-5681
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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).
X YES NO
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the 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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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
YES X NO
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 November 6, 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 SEPTEMBER 30, 2009
TABLE OF CONTENTS
1
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Item 1.
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Financial
Statements
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Successor Company
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Predecessor Company
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Three Months Ended
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Three Months Ended
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(dollars in millions, except per share amounts)
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September 30, 2009
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September 26, 2008
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Revenues
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|
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Principal transactions
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$
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214
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$
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(6,573
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)
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Commissions
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1,316
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1,745
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Managed accounts and other fee-based revenues
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997
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1,395
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Investment banking
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732
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845
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Earnings from equity method investments
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213
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4,401
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Other income (loss)
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1,657
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(2,986
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)
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Other-than-temporary
impairment losses on AFS debt securities:
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Total
other-than-temporary
impairment losses on AFS debt securities
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(306
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)
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-
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Portion of
other-than-temporary
impairment losses recognized in OCI on AFS debt securities
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1
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-
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Subtotal
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4,824
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(1,173
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)
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Interest and dividend revenues
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2,685
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9,019
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Less interest expense
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2,407
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7,830
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Net interest profit
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278
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1,189
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Revenues, net of interest expense
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5,102
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16
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Non-interest expenses
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Compensation and benefits
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2,768
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3,483
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Communications and technology
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501
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546
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Occupancy and related depreciation
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314
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314
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Brokerage, clearing, and exchange fees
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240
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348
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Advertising and market development
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89
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159
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Professional fees
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148
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242
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Office supplies and postage
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38
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48
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Other
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495
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588
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Payment related to price reset on common stock offering
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-
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2,500
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Restructuring charge
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-
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39
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Total non-interest expenses
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4,593
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8,267
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Pre-tax earnings/(loss) from continuing operations
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509
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(8,251
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)
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Income tax benefit
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(181
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)
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(3,131
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)
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Net earnings/(loss) from continuing operations
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690
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(5,120
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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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(53
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)
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Income tax benefit
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-
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(21
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)
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Net loss from discontinued operations
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-
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(32
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)
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Net earnings/(loss)
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$
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690
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$
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(5,152
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)
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Preferred stock dividends
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38
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2,319
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Net earnings/(loss) applicable to common stockholders
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$
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652
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$
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(7,471
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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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$
|
(5.56
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)
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Basic loss per common share from discontinued operations
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|
N/A
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|
|
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(0.02
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)
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Basic loss per common share
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N/A
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$
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(5.58
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)
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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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$
|
(5.56
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)
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Diluted loss per common share from discontinued operations
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|
N/A
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|
|
|
|
(0.02
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)
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|
|
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|
|
|
|
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|
Diluted loss per common share
|
|
|
N/A
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|
|
|
$
|
(5.58
|
)
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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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|
$
|
0.35
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Average shares used in computing losses per common share
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|
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Basic
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N/A
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|
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1,339.0
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Diluted
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N/A
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|
1,339.0
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|
See Notes to Condensed
Consolidated Financial Statements.
2
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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Nine Months Ended
|
|
|
December 27, 2008
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|
Nine Months Ended
|
(dollars in millions, except per share amounts)
|
|
September 30, 2009
|
|
|
to December 31, 2008
|
|
September 26, 2008
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
4,047
|
|
|
|
$
|
(280
|
)
|
|
$
|
(13,074
|
)
|
Commissions
|
|
|
4,049
|
|
|
|
|
22
|
|
|
|
5,445
|
|
Managed accounts and other fee-based revenues
|
|
|
3,118
|
|
|
|
|
22
|
|
|
|
4,249
|
|
Investment banking
|
|
|
2,200
|
|
|
|
|
12
|
|
|
|
2,920
|
|
Earnings from equity method investments
|
|
|
306
|
|
|
|
|
-
|
|
|
|
4,943
|
|
Other income (loss)
|
|
|
2,994
|
|
|
|
|
19
|
|
|
|
(6,310
|
)
|
Other-than-temporary
impairment losses on AFS debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on AFS debt securities
|
|
|
(603
|
)
|
|
|
|
-
|
|
|
|
-
|
|
Portion of
other-than-temporary
impairment losses recognized in OCI on AFS debt securities
|
|
|
4
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
16,115
|
|
|
|
|
(205
|
)
|
|
|
(1,827
|
)
|
Interest and dividend revenues
|
|
|
9,505
|
|
|
|
|
34
|
|
|
|
28,415
|
|
Less interest expense
|
|
|
8,831
|
|
|
|
|
-
|
|
|
|
25,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
674
|
|
|
|
|
34
|
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
16,789
|
|
|
|
|
(171
|
)
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
9,203
|
|
|
|
|
64
|
|
|
|
11,170
|
|
Communications and technology
|
|
|
1,395
|
|
|
|
|
-
|
|
|
|
1,667
|
|
Occupancy and related depreciation
|
|
|
867
|
|
|
|
|
-
|
|
|
|
951
|
|
Brokerage, clearing, and exchange fees
|
|
|
732
|
|
|
|
|
10
|
|
|
|
1,105
|
|
Advertising and market development
|
|
|
248
|
|
|
|
|
-
|
|
|
|
501
|
|
Professional fees
|
|
|
396
|
|
|
|
|
-
|
|
|
|
747
|
|
Office supplies and postage
|
|
|
115
|
|
|
|
|
-
|
|
|
|
160
|
|
Other
|
|
|
1,398
|
|
|
|
|
-
|
|
|
|
1,212
|
|
Payment related to price reset on common stock offering
|
|
|
-
|
|
|
|
|
-
|
|
|
|
2,500
|
|
Restructuring charge
|
|
|
-
|
|
|
|
|
-
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
14,354
|
|
|
|
|
74
|
|
|
|
20,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings/(loss) from continuing operations
|
|
|
2,435
|
|
|
|
|
(245
|
)
|
|
|
(19,663
|
)
|
Income tax expense/(benefit)
|
|
|
241
|
|
|
|
|
(92
|
)
|
|
|
(7,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) from continuing operations
|
|
|
2,194
|
|
|
|
|
(153
|
)
|
|
|
(11,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) from discontinued operations
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(110
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
|
$
|
2,194
|
|
|
|
$
|
(153
|
)
|
|
$
|
(11,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
91
|
|
|
|
|
-
|
|
|
|
2,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) applicable to common stockholders
|
|
$
|
2,103
|
|
|
|
$
|
(153
|
)
|
|
$
|
(14,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share from continuing operations
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(13.16
|
)
|
Basic loss per common share from discontinued operations
|
|
|
N/A
|
|
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(13.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share from continuing operations
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(13.16
|
)
|
Diluted loss per common share from discontinued operations
|
|
|
N/A
|
|
|
|
|
-
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(13.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid per common share
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in computing losses per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
|
|
1,600.3
|
|
|
|
1,098.6
|
|
Diluted
|
|
|
N/A
|
|
|
|
|
1,600.3
|
|
|
|
1,098.6
|
|
See Notes to Condensed
Consolidated Financial Statements.
3
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
(dollars in millions, except per share amounts)
|
|
September 30, 2009
|
|
|
December 26, 2008
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,697
|
|
|
|
$
|
68,403
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
23,796
|
|
|
|
|
32,923
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements (includes $52,436 in 2009
and $62,146 in 2008 measured at fair value in accordance with
the fair value option election)
|
|
|
69,948
|
|
|
|
|
93,247
|
|
Receivables under securities borrowed transactions (includes
$993 in 2009 and $853 in 2008 measured at fair value in
accordance with the fair value option election)
|
|
|
53,062
|
|
|
|
|
35,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,010
|
|
|
|
|
128,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, at fair value (includes securities pledged as
collateral that can be sold or repledged of $22,775 in 2009 and
$18,663 in 2008):
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
58,190
|
|
|
|
|
89,477
|
|
Corporate debt and preferred stock
|
|
|
22,822
|
|
|
|
|
30,829
|
|
Equities and convertible debentures
|
|
|
28,018
|
|
|
|
|
26,160
|
|
Non-U.S.
governments and agencies
|
|
|
21,538
|
|
|
|
|
6,107
|
|
Mortgages, mortgage-backed, and asset-backed
|
|
|
7,015
|
|
|
|
|
13,786
|
|
U.S. Government and agencies
|
|
|
3,632
|
|
|
|
|
5,253
|
|
Municipals, money markets and physical commodities
|
|
|
6,838
|
|
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,053
|
|
|
|
|
175,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (includes $272 in 2009 and $2,770 in 2008
measured at fair value in accordance with the fair value option
election) (includes securities pledged as collateral that can be
sold or repledged of $0 in 2009 and $2,557 in 2008)
|
|
|
33,916
|
|
|
|
|
57,007
|
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral, at fair value
|
|
|
15,224
|
|
|
|
|
11,658
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from Bank of America
|
|
|
21,446
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
|
|
|
|
|
|
|
Customers (net of allowance for doubtful accounts of $0 in 2009
and $143 in 2008)
|
|
|
27,136
|
|
|
|
|
51,131
|
|
Brokers and dealers
|
|
|
10,411
|
|
|
|
|
12,410
|
|
Interest and other
|
|
|
14,750
|
|
|
|
|
26,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,297
|
|
|
|
|
89,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes, and mortgages (net of allowances for loan losses
of $114 in 2009 and $2,072 in 2008) (includes $4,765 in 2009 and
$979 in 2008 measured at fair value in accordance with the fair
value option election)
|
|
|
67,729
|
|
|
|
|
69,190
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and facilities (net of accumulated depreciation and
amortization of $571 in 2009 and $5,856 in 2008)
|
|
|
2,444
|
|
|
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
9,326
|
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
20,119
|
|
|
|
|
29,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
536,057
|
|
|
|
$
|
667,543
|
|
|
|
|
|
|
|
|
|
|
|
4
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
(dollars in millions, except per share amounts)
|
|
September 30, 2009
|
|
|
December 26, 2008
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements (includes $49,501 in 2009
and $32,910 in 2008 measured at fair value in accordance with
the fair value option election)
|
|
$
|
65,966
|
|
|
|
$
|
92,654
|
|
Payables under securities loaned transactions
|
|
|
21,369
|
|
|
|
|
24,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,335
|
|
|
|
|
117,080
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (includes $568 in 2009 and $3,387 in 2008
measured at fair value in accordance with the fair value option
election)
|
|
|
686
|
|
|
|
|
37,895
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
47,819
|
|
|
|
|
96,107
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, at fair value
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
41,440
|
|
|
|
|
71,363
|
|
Equities and convertible debentures
|
|
|
12,715
|
|
|
|
|
7,871
|
|
Non-U.S.
governments and agencies
|
|
|
19,906
|
|
|
|
|
4,345
|
|
Corporate debt and preferred stock
|
|
|
1,622
|
|
|
|
|
1,318
|
|
U.S. Government and agencies
|
|
|
1,564
|
|
|
|
|
3,463
|
|
Municipals, money markets and other
|
|
|
967
|
|
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,214
|
|
|
|
|
89,471
|
|
|
|
|
|
|
|
|
|
|
|
Obligation to return securities received as collateral, at fair
value
|
|
|
15,224
|
|
|
|
|
11,658
|
|
|
|
|
|
|
|
|
|
|
|
Payables to Bank of America
|
|
|
26,864
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
38,547
|
|
|
|
|
44,924
|
|
Brokers and dealers
|
|
|
16,444
|
|
|
|
|
12,553
|
|
Interest and other (includes $287 in 2009 measured at fair value
in accordance with the fair value option election)
|
|
|
21,359
|
|
|
|
|
32,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,350
|
|
|
|
|
90,395
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings (includes $48,847 in 2009 and $49,521 in
2008 measured at fair value in accordance with the fair value
option election)
|
|
|
161,444
|
|
|
|
|
199,678
|
|
Junior subordinated notes (related to trust preferred securities)
|
|
|
3,546
|
|
|
|
|
5,256
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
497,482
|
|
|
|
|
647,540
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stockholders Equity; authorized
25,000,000 shares;
|
|
|
|
|
|
|
|
|
|
(liquidation preference of $30,000 per share; issued:
2008 244,100 shares;
|
|
|
|
|
|
|
|
|
|
liquidation preference of $1,000 per share; issued:
2008 115,000 shares; liquidation preference of
$100,000 per share; issued: 2009 17,000 shares;
issued: 2008 17,000 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
|
|
|
34,969
|
|
|
|
|
47,232
|
|
Accumulated other comprehensive (loss) (net of tax)
|
|
|
(38
|
)
|
|
|
|
(6,318
|
)
|
Retained earnings/ (Accumulated deficit)
|
|
|
2,103
|
|
|
|
|
(8,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,034
|
|
|
|
|
35,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Treasury stock, at cost (2009 None;
2008 431,742,565 shares)
|
|
|
-
|
|
|
|
|
23,622
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
|
37,034
|
|
|
|
|
11,398
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
38,575
|
|
|
|
|
20,003
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
536,057
|
|
|
|
$
|
667,543
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements.
5
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
(dollars in millions)
|
|
September 30, 2009
|
|
|
September 26, 2008
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
|
$
|
2,194
|
|
|
|
$
|
(11,768
|
)
|
Adjustments to reconcile net earnings/(loss) to cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
896
|
|
|
|
|
671
|
|
Share-based compensation expense
|
|
|
579
|
|
|
|
|
1,787
|
|
Payment related to price reset on common stock offering
|
|
|
-
|
|
|
|
|
2,500
|
|
Deferred taxes
|
|
|
613
|
|
|
|
|
(5,571
|
)
|
Gain on sale of Bloomberg L.P.
|
|
|
-
|
|
|
|
|
(4,296
|
)
|
Earnings/(loss) from equity method investments
|
|
|
(306
|
)
|
|
|
|
(146
|
)
|
Other
|
|
|
(729
|
)
|
|
|
|
6,140
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
21,400
|
|
|
|
|
45,311
|
|
Cash and securities segregated for regulatory purposes
|
|
|
|
|
|
|
|
|
|
or deposited with clearing organizations
|
|
|
6,018
|
|
|
|
|
658
|
|
Receivables from Bank of America
|
|
|
(51,279
|
)
|
|
|
|
-
|
|
Receivables under resale agreements
|
|
|
33,799
|
|
|
|
|
57,151
|
|
Receivables under securities borrowed transactions
|
|
|
(17,421
|
)
|
|
|
|
33,544
|
|
Customer receivables
|
|
|
6,678
|
|
|
|
|
(13,359
|
)
|
Brokers and dealers receivables
|
|
|
2,000
|
|
|
|
|
(10,905
|
)
|
Proceeds from loans, notes, and mortgages held for sale
|
|
|
7,923
|
|
|
|
|
18,550
|
|
Other changes in loans, notes, and mortgages held for sale
|
|
|
(6,100
|
)
|
|
|
|
(1,264
|
)
|
Trading liabilities
|
|
|
(11,437
|
)
|
|
|
|
(37,082
|
)
|
Payables under repurchase agreements
|
|
|
(21,188
|
)
|
|
|
|
(63,702
|
)
|
Payables under securities loaned transactions
|
|
|
(3,057
|
)
|
|
|
|
(10,686
|
)
|
Payables to Bank of America
|
|
|
26,864
|
|
|
|
|
-
|
|
Customer payables
|
|
|
(6,385
|
)
|
|
|
|
5,805
|
|
Brokers and dealers payables
|
|
|
3,891
|
|
|
|
|
3,398
|
|
Trading investment securities
|
|
|
209
|
|
|
|
|
942
|
|
Other, net
|
|
|
11,264
|
|
|
|
|
(14,708
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
6,426
|
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
Maturities of
available-for-sale
securities
|
|
|
5,692
|
|
|
|
|
5,978
|
|
Sales of
available-for-sale
securities
|
|
|
9,613
|
|
|
|
|
27,218
|
|
Purchases of
available-for-sale
securities
|
|
|
(556
|
)
|
|
|
|
(29,121
|
)
|
Proceeds from the sale of discontinued operations
|
|
|
-
|
|
|
|
|
12,576
|
|
Equipment and facilities, net
|
|
|
(100
|
)
|
|
|
|
(593
|
)
|
Loans, notes, and mortgages held for investment
|
|
|
3,559
|
|
|
|
|
(11,240
|
)
|
Other investments
|
|
|
3,354
|
|
|
|
|
1,909
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
21,562
|
|
|
|
|
6,727
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
Commercial paper and short-term borrowings
|
|
|
(36,798
|
)
|
|
|
|
779
|
|
Issuance and resale of long-term borrowings
|
|
|
7,102
|
|
|
|
|
64,851
|
|
Settlement and repurchases of long-term borrowings
|
|
|
(46,489
|
)
|
|
|
|
(83,353
|
)
|
Capital contributions from Bank of America
|
|
|
6,850
|
|
|
|
|
-
|
|
Deposits
|
|
|
7,514
|
|
|
|
|
(13,986
|
)
|
Derivative financing transactions
|
|
|
18
|
|
|
|
|
554
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
|
9,885
|
|
Issuance of preferred stock, net
|
|
|
-
|
|
|
|
|
9,281
|
|
Other common stock transactions
|
|
|
-
|
|
|
|
|
(822
|
)
|
Excess tax benefits related to share-based compensation
|
|
|
-
|
|
|
|
|
39
|
|
Dividends
|
|
|
(91
|
)
|
|
|
|
(1,865
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash (used for) financing activities
|
|
|
(61,894
|
)
|
|
|
|
(14,637
|
)
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in cash and cash equivalents
|
|
|
(33,906
|
)
|
|
|
|
(4,940
|
)
|
Cash and cash equivalents, beginning of period(1)
|
|
|
52,603
|
|
|
|
|
41,346
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
18,697
|
|
|
|
$
|
36,406
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Income taxes paid (net of refunds)
|
|
$
|
269
|
|
|
|
$
|
422
|
|
Interest paid
|
|
|
9,739
|
|
|
|
|
26,529
|
|
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 nine months ended September 30, 2009,
which were recorded as non-cash capital contributions. See
Note 2.
In connection with the sale of Merrill Lynch Bank USA to a
subsidiary of Bank of America, Merrill Lynch received a note
receivable as consideration for the net book value of assets and
liabilities transferred to Bank of America. See Note 21.
|
|
|
(1) |
|
Amount for Successor Company is
as of January 1, 2009. |
See Notes to Condensed
Consolidated Financial Statements.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Three Months
|
|
Nine Months
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
Ended
|
|
Ended
|
(dollars in millions)
|
|
September 30,
2009
|
|
September 30,
2009
|
|
|
September 26,
2008
|
|
September 26,
2008
|
Net earnings/(loss)
|
|
$
|
690
|
|
|
$
|
2,194
|
|
|
|
$
|
(5,152
|
)
|
|
$
|
(11,768
|
)
|
Other comprehensive income/(loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
193
|
|
|
|
74
|
|
|
|
|
(141
|
)
|
|
|
(189
|
)
|
Net unrealized (loss) on investment securities
available-for-sale
|
|
|
(680
|
)
|
|
|
(146
|
)
|
|
|
|
(544
|
)
|
|
|
(2,358
|
)
|
Net deferred gain/(loss) on cash flow hedges
|
|
|
28
|
|
|
|
34
|
|
|
|
|
37
|
|
|
|
(3
|
)
|
Defined benefit pension and postretirement plans
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss), net of tax
|
|
|
(459
|
)
|
|
|
(38
|
)
|
|
|
|
(649
|
)
|
|
|
(2,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss)
|
|
$
|
231
|
|
|
$
|
2,156
|
|
|
|
$
|
(5,801
|
)
|
|
$
|
(14,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements.
7
September 30, 2009
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
were 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 year
(January 1, 2009) (the stub period) is
presented separately on the accompanying Condensed Consolidated
Statements of Earnings/(Loss) for the nine months ended
September 30, 2009.
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
8
Accepted Accounting Principles. Intercompany transactions and
balances within Merrill Lynch have been eliminated. Transactions
and balances with Bank of America have not been eliminated. The
interim Condensed Consolidated Financial Statements for the
three and nine 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.
During the third quarter of 2009, Merrill Lynch adjusted
previously reported prior period 2009 amounts related to the
valuation of certain long-term borrowings, primarily structured
notes. The impact of these adjustments reduced principal
transactions revenues by $252 million and $178 million
and net earnings by $176 million and $160 million for
the first and second quarters of 2009, respectively. The results
for the three and nine months ended September 30, 2009 are
appropriately stated. Historical quarterly results presented in
future filings will include the impact of these revisions.
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. Merrill Lynch evaluates
subsequent events through the date of filing with the Securities
and Exchange Commission. Certain prior period amounts have been
reclassified 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 three and nine months
ended September 30, 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.
In July 2009, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Codification
(ASC) 105, Generally Accepted Accounting
Principles, (ASC 105), which approved the FASB Accounting
Standards Codification (the Codification) as the
single source of authoritative nongovernmental GAAP. The
Codification is effective for interim or annual periods ending
after September 15, 2009. All existing accounting standards
have been superseded and all other accounting literature not
included in the Codification will be considered
nonauthoritative. The adoption of ASC 105 did not impact
Merrill Lynchs financial condition or results of
operations. All accounting references within this report are in
accordance with the new Codification.
9
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 ASC 810, Consolidation,
(Consolidation Accounting), 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 ASC 323,
Investments Equity Method and Joint Ventures
(Equity Method Accounting), 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 Equity Method Accounting, Merrill Lynch applies the equity
method of accounting where it has significant influence over the
investee. Significant influence can be evidenced by a
significant ownership interest (which is generally defined as a
voting interest of 20% to 50%), significant board of director
representation, or other contracts and arrangements.
VIEs Those entities that do not meet the VRE
criteria are generally analyzed for consolidation as either VIEs
or QSPEs. Merrill Lynch consolidates those VIEs in which it
absorbs the majority of the variability in expected losses
and/or the
variability in expected returns of the entity as required by
Consolidation Accounting. 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 ASC 860, Transfers
and Servicing, (Financial Transfers and Servicing
Accounting), and Consolidation Accounting, 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 Financial Transfers and Servicing Accounting,
Merrill Lynch recognizes transfers of financial assets where it
relinquishes control as sales to the extent of cash and any
proceeds received. Control is considered to be relinquished when
all of the following conditions have been met:
|
|
|
The transferred assets have been legally isolated from the
transferor even in bankruptcy or other receivership;
|
10
|
|
|
The transferee has the right to pledge or exchange the assets it
received, or if the entity is a QSPE the beneficial interest
holders have the right to pledge or exchange their beneficial
interests; and
|
|
|
The transferor does not maintain effective control over the
transferred assets (e.g., the ability to unilaterally cause the
holder to return specific transferred assets).
|
Revenue
Recognition
Principal transactions revenues include both realized and
unrealized gains and losses on trading assets and trading
liabilities, investment securities classified as trading
investments and fair value changes associated with structured
debt. These instruments are recorded at fair value. Fair value
is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants. Gains and losses on sales are recognized on a
trade date basis.
Commissions revenues include commissions, mutual fund
distribution fees and contingent deferred sales charge revenue,
which are all accrued as earned. Commissions revenues also
include mutual fund redemption fees, which are recognized at the
time of redemption. Commissions revenues earned from certain
customer equity transactions are recorded net of related
brokerage, clearing and exchange fees.
Managed accounts and other fee-based revenues primarily consist
of asset-priced portfolio service fees earned from the
administration of separately managed accounts and other
investment accounts for retail investors, annual account fees,
and certain other account-related fees.
Investment banking revenues include underwriting revenues and
fees for merger and acquisition advisory services, which are
accrued when services for the transactions are substantially
completed. Underwriting revenues are presented net of
transaction-related expenses. Transaction-related expenses,
primarily legal, travel and other costs directly associated with
the transaction, are deferred and recognized in the same period
as the related revenue from the investment banking transaction
to match revenue recognition.
Earnings from equity method investments include Merrill
Lynchs pro rata share of income and losses associated with
investments accounted for under the equity method.
Other revenues include gains/(losses) on investment securities,
including sales and
other-than-temporary-impairment
losses associated with certain
available-for-sale
securities, gains/(losses) on private equity investments and
gains/(losses) on loans and other miscellaneous items.
Contractual interest and dividends received and paid on trading
assets and trading liabilities, excluding derivatives, are
recognized on an accrual basis as a component of interest and
dividend revenues and interest expense. Interest and dividends
on investment securities are recognized on an accrual basis as a
component of interest and dividend revenues. Interest related to
loans, notes, and mortgages, securities financing activities and
certain short- and long-term borrowings are recorded on an
accrual basis with related interest recorded as interest revenue
or interest expense, as applicable. Contractual interest, if
any, on structured notes is recorded as a component of interest
expense.
Use of
Estimates
In presenting the Condensed Consolidated Financial Statements,
management makes estimates regarding:
|
|
|
Valuations of assets and liabilities requiring fair value
estimates;
|
|
|
The allowance for credit losses;
|
11
|
|
|
Determination of
other-than-temporary
impairments for
available-for-sale
investment securities;
|
|
|
The outcome of litigation;
|
|
|
Assumptions and cash flow projections used in determining
whether VIEs should be consolidated and the determination of the
qualifying status of QSPEs;
|
|
|
The realization of deferred taxes and the recognition and
measurement of uncertain tax positions;
|
|
|
The carrying amount of goodwill and intangible assets;
|
|
|
The amortization period of intangible assets with definite lives;
|
|
|
Incentive-based compensation accruals and valuation of
share-based payment compensation arrangements; and
|
|
|
Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements.
|
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 ASC 320, Investments Debt
and Equity Securities, (Investment Accounting),
ASC 815, Derivatives and Hedging, (Derivatives
Accounting), and the fair value option election in
accordance with ASC 825-10-25, Financial
Instruments Recognition, (fair value
option election). Merrill Lynch also accounts for certain
assets at fair value under applicable industry guidance, namely
ASC 940 Financial Services Brokers and Dealers
(Broker-Dealer Guide) and ASC 946, Financial
Services Investment Companies (Investment
Company Guide).
ASC 820, Fair Value Measurements and Disclosures,
(Fair Value Accounting) defined fair value,
established a framework for measuring fair value, established a
fair value hierarchy based on the quality of inputs used to
measure fair value and enhanced 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
12
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 Fair Value
Accounting. The significant adjustments include liquidity and
counterparty credit risk.
Liquidity
Merrill Lynch makes adjustments to bring a position from a
mid-market to a bid or offer price, depending upon the net open
position. Merrill Lynch values net long positions at bid prices
and net short positions at offer prices. These adjustments are
based upon either observable or implied bid-offer prices.
Counterparty
Credit Risk
In determining fair value, Merrill Lynch considers both the
credit risk of its counterparties, as well as its own
creditworthiness. Merrill Lynch attempts to mitigate credit risk
to third parties by entering into netting and collateral
arrangements. Net counterparty exposure (counterparty positions
netted by offsetting transactions and both cash and securities
collateral) is then valued for counterparty creditworthiness and
this resultant value is incorporated into the fair value of the
respective instruments. Merrill Lynch generally calculates the
credit risk adjustment for derivatives on observable market
credit spreads.
Fair Value Accounting 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 instruments such as 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.
13
Income
Taxes
Merrill Lynch provides for income taxes on all transactions that
have been recognized in the Condensed Consolidated Financial
Statements in accordance with ASC 740, Income Taxes
(Income Tax Accounting). 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 that are
more-likely-than-not to be realized. Pursuant to Income Tax
Accounting, 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 Merrill
Lynchs net deferred tax assets are carryforward amounts
generated in the U.S. and United Kingdom (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
intercompany 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 Income Tax Accounting. 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 item, any material impact determined 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 intercompany tax allocation policy of Bank of America. This
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 this 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 16 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.
14
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. 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 election has been made, 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 4.
Resale and repurchase agreements recorded at their contractual
amounts plus accrued interest approximate fair value, as the
fair value of these items is not materially sensitive to shifts
in market interest rates because of the short-term nature of
these instruments
and/or
variable interest rates or to credit risk because the resale and
repurchase agreements are fully collateralized.
Merrill Lynchs policy is to obtain possession of
collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. To ensure that
the market value of the underlying collateral remains
sufficient, collateral is generally valued daily and Merrill
Lynch may require counterparties to deposit additional
collateral or may return collateral pledged when appropriate.
Substantially all repurchase and resale activities are
transacted under master repurchase agreements that give Merrill
Lynch the right, in the event of default, to liquidate
collateral held and to offset 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 Securities Exchange Act of 1934.
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.
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.
15
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. Trading assets and trading
liabilities also include commodities inventory. See Note 6
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.
Investment
Securities
Investment securities consist of marketable investment
securities and non-qualifying investments. Refer to Note 8.
Marketable
Investments
ML & Co. and certain of its non-broker-dealer
subsidiaries, including Merrill Lynch banks, follow the guidance
within Investment 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 Investment Accounting 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 Derivatives
Accounting. 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)
(OCI).
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
is recognized in 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.
16
Merrill Lynchs impairment review generally includes:
|
|
|
Identifying securities with indicators of possible impairment;
|
|
|
Analyzing individual securities with fair value less than
amortized cost for specific factors including:
|
|
|
|
|
|
The estimated length of time to recover from fair value to
amortized cost;
|
|
|
|
The severity and duration of the fair value decline from
amortized cost;
|
|
|
|
Deterioration in the financial condition of the issuer;
|
|
|
|
Discussing evidential matter, including an evaluation of the
factors that could cause individual securities to have an
other-than-temporary
impairment;
|
|
|
Determining whether Merrill Lynch intends to sell the security
or if it is more likely than not that Merrill Lynch will be
required to sell the security before recovery of its amortized
cost; and
|
|
|
Documenting the analysis and conclusions.
|
Non-Qualifying
Investments
Non-qualifying investments are those investments that are not
within the scope of Investment Accounting 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 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. The carrying value of private equity
investments reflects expected exit values based upon market
prices or other valuation methodologies including market
comparables of similar companies and expected cash flows.
Merrill Lynch has non-controlling investments in the common
shares of corporations and in partnerships that do not fall
within the scope of Investment Accounting 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 Equity Method
Accounting 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 Investment Accounting and the cost basis is
reduced when an impairment is deemed
other-than-temporary.
17
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 ASC
310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality (Acquired Impaired Loan Accounting). See
Note 10.
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 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 election has been made 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 election
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
18
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 election, the fees are included in the
determination of the fair value and included in other revenue.
New
Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140
(SFAS No. 166), and
SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167). The
amendments will be effective January 1, 2010 for Merrill
Lynch. SFAS No. 166 revises ASC 860, Transfers and
Servicing (Financial Transfers and Servicing
Accounting), which establishes sale accounting criteria
for transfers of financial assets. Among other things,
SFAS No. 166 amends Financial Transfers and Servicing
Accounting to eliminate the concept of a QSPE. As a result,
existing QSPEs will be subject to consolidation in accordance
with the guidance provided in SFAS No. 167.
SFAS No. 167 amends Consolidation Accounting by
significantly changing the criteria by which an enterprise
determines whether it must consolidate a VIE. A VIE is an
entity, typically an SPE, which has insufficient equity at risk
or which is not controlled through voting rights held by equity
investors. Consolidation Accounting currently requires that a
VIE be consolidated by the enterprise that will absorb a
majority of the expected losses or expected residual returns
created by the assets of the VIE. SFAS No. 167 amends
Consolidation Accounting to require that a VIE be consolidated
by the enterprise that has both the power to direct the
activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE. SFAS No. 167 also requires that an
enterprise continually reassess, based on current facts and
circumstances, whether it should consolidate the VIEs with which
it is involved. See Note 9 for Merrill Lynchs
involvement with VIEs.
The adoption in January 2010 of SFAS Nos. 166 and 167 will
result in the consolidation of certain QSPEs and VIEs that are
not currently recorded on Merrill Lynchs Condensed
Consolidated Balance Sheets. Based upon the evaluation performed
as of September 30, 2009, Merrill Lynch expects to consolidate
certain vehicles, including credit-linked note entities,
collateralized debt obligations and municipal bond trusts, which
hold aggregate assets of approximately $15 billion. These
consolidations will result in an increase in trading assets and
long-term borrowings. Merrill Lynch continues to evaluate other
VIEs with which it is involved to determine the impact of
SFAS No. 167.
In May 2009, the FASB issued ASC 855, Subsequent Events,
which provides general standards of accounting for and
disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be
issued. In addition, ASC 855 requires the disclosure of the date
through which an entity has evaluated subsequent events and the
basis for that date. The adoption of ASC 855, effective
June 30, 2009, did not impact Merrill Lynchs
financial condition or results of operations. Merrill Lynch
evaluated subsequent events through the date of filing.
In April 2009, the FASB amended Fair Value Accounting to provide
guidance for determining whether a market is inactive and a
transaction is distressed. Merrill Lynch elected to early adopt
the amendments effective January 1, 2009. The adoption did
not have a material impact on the Condensed Consolidated
Financial Statements.
19
In April 2009, the FASB amended Investment Accounting to require
that an entity recognize the credit component of an
other-than-temporary
impairment of a debt security in earnings and the noncredit
component in 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. The
amendments also require expanded disclosures. Merrill Lynch
elected to early adopt the amendments 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. The amendments did
not change the recognition of
other-than-temporary
impairment for equity securities.
In April 2009, the FASB amended ASC 825, Financial
Instruments, to require expanded disclosures for all
financial instruments within its scope, such as loans that are
not measured at fair value through earnings. Merrill Lynch
adopted the amendments during the second quarter of 2009. Since
the amendments only require certain additional disclosures, they
did not affect Merrill Lynchs consolidated financial
position, results of operations or cash flows. Refer to
Note 5 for further information.
In April 2009, the FASB amended ASC
805-10,
Business Combinations, 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. This new guidance is
effective for new acquisitions consummated on or after
January 1, 2009. Bank of America applied this guidance 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 March 2008, the FASB amended Derivatives Accounting 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. The
amendments apply to all derivative instruments within the scope
of Derivatives Accounting. The amendments also apply to
non-derivative hedging instruments and all hedged items
designated and qualifying as hedges under Derivatives
Accounting. The amendments require additional qualitative and
quantitative disclosures for derivative instruments and hedging
activities set forth in Derivatives Accounting and generally
increase the level of disaggregation required in an
entitys financial statements. Additional disclosures
include 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. Merrill Lynch adopted the amendments to
Derivatives Accounting on January 1, 2009, effective
prospectively. Since the amendments only resulted in certain
additional disclosures, they did not have an effect on Merrill
Lynchs consolidated financial position, results of
operations or cash flows. See Note 6 for further
information regarding these disclosures.
In February 2008, the FASB modified Financial Transfers and
Servicing Accounting. Under this new guidance, 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 Financial Transfers and Servicing Accounting.
However, if certain criteria are met, the initial transfer and
repurchase financing will be evaluated as two separate
transactions under Financial Transfers and Servicing Accounting.
This new guidance was effective for new transactions entered
into in fiscal years beginning after November 15, 2008.
Early adoption was prohibited. The adoption of this guidance did
not have a material impact on the Condensed Consolidated
Financial Statements.
20
In December 2007, the FASB amended Consolidation Accounting to
require 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 the amendments, 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. The amendments were effective for Merrill Lynch
beginning in 2009; earlier application was prohibited. The
amendments were 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 the amendments did not have a material impact on the
Condensed Consolidated Financial Statements.
In December 2007, the FASB issued ASC
805-10,
Business Combinations, which significantly changed the
financial accounting and reporting for business combinations.
ASC 805-10
required, for example: (i) 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 ASC
805-10 to
its January 1, 2009 acquisition of Merrill Lynch, the
effects of which are included in these Condensed Consolidated
Financial Statements.
As a result of the acquisition of Merrill Lynch by Bank of
America, Merrill Lynch recorded the following preliminary
purchase accounting adjustments. The allocation of the purchase
price will be finalized upon completion of Bank of
Americas analysis of the fair values of Merrill
Lynchs assets and liabilities in accordance with the
acquisition method of accounting.
21
|
|
|
|
|
(dollars in billions, except
per share amounts)
|
|
|
|
|
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
|
|
|
(1.2
|
)
|
Loans
|
|
|
(6.1
|
)
|
Intangible
assets(3)
|
|
|
5.7
|
|
Other assets
|
|
|
(1.5
|
)
|
Long-term
borrowings(4)
|
|
|
15.8
|
|
|
|
|
|
|
Pre-tax total adjustments
|
|
|
12.7
|
|
Deferred income taxes
|
|
|
(5.7
|
)
|
|
|
|
|
|
After-tax total adjustments
|
|
|
7.0
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
24.3
|
|
|
|
|
|
|
Preliminary goodwill resulting from the acquisition by Bank
of
America(5)
|
|
$
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
(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 are primarily amortized on a straight-line
basis. |
(4) |
|
The change in the estimated
fair value of long-term borrowings of approximately
$400 million had an immaterial impact on net income for the
first and second quarters of 2009. |
(5) |
|
No goodwill is expected to be
deductible for federal income tax purposes. |
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.
During the nine months ended September 30, 2009, 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. Approximately $42 billion of assets
and $19 billion of liabilities were transferred from Bank
of America to Merrill Lynch, primarily equity-related positions.
In addition to these transfers, Merrill Lynch also sold one of
its U.S. bank subsidiaries to Bank of America during the third
quarter of 2009. See Note 21.
22
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 ASC 280,
Segment Reporting (Segment Reporting): 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 Segment Reporting in the first
quarter of 2009. Pursuant to Segment Reporting, 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 Segment
Reporting. 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;
|
|
|
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.
|
23
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
2009
|
|
September 30,
2009
|
|
|
September 26,
2008
|
|
September 26,
2008
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East, and Africa
|
|
$
|
1,577
|
|
|
$
|
4,642
|
|
|
|
$
|
(1,339
|
)
|
|
$
|
1,061
|
|
Pacific Rim
|
|
|
378
|
|
|
|
1,772
|
|
|
|
|
311
|
|
|
|
1,858
|
|
Latin America
|
|
|
207
|
|
|
|
605
|
|
|
|
|
325
|
|
|
|
1,191
|
|
Canada
|
|
|
71
|
|
|
|
185
|
|
|
|
|
22
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
2,233
|
|
|
|
7,204
|
|
|
|
|
(681
|
)
|
|
|
4,265
|
|
United
States(1)
|
|
|
2,869
|
|
|
|
9,585
|
|
|
|
|
697
|
|
|
|
(3,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
5,102
|
|
|
$
|
16,789
|
|
|
|
$
|
16
|
|
|
$
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) from continuing
operations(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East, and Africa
|
|
$
|
885
|
|
|
$
|
2,405
|
|
|
|
$
|
(2,410
|
)
|
|
$
|
(2,583
|
)
|
Pacific Rim
|
|
|
(76
|
)
|
|
|
272
|
|
|
|
|
(275
|
)
|
|
|
46
|
|
Latin America
|
|
|
76
|
|
|
|
153
|
|
|
|
|
104
|
|
|
|
473
|
|
Canada
|
|
|
39
|
|
|
|
90
|
|
|
|
|
(12
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
924
|
|
|
|
2,920
|
|
|
|
|
(2,593
|
)
|
|
|
(2,048
|
)
|
United
States(1)
|
|
|
(415
|
)
|
|
|
(485
|
)
|
|
|
|
(5,658
|
)
|
|
|
(17,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax earnings (loss) from continuing
operations(2)
|
|
$
|
509
|
|
|
$
|
2,435
|
|
|
|
$
|
(8,251
|
)
|
|
$
|
(19,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
U.S. results for the three and
nine months ended September 30, 2009 included net losses of
$2.1 billion and $3.5 billion, respectively, which
resulted from the narrowing of Merrill Lynchs credit
spreads on the carrying values of certain long-term borrowings.
Losses for the three and nine months ended September 26,
2008 were partially offset by gains of $2.8 and
$5.0 billion, respectively, that resulted from the widening
of Merrill Lynchs credit spreads on the carrying
value of certain long-term borrowings, and a $4.3 billion
net gain related to the sale of Merrill Lynchs ownership
stake in Bloomberg L.P. (see Note 5 of the 2008 Annual
Report). |
(2) |
|
See Note 18 for further
information on discontinued operations. |
Note 4. Fair Value Disclosures
Fair
Value Accounting
Fair
Value Hierarchy
In accordance with Fair Value Accounting, 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).
24
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).
|
|
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 Fair Value Accounting, 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 offsetting effect of
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.
25
Valuation
Techniques
The following outlines the valuation methodologies for the most
significant Level 3 positions:
Mortgage
related positions
In the most liquid markets, readily available or observable
prices are used in valuing mortgage related positions. In less
liquid markets, the lack of securitization activity and related
pricing necessitates the use of other available information and
modeling techniques to approximate the fair value for some of
these positions, including whole loans, derivatives, and
securities.
Residential
and commercial mortgages
For certain residential and commercial mortgages, Merrill Lynch
employs a fundamental cash flow valuation approach. 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.
U.S. ABS
CDOs
The valuation for certain of Merrill Lynchs
U.S. super senior asset-backed collateralized debt
obligations (ABS CDO) positions is based on cash
flow analysis including cumulative loss assumptions. These
assumptions are derived from multiple inputs including mortgage
remittance reports, housing prices and other market data.
Relevant ABX indices are also analyzed as part of the overall
valuation process.
Corporate
debt, loans and auction rate securities
Certain corporate debt and loans, particularly those related to
emerging market, leveraged and distressed companies, and auction
rate securities have limited price transparency. For corporate
debt and loans, where credit spread pricing is unavailable for a
particular company, recent trades as well as proxy credit
spreads and trends may be considered in the valuation. For
leveraged loans, Merrill Lynch may also refer to certain credit
indices. For auction rate securities, the pricing methodology
relies upon a number of assumptions including weighted average
life, coupon, discount margin and liquidity discounts. In
addition, recent trades and issuer tenders may be considered in
the valuation.
Private
equity and principal investments
For certain private equity and principal investments held,
valuation methodologies include publicly traded comparables
derived by multiplying a key performance metric (e.g., earnings
before interest, taxes, depreciation and amortization) of the
portfolio company by the relevant valuation multiple observed
for comparable companies, acquisition comparables, entry level
multiples and discounted cash flows, and are subject to
appropriate discounts for lack of liquidity or marketability.
Certain factors which may influence changes to the fair value
include, but are not limited to, recapitalizations, subsequent
rounds of financing, and offerings in the equity or debt capital
markets.
26
Derivatives
and structured notes with significant unobservable
correlation
Merrill Lynch enters into a number of derivative contracts and
issues structured notes where the performance is wholly or
partly dependent on the relative performance of two or more
assets. In these transactions, referred to as correlation
trades, correlation between the assets can be a significant
factor in the valuation. Examples of this type of transaction
include: equity or foreign exchange baskets, constant maturity
swap spreads (i.e., options where the performance is determined
based upon the fluctuations between two benchmark interest
rates), and commodity spread trades. Many correlations are
available through external pricing services. Where external
pricing information is not available, management uses estimates
based on historical data, calibrated to more liquid market
information. Unobservable credit correlation, such as that
influencing the valuation of complex structured CDOs, is
calibrated using a proxy approach (e.g., using implied
correlation from traded credit index tranches as a proxy for
calibrating correlation for a basket of single-name corporate
investment grade credits that are infrequently traded).
Derivatives
and structured notes with significant unobservable
volatility
Merrill Lynch enters into a number of derivative contracts and
issues structured notes whose values are dependent on
volatilities for which market observable values are not
available. These volatilities correspond to options with
long-dated expiration dates, strikes significantly in or out of
the money,
and/or in
the case of interest rate underlyings, a large tenor (i.e., an
underlying interest rate reference that itself is long-dated).
Merrill Lynch uses model-based extrapolation, proxy techniques,
or historical analysis to derive the unobservable volatility.
These methods are selected based on available market information
and are used across all asset classes. Volatility estimation can
have a significant impact on valuations.
27
Recurring
Fair Value
The following tables present Merrill Lynchs fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis as of September 30, 2009 and
December 26, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
Successor Company as of September 30, 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
|
|
$
|
-
|
|
|
$
|
6,045
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,045
|
|
Corporate debt
|
|
|
-
|
|
|
|
268
|
|
|
|
-
|
|
|
|
-
|
|
|
|
268
|
|
Non-U.S.
governments and agencies
|
|
|
1,048
|
|
|
|
869
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,917
|
|
U.S. government and agencies
|
|
|
369
|
|
|
|
1,695
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities segregated for regulatory purposes or deposited
with clearing organizations
|
|
|
1,417
|
|
|
|
8,877
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
|
-
|
|
|
|
52,436
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,436
|
|
Receivables under securities borrowed transactions
|
|
|
-
|
|
|
|
993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
993
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
16,537
|
|
|
|
6,644
|
|
|
|
299
|
|
|
|
-
|
|
|
|
23,480
|
|
Convertible debentures
|
|
|
-
|
|
|
|
4,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,538
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
-
|
|
|
|
2,991
|
|
|
|
4,024
|
|
|
|
-
|
|
|
|
7,015
|
|
Corporate debt
|
|
|
-
|
|
|
|
7,626
|
|
|
|
8,796
|
|
|
|
-
|
|
|
|
16,422
|
|
Preferred
stock(2)
|
|
|
325
|
|
|
|
-
|
|
|
|
6,075
|
|
|
|
-
|
|
|
|
6,400
|
|
Non-U.S.
governments and agencies
|
|
|
18,317
|
|
|
|
2,456
|
|
|
|
765
|
|
|
|
-
|
|
|
|
21,538
|
|
U.S. government and agencies
|
|
|
3,184
|
|
|
|
448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,632
|
|
Municipals and money markets
|
|
|
500
|
|
|
|
4,679
|
|
|
|
966
|
|
|
|
-
|
|
|
|
6,145
|
|
Commodities and related contracts
|
|
|
-
|
|
|
|
693
|
|
|
|
-
|
|
|
|
-
|
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
38,863
|
|
|
|
30,075
|
|
|
|
20,925
|
|
|
|
-
|
|
|
|
89,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
5,979
|
|
|
|
820,966
|
|
|
|
21,119
|
|
|
|
(789,874
|
)
|
|
|
58,190
|
|
Investment securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
23
|
|
Corporate debt
|
|
|
-
|
|
|
|
113
|
|
|
|
40
|
|
|
|
-
|
|
|
|
153
|
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
430
|
|
|
|
247
|
|
|
|
-
|
|
|
|
677
|
|
Municipals and money markets
|
|
|
345
|
|
|
|
361
|
|
|
|
-
|
|
|
|
-
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities trading
|
|
|
345
|
|
|
|
921
|
|
|
|
310
|
|
|
|
-
|
|
|
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities agency collateralized
|
|
|
-
|
|
|
|
9,818
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,818
|
|
mortgage obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities non-agency MBSs
|
|
|
-
|
|
|
|
1,559
|
|
|
|
796
|
|
|
|
-
|
|
|
|
2,355
|
|
Corporate/agency bonds
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
Other taxable securities
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
-
|
|
|
|
11,447
|
|
|
|
796
|
|
|
|
-
|
|
|
|
12,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
1,945
|
|
|
|
837
|
|
|
|
3,262
|
|
|
|
-
|
|
|
|
6,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
2,290
|
|
|
|
13,205
|
|
|
|
4,368
|
|
|
|
-
|
|
|
|
19,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral
|
|
|
14,849
|
|
|
|
375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,224
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
761
|
|
|
|
4,074
|
|
|
|
-
|
|
|
|
4,835
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
Successor Company as of September 30, 2009
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(dollars in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
$
|
-
|
|
|
$
|
49,501
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49,501
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
568
|
|
|
|
-
|
|
|
|
-
|
|
|
|
568
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
11,469
|
|
|
|
1,092
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,561
|
|
Convertible debentures
|
|
|
-
|
|
|
|
154
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
Corporate debt
|
|
|
-
|
|
|
|
1,622
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,622
|
|
Non-U.S.
governments and agencies
|
|
|
18,990
|
|
|
|
525
|
|
|
|
391
|
|
|
|
-
|
|
|
|
19,906
|
|
U.S. government and agencies
|
|
|
1,391
|
|
|
|
173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,564
|
|
Municipals, money markets and other
|
|
|
407
|
|
|
|
560
|
|
|
|
-
|
|
|
|
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
32,257
|
|
|
|
4,126
|
|
|
|
391
|
|
|
|
-
|
|
|
|
36,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
5,497
|
|
|
|
823,251
|
|
|
|
15,316
|
|
|
|
(802,624
|
)
|
|
|
41,440
|
|
Obligation to return securities received as collateral
|
|
|
14,849
|
|
|
|
375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,224
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
46
|
|
|
|
241
|
|
|
|
-
|
|
|
|
287
|
|
Long-term borrowings
|
|
|
-
|
|
|
|
43,769
|
|
|
|
5,078
|
|
|
|
-
|
|
|
|
48,847
|
|
|
|
|
|
|
(1) |
|
Represents counterparty and
cash collateral netting. |
(2) |
|
Primarily represents auction
rate securities. |
Level 3 derivative contracts (assets) primarily relate to
derivative positions on U.S. ABS CDOs and other mortgages
of $5.7 billion, $9.6 billion of other credit
derivatives that incorporate unobservable correlation, and
$5.8 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 and corporate loans.
Level 3 derivative contracts (liabilities) primarily relate
to derivative positions on U.S. ABS CDOs and other
mortgages of $4.0 billion, $6.3 billion of other
credit derivatives that incorporate unobservable correlation,
and $5.0 billion of equity, currency, interest rate and
commodity derivatives that are long-dated
and/or have
unobservable correlation.
Level 3 long-term borrowings primarily relate to
equity-linked structured notes of $4.1 billion that are
long-dated
and/or have
unobservable correlation.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
Other payables interest and
other(2)
|
|
|
10
|
|
|
|
741
|
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
672
|
|
Long-term
borrowings(3)
|
|
|
-
|
|
|
|
41,575
|
|
|
|
7,480
|
|
|
|
-
|
|
|
|
49,055
|
|
|
|
|
|
|
(1) |
|
Represents counterparty and
cash collateral netting. |
(2) |
|
Primarily represents certain
derivatives used for non-trading purposes. |
(3) |
|
Includes bifurcated embedded
derivatives carried at fair value. |
Level 3 trading assets primarily include U.S. ABS CDOs
of $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.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Successor Company
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
|
Total Realized and Unrealized Gains or (Losses)
|
|
Total Realized and
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
included in Income
|
|
Unrealized Gains
|
|
Unrealized
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
Losses to
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
OCI
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
330
|
|
|
$
|
(36
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(36
|
)
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
299
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
7,176
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
(3,177
|
)
|
|
|
8
|
|
|
|
4,024
|
|
Corporate debt
|
|
|
4,004
|
|
|
|
542
|
|
|
|
-
|
|
|
|
-
|
|
|
|
542
|
|
|
|
-
|
|
|
|
3,696
|
|
|
|
554
|
|
|
|
8,796
|
|
Preferred stock
|
|
|
6,591
|
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
(553
|
)
|
|
|
-
|
|
|
|
6,075
|
|
Non-U.S.
governments and agencies
|
|
|
691
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
765
|
|
Municipals and money markets
|
|
|
931
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
19,723
|
|
|
|
627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
577
|
|
|
|
20,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
6,248
|
|
|
|
(1,356
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,356
|
)
|
|
|
-
|
|
|
|
(136
|
)
|
|
|
1,047
|
|
|
|
5,803
|
|
Investment securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
38
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
23
|
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
40
|
|
Non-U.S.
governments and agencies
|
|
|
174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities trading
|
|
|
212
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
113
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
non-agency
MBSs
|
|
|
3,227
|
|
|
|
-
|
|
|
|
(158
|
)
|
|
|
-
|
|
|
|
(158
|
)
|
|
|
(602
|
)
|
|
|
(1,691
|
)
|
|
|
20
|
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
3,227
|
|
|
|
-
|
|
|
|
(158
|
)
|
|
|
-
|
|
|
|
(158
|
)
|
|
|
(602
|
)
|
|
|
(1,691
|
)
|
|
|
20
|
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,832
|
|
|
|
-
|
|
|
|
420
|
|
|
|
-
|
|
|
|
420
|
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
47
|
|
|
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
6,271
|
|
|
|
3
|
|
|
|
262
|
|
|
|
-
|
|
|
|
265
|
|
|
|
(602
|
)
|
|
|
(1,746
|
)
|
|
|
180
|
|
|
|
4,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
6,085
|
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
53
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
(2,052
|
)
|
|
|
47
|
|
|
|
4,074
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
352
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
352
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
628
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
(340
|
)
|
|
|
-
|
|
|
|
241
|
|
Long-term borrowings
|
|
|
5,289
|
|
|
|
(468
|
)
|
|
|
(93
|
)
|
|
|
-
|
|
|
|
(561
|
)
|
|
|
-
|
|
|
|
(371
|
)
|
|
|
(401
|
)
|
|
|
5,078
|
|
|
|
Net losses in principal transactions related to net derivative
contracts were primarily due to the narrowing of credit spreads,
primarily related to monoline hedges of mortgage-related
positions.
Decreases in purchases, issuances and settlements related to
mortgages, mortgage-backed and asset-backed securities are
primarily due to the reclassification of certain positions to
corporate debt during the third quarter of 2009. Increases in
purchases, issuances and settlements related to corporate debt
primarily relates to the reclassification of certain positions
from mortgages, mortgage-backed and asset-backed securities
during the third quarter of 2009 in addition to the recording of
assets for which the exposure was previously recognized as a
derivative contract (total return swap). Decreases in purchases,
issuances and settlements related to
available-for-sale
mortgage-backed securities non-agency primarily
relates to the sale of certain positions. Decreases in
purchases, issuances and settlements related to loans, notes and
mortgages were due to the sale of certain held for investment
loans associated with the sale of Merrill Lynch Bank USA
(MLBUSA) to Bank of America during the third quarter
of 2009. See Note 21.
Net transfers in for net derivative contracts is primarily due
to an increase in the impact of credit valuation adjustments in
relation to the overall pricing of certain corporate bespoke CDO
positions.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Successor Company
|
|
|
Nine Months Ended September 30, 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
|
|
|
$
|
(58
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(58
|
)
|
|
$
|
-
|
|
|
$
|
175
|
|
|
$
|
(49
|
)
|
|
$
|
299
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
7,568
|
|
|
|
(315
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(315
|
)
|
|
|
-
|
|
|
|
(809
|
)
|
|
|
(2,420
|
)
|
|
|
4,024
|
|
Corporate debt
|
|
|
10,149
|
|
|
|
312
|
|
|
|
-
|
|
|
|
-
|
|
|
|
312
|
|
|
|
-
|
|
|
|
2,209
|
|
|
|
(3,874
|
)
|
|
|
8,796
|
|
Preferred stock
|
|
|
3,344
|
|
|
|
(153
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(153
|
)
|
|
|
-
|
|
|
|
2,779
|
|
|
|
105
|
|
|
|
6,075
|
|
Non-U.S.
governments and agencies
|
|
|
30
|
|
|
|
125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
|
-
|
|
|
|
10
|
|
|
|
600
|
|
|
|
765
|
|
Municipals and money markets
|
|
|
798
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
175
|
|
|
|
(13
|
)
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
22,120
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
4,539
|
|
|
|
(5,651
|
)
|
|
|
20,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
2,307
|
|
|
|
(1,263
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,263
|
)
|
|
|
-
|
|
|
|
(56
|
)
|
|
|
4,815
|
|
|
|
5,803
|
|
Investment securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
22
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
30
|
|
|
|
23
|
|
Corporate debt
|
|
|
146
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
40
|
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
247
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities trading
|
|
|
168
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
180
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities -non- agency MBSs
|
|
|
350
|
|
|
|
-
|
|
|
|
(432
|
)
|
|
|
178
|
|
|
|
(254
|
)
|
|
|
709
|
|
|
|
(2,201
|
)
|
|
|
2,192
|
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
350
|
|
|
|
-
|
|
|
|
(432
|
)
|
|
|
178
|
|
|
|
(254
|
)
|
|
|
709
|
|
|
|
(2,201
|
)
|
|
|
2,192
|
|
|
|
796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,761
|
|
|
|
-
|
|
|
|
568
|
|
|
|
-
|
|
|
|
568
|
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
(7
|
)
|
|
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
3,279
|
|
|
|
(16
|
)
|
|
|
136
|
|
|
|
178
|
|
|
|
298
|
|
|
|
709
|
|
|
|
(2,283
|
)
|
|
|
2,365
|
|
|
|
4,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
359
|
|
|
|
-
|
|
|
|
450
|
|
|
|
53
|
|
|
|
503
|
|
|
|
-
|
|
|
|
(2,646
|
)
|
|
|
5,858
|
|
|
|
4,074
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
348
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
348
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
-
|
|
|
|
-
|
|
|
|
717
|
|
|
|
-
|
|
|
|
717
|
|
|
|
-
|
|
|
|
(340
|
)
|
|
|
1,298
|
|
|
|
241
|
|
Long-term borrowings
|
|
|
7,480
|
|
|
|
(2,032
|
)
|
|
|
(133
|
)
|
|
|
-
|
|
|
|
(2,165
|
)
|
|
|
-
|
|
|
|
(338
|
)
|
|
|
(4,229
|
)
|
|
|
5,078
|
|
|
|
Net losses in principal transactions related to net derivative
contracts were primarily due to the narrowing of credit spreads
during the third quarter of 2009, primarily related to monoline
hedges of mortgage-related positions. Net losses in principal
transactions related to long-term borrowings were primarily due
to the narrowing of Merrill Lynchs credit spreads on
certain equity linked notes.
Increases in purchases, issuances and settlements related to
corporate debt primarily relates to the reclassification of
certain positions from mortgages, mortgage-backed and
asset-backed securities during the third quarter of 2009 in
addition to the recording of assets for which the exposure was
previously recognized as a derivative contract (total return
swap). Increases in purchases, issuances and settlements of
preferred stock were primarily attributable to the purchase of
auction rate securities in the first quarter of 2009. Decreases
in purchases, issuances and settlements related to
available-for-sale
mortgage-backed securities non agency primarily
relates to the sale of certain positions. Decreases in
purchases, issuances and settlements related to loans, notes and
mortgages were due to the sale of certain held for investment
loans associated with the sale of MLBUSA to Bank of America
during the third quarter of 2009. See Note 21.
Net transfers out for mortgages, mortgage-backed and
asset-backed securities primarily relates to increased price
transparency (e.g. trading activity and external vendor quotes)
for certain
32
U.S. ABS CDO underlying collateral types. Net
transfers out for corporate debt primarily relates to the
reclassification in the first quarter of 2009 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 net derivative contracts primarily relates to decreased
price observability for certain underlying U.S. ABS CDOs
and other mortgage positions. Net transfers in for
available-for-sale
mortgage-backed securities non agency is the result
of changes in price transparency. Net transfers in for loans,
notes and mortgages relates to the fair value option election by
Merrill Lynch for certain mortgage, corporate and leveraged
loans as a result of its acquisition by Bank of America. Net
transfers in for other payables interest and other
relates to the fair value option election by Merrill Lynch for
certain loan commitments as a result of its acquisition by Bank
of America. Net transfers out for long-term borrowings were
primarily due to decreases in the significance of unobservable
pricing inputs for certain equity linked notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Predecessor Company
|
|
|
Three Months Ended September 26, 2008
|
|
|
|
|
Total Realized and Unrealized Gains
|
|
Total Realized and
|
|
Purchases,
|
|
|
|
|
|
|
|
|
or (Losses) included in Income
|
|
Unrealized Gains
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Trading assets
|
|
|
20,190
|
|
|
|
303
|
|
|
|
-
|
|
|
|
5
|
|
|
|
308
|
|
|
|
(3,374
|
)
|
|
|
699
|
|
|
|
17,823
|
|
Derivative contracts, net
|
|
|
(1,292
|
)
|
|
|
(8,792
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,792
|
)
|
|
|
13,348
|
|
|
|
436
|
|
|
|
3,700
|
|
Investment securities
|
|
|
4,589
|
|
|
|
(147
|
)
|
|
|
(304
|
)
|
|
|
-
|
|
|
|
(451
|
)
|
|
|
61
|
|
|
|
3
|
|
|
|
4,202
|
|
Loans, notes and mortgages
|
|
|
172
|
|
|
|
(6
|
)
|
|
|
(18
|
)
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
557
|
|
|
|
15
|
|
|
|
721
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
29
|
|
|
|
28
|
|
Short-term borrowings
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
15
|
|
Long-term borrowings
|
|
|
12,749
|
|
|
|
3,788
|
|
|
|
271
|
|
|
|
-
|
|
|
|
4,059
|
|
|
|
(30
|
)
|
|
|
2,875
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 26, 2008
|
|
|
|
|
|
|
|
|
|
|
Total Realized and
|
|
Purchases,
|
|
|
|
|
|
|
|
|
Total Realized and Unrealized Gains or (Losses) included in
Income
|
|
Unrealized Gains
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
84
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(79
|
)
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
Trading assets
|
|
|
9,773
|
|
|
|
(2,744
|
)
|
|
|
-
|
|
|
|
86
|
|
|
|
(2,658
|
)
|
|
|
7,025
|
|
|
|
3,683
|
|
|
|
17,823
|
|
Derivative contracts, net
|
|
|
(9,069
|
)
|
|
|
(9,849
|
)
|
|
|
-
|
|
|
|
5
|
|
|
|
(9,844
|
)
|
|
|
25,467
|
|
|
|
(2,854
|
)
|
|
|
3,700
|
|
Investment securities
|
|
|
5,491
|
|
|
|
(895
|
)
|
|
|
(291
|
)
|
|
|
-
|
|
|
|
(1,186
|
)
|
|
|
159
|
|
|
|
(262
|
)
|
|
|
4,202
|
|
Loans, notes and mortgages
|
|
|
63
|
|
|
|
(6
|
)
|
|
|
(19
|
)
|
|
|
(2
|
)
|
|
|
(27
|
)
|
|
|
676
|
|
|
|
9
|
|
|
|
721
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
29
|
|
|
|
28
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Long-term borrowings
|
|
|
4,765
|
|
|
|
2,171
|
|
|
|
285
|
|
|
|
-
|
|
|
|
2,456
|
|
|
|
1,435
|
|
|
|
7,791
|
|
|
|
11,535
|
|
|
|
33
The following tables provide the portion of gains or losses
included in income for the three and nine months ended
September 30, 2009 and September 26, 2008 attributable
to unrealized gains or losses relating to those Level 3
assets and liabilities held at September 30, 2009 and
September 26, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Unrealized Gains or (Losses) for Level 3 Assets and
Liabilities Still Held
|
|
|
Successor Company
|
|
|
Three Months Ended Sept. 30, 2009
|
|
Nine Months Ended Sept. 30, 2009
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
(36
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(36
|
)
|
|
$
|
(58
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(58
|
)
|
Mortgages, mortgage-backed and asset-backed
|
|
|
99
|
|
|
|
-
|
|
|
|
-
|
|
|
|
99
|
|
|
|
(238
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(238
|
)
|
Corporate debt
|
|
|
409
|
|
|
|
-
|
|
|
|
-
|
|
|
|
409
|
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
Preferred stock
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
(153
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(153
|
)
|
Non-U.S.
governments and agencies
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
|
|
125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
Municipals and money markets
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
576
|
|
|
|
-
|
|
|
|
-
|
|
|
|
576
|
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
(1,365
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,365
|
)
|
|
|
(1,281
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,281
|
)
|
Investment securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
Corporate debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities trading
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
non-agency
MBSs
|
|
|
-
|
|
|
|
(177
|
)
|
|
|
-
|
|
|
|
(177
|
)
|
|
|
-
|
|
|
|
(241
|
)
|
|
|
178
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
-
|
|
|
|
(177
|
)
|
|
|
-
|
|
|
|
(177
|
)
|
|
|
-
|
|
|
|
(241
|
)
|
|
|
178
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
-
|
|
|
|
438
|
|
|
|
-
|
|
|
|
438
|
|
|
|
-
|
|
|
|
586
|
|
|
|
-
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
2
|
|
|
|
261
|
|
|
|
-
|
|
|
|
263
|
|
|
|
(18
|
)
|
|
|
345
|
|
|
|
178
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
555
|
|
|
|
-
|
|
|
|
555
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
717
|
|
|
|
-
|
|
|
|
717
|
|
Long-term borrowings
|
|
|
(484
|
)
|
|
|
(93
|
)
|
|
|
-
|
|
|
|
(577
|
)
|
|
|
(2,266
|
)
|
|
|
(133
|
)
|
|
|
-
|
|
|
|
(2,399
|
)
|
|
|
Net losses in principal transactions related to net derivative
contracts were primarily due to the narrowing of credit spreads,
primarily related to monoline hedges of mortgage-related
positions. Net losses in principal transactions related to
long-term borrowings were primarily due to the narrowing of
Merrill Lynchs credit spreads on certain equity linked
notes.
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Unrealized Gains or (Losses) for Level 3 Assets and
Liabilities Still Held
|
|
|
Predecessor Company
|
|
|
Three Months Ended September 26, 2008
|
|
Nine Months Ended September 26, 2008
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Trading assets
|
|
|
293
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
264
|
|
|
|
(2,753
|
)
|
|
|
-
|
|
|
|
74
|
|
|
|
(2,679
|
)
|
Derivative contracts, net
|
|
|
(3,979
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,979
|
)
|
|
|
2,611
|
|
|
|
-
|
|
|
|
5
|
|
|
|
2,616
|
|
Investment securities
|
|
|
(102
|
)
|
|
|
(304
|
)
|
|
|
-
|
|
|
|
(406
|
)
|
|
|
(822
|
)
|
|
|
(295
|
)
|
|
|
-
|
|
|
|
(1,117
|
)
|
Loans, notes, and mortgages
|
|
|
(6
|
)
|
|
|
(15
|
)
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
(2
|
)
|
|
|
(17
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
3,811
|
|
|
|
271
|
|
|
|
-
|
|
|
|
4,082
|
|
|
|
2,236
|
|
|
|
285
|
|
|
|
-
|
|
|
|
2,521
|
|
|
|
Non-recurring
Fair Value
Certain assets and liabilities are measured at fair value on a
non-recurring basis and are not included in the tables above.
These assets and liabilities primarily include loans and loan
commitments held for sale and reported at lower of cost or fair
value and loans held for investment that were initially measured
at cost and have been written down to fair value as a result of
an impairment. The following table shows the fair value
hierarchy for those assets and liabilities measured at fair
value on a non-recurring basis as of September 30, 2009 and
December 26, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Non-Recurring Basis
|
|
Gains/(Losses)
|
|
Gains/(Losses)
|
|
|
Successor Company
|
|
Three Months
|
|
Nine Months
|
|
|
as of September 30, 2009
|
|
Ended
|
|
Ended
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Sept. 30, 2009
|
|
Sept. 30, 2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
$
|
-
|
|
|
$
|
941
|
|
|
$
|
2,865
|
|
|
$
|
3,806
|
|
|
$
|
111
|
|
|
$
|
90
|
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
|
|
135
|
|
|
|
(61
|
)
|
|
|
(121
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
56
|
|
|
|
(1
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Non-Recurring Basis
|
|
|
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 September 30, 2009
and December 26, 2008, respectively. 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
35
September 30, 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. 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 Election
The fair value option election 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. The fair
value option election is permitted 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 Investment Accounting and Derivatives
Accounting, 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 election has been made.
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 election has been made, are included for the three and
nine months ended September 30, 2009 and September 26,
2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Successor Company
|
|
|
Changes in Fair Value for Items Measured at Fair Value
Pursuant to the Fair Value Option Election
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30, 2009
|
|
September 30, 2009
|
|
|
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
|
|
$
|
(9
|
)
|
|
$
|
-
|
|
|
$
|
(9
|
)
|
|
$
|
(330
|
)
|
|
$
|
-
|
|
|
$
|
(330
|
)
|
Investment securities
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
379
|
|
|
|
(148
|
)
|
|
|
231
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
(37
|
)
|
|
|
(37
|
)
|
|
|
-
|
|
|
|
601
|
|
|
|
601
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
186
|
|
|
|
-
|
|
|
|
186
|
|
Short-term borrowings
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
|
|
(226
|
)
|
|
|
6
|
|
|
|
(220
|
)
|
Other payables interest and other
|
|
|
-
|
|
|
|
48
|
|
|
|
48
|
|
|
|
-
|
|
|
|
729
|
|
|
|
729
|
|
Long-term
borrowings(1)
|
|
|
(3,438
|
)
|
|
|
11
|
|
|
|
(3,427
|
)
|
|
|
(7,195
|
)
|
|
|
(29
|
)
|
|
|
(7,224
|
)
|
|
|
|
|
|
(1) |
|
Other revenues primarily
represent fair value changes on non-recourse long-term
borrowings issued by consolidated SPEs. |
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Predecessor Company
|
|
|
Changes in Fair Value for Items Measured at Fair Value
Pursuant to the Fair Value Option Election
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 26, 2008
|
|
September 26, 2008
|
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
|
Principal
|
|
Other
|
|
in Fair
|
|
Principal
|
|
Other
|
|
in Fair
|
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
139
|
|
|
$
|
-
|
|
|
$
|
139
|
|
|
$
|
(70
|
)
|
|
$
|
-
|
|
|
$
|
(70
|
)
|
Investment securities
|
|
|
(588
|
)
|
|
|
(212
|
)
|
|
|
(800
|
)
|
|
|
(671
|
)
|
|
|
(251
|
)
|
|
|
(922
|
)
|
Loans, notes and mortgages
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
(37
|
)
|
|
|
12
|
|
|
|
(25
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
(52
|
)
|
|
|
-
|
|
|
|
(52
|
)
|
Short-term borrowings
|
|
|
(367
|
)
|
|
|
-
|
|
|
|
(367
|
)
|
|
|
(185
|
)
|
|
|
-
|
|
|
|
(185
|
)
|
Long-term
borrowings(1)
|
|
|
8,632
|
|
|
|
846
|
|
|
|
9,478
|
|
|
|
12,578
|
|
|
|
1,715
|
|
|
|
14,293
|
|
|
|
|
|
|
(1) |
|
Other revenues primarily
represent fair value changes on non-recourse long-term
borrowings issued by consolidated SPEs. |
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 made the fair value option election 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.
Loans,
notes and mortgages and loan commitments:
Merrill Lynch made the fair value option election 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 made the fair value option
election for certain mortgage, corporate, 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 election was made that was attributable to changes
in borrower-specific credit risk were gains of $70 million
for the three months ended September 30, 2009 and gains of
$320 million for the nine months ended September 30,
2009. The change in the fair value of loans, notes and mortgages
for which the fair value option election was made that was
attributable to changes in borrower-specific credit risk was not
material for the three and nine months ended September 26,
2008.
For those loans, notes and mortgages for which the fair value
option election has been made, 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.
37
Short-term
and long-term borrowings:
Merrill Lynch made the fair value option election 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 Derivatives Accounting 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. Excluding losses
for the three and nine months ended September 30, 2009 and
gains for the three and nine months ended September 26,
2008 related to changes in Merrill Lynchs credit spreads,
the majority of (losses)/gains for the respective periods are
offset by gains/(losses) on derivatives that economically hedge
these borrowings and that are accounted for at fair value under
Derivatives Accounting. The changes in the fair value of
liabilities for which the fair value option election was made
that were attributable to changes in Merrill Lynch credit
spreads were losses of approximately $2.1 billion and
$3.5 billion for the three and nine months ended
September 30, 2009 and gains of $2.8 billion and
$5.0 billion for the three and nine months ended
September 26, 2008. 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 election was also made 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, loans, notes, and mortgages and
long-term borrowings for which the fair value option election
has been made as of September 30, 2009 and
December 26, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Successor Company
|
|
|
|
|
Principal
|
|
|
|
|
Fair Value
|
|
Amount
|
|
|
|
|
at
|
|
Due Upon
|
|
|
|
|
September 30,
2009
|
|
Maturity
|
|
Difference
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
52,436
|
|
|
$
|
52,083
|
|
|
$
|
353
|
|
Loans, notes and mortgages
|
|
|
4,765
|
|
|
|
9,127
|
|
|
|
(4,362
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings(1)
|
|
|
48,847
|
|
|
|
55,604
|
|
|
|
(6,757
|
)
|
|
|
|
|
|
(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. |
38
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Predecessor Company
|
|
|
|
|
Principal
|
|
|
|
|
Fair Value
|
|
Amount
|
|
|
|
|
at
|
|
Due Upon
|
|
|
|
|
December 26,
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 September 30, 2009, Merrill Lynch had sizeable exposure
to the mortgage market through securities, derivatives, loans
and loan commitments. This exposure primarily related to:
|
|
|
Net exposures of $33.3 billion in U.S. Prime
residential mortgage-related positions and $2.6 billion in
other residential mortgage-related positions, excluding Merrill
Lynchs investment securities portfolio; and
|
|
|
Net exposure of $5.9 billion in commercial real estate
related positions, excluding First Republic, and
$5.3 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 $4.5 billion at September 30, 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.
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 September 30, 2009, the
carrying value of our hedges with financial guarantors related
to U.S. super senior ABS CDOs was $1.0 billion.
39
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 September 30, 2009, the carrying
value of our hedges with financial guarantors related to these
types of exposures was $4.2 billion.
Disclosure is required on an interim and annual basis of the
estimated fair value of financial instruments, including those
financial instruments for which Merrill Lynch did not make the
fair value option election. The fair values of such instruments
have been derived, in part, by managements assumptions,
the estimated amount and timing of future cash flows and
estimated discount rates. Different assumptions could
significantly affect these estimated fair values. Accordingly,
the net realizable values could be materially different from the
estimates presented below. In addition, the estimates are only
indicative of the value of individual financial instruments and
should not be considered an indication of the fair value of
Merrill Lynch.
Disclosure of the fair value of lease financing arrangements and
nonfinancial instruments, including goodwill and intangible
assets, is not required.
The following disclosures represent financial instruments for
which the ending balances at September 30, 2009 are not
carried at fair value in their entirety on Merrill Lynchs
Condensed Consolidated Balance Sheets.
Short-term
Financial Instruments
The carrying value of short-term financial instruments,
including cash and cash equivalents, certain securities
financing transactions, customer and broker-dealer receivables
and payables, and commercial paper and other short-term
borrowings, approximates the fair value of these instruments.
These financial instruments generally expose Merrill Lynch to
limited credit risk and have no stated maturities or have
short-term maturities and carry interest rates that approximate
market. Merrill Lynch applied the fair value option election for
certain securities financing transactions.
Loans,
Notes and Mortgages
Fair values were generally determined by discounting both
principal and interest 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. Merrill Lynch estimates the
cash flows expected to be collected using internal credit risk,
interest rate and prepayment risk models that incorporate
managements best estimate of current key assumptions, such
as default rates, loss severity and prepayment speeds for the
life of the loan. Merrill Lynch made the fair value option
election for certain loans and loan commitments. See Note 4
for additional information on loans for which Merrill Lynch made
the fair value option election.
Deposits
The fair value for certain deposits with stated maturities was
calculated by discounting contractual cash flows using current
market rates for instruments with similar maturities. For
deposits with no stated maturities, the carrying amount was
considered to approximate fair value and does not take into
40
account the significant value of the cost advantage and
stability of Merrill Lynchs long-term relationships with
depositors.
Long-term
Borrowings
Merrill Lynch uses quoted market prices for its long-term
borrowings when available. When quoted market prices are not
available, fair value is estimated based on current market
interest rates and credit spreads for debt with similar
maturities. Merrill Lynch made the fair value option election
for certain long-term borrowings, including structured notes,
for which hedge accounting had been difficult to obtain. See
Note 4 for additional information.
The book and fair values of certain financial instruments at
September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Successor Company
|
|
|
September 30, 2009
|
|
|
Book Value
|
|
Fair Value
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
Loans, notes and
mortgages(1)
|
|
$
|
67,729
|
|
|
$
|
66,301
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
47,819
|
|
|
|
47,872
|
|
Long-term
borrowings(2)
|
|
|
164,990
|
|
|
|
171,061
|
|
|
|
|
|
|
(1) |
|
Loans are presented net of
allowance for loan losses and exclude leases. The fair value is
determined based on the present value of future cash flows using
credit spreads or risk adjusted rates of return that a buyer of
the portfolio would require. Merrill Lynch expects to collect
the principal cash flows underlying the book values as well as
the related interest cash flows. |
(2) |
|
Includes junior subordinated
notes (related to trust preferred securities). |
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).
Derivatives Accounting establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts
(embedded derivatives) and for hedging activities.
Derivatives Accounting 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
Derivatives Accounting.
41
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.
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 Derivatives Accounting 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.
|
42
|
|
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 OCI 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 OCI and recorded in
principal transactions when the forecasted purchase or sale of
the commodity occurs.
|
|
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
OCI. Changes in the fair value of the hedge instruments that are
associated with the difference between the spot rate and the
contracted forward 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 three and nine months ended
September 30, 2009 included the following:
Fair
value hedges of interest rate risk on long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Account location
|
|
September 30,
2009
|
|
September 30, 2009
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Interest expense
|
|
$
|
944
|
|
|
$
|
(1,581
|
)
|
Gain/(loss) recognized in income on the long-term borrowing
|
|
Interest expense
|
|
$
|
(1,156
|
)
|
|
$
|
981
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Interest expense
|
|
$
|
(212
|
)
|
|
$
|
(600
|
)
|
Carrying value of hedging derivatives as of September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
4,678
|
|
|
$
|
4,678
|
|
|
|
Trading liabilities
|
|
$
|
60
|
|
|
$
|
60
|
|
Notional amount of hedging derivatives as of September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
59,845
|
|
|
$
|
59,845
|
|
in a liability position
|
|
|
|
$
|
2,480
|
|
|
$
|
2,480
|
|
|
|
43
Fair
value hedges of commodity price risk on commodity
inventory
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Account location
|
|
September 30,
2009
|
|
September 30,
2009
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Principal transactions
|
|
$
|
3
|
|
|
$
|
63
|
|
Gain/(loss) recognized in income on the commodity inventory
|
|
Principal transactions
|
|
$
|
(2
|
)
|
|
$
|
(59
|
)
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
$
|
1
|
|
|
$
|
4
|
|
Carrying value of hedging derivatives as of September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
57
|
|
|
$
|
57
|
|
|
|
Trading liabilities
|
|
$
|
6
|
|
|
$
|
6
|
|
Notional amount of hedging derivatives as of September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
163
|
|
|
$
|
163
|
|
in a liability position
|
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
|
Cash
flow hedges of commodity price risk on forecasted purchases and
sales
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Account location
|
|
September 30,
2009
|
|
September 30,
2009
|
|
|
Gain/(loss) on the derivative deferred in equity
|
|
Accumulated other
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
$
|
(4
|
)
|
|
$
|
64
|
|
Gain/(loss) reclassified into earnings in the current period
|
|
Principal transactions
|
|
$
|
53
|
|
|
$
|
59
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Amount that is expected to be reclassified into earnings in the
next 12 months as of September 30, 2009
|
|
Principal transactions
|
|
$
|
5
|
|
|
$
|
5
|
|
Carrying value of hedging derivatives as of September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
Trading liabilities
|
|
$
|
8
|
|
|
$
|
8
|
|
Notional amount of hedging derivatives as of September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
101
|
|
|
$
|
101
|
|
in a liability position
|
|
|
|
$
|
67
|
|
|
$
|
67
|
|
|
|
44
Net
investment hedges of foreign operations
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Account location
|
|
September 30,
2009
|
|
September 30, 2009
|
|
|
Gain/(loss) on the derivative and non-derivative hedges deferred
in equity
|
|
Accumulated other
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
$
|
(421
|
)
|
|
$
|
(1,682
|
)
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Other revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain/(loss) recognized in income from the unused portion (time
value) of the hedging derivative
|
|
Other revenue
|
|
$
|
(6
|
)
|
|
$
|
(98
|
)
|
Carrying value of hedging derivatives as of September 30,
2009
|
|
Trading assets
|
|
$
|
362
|
|
|
$
|
362
|
|
|
|
Trading liabilities
|
|
$
|
398
|
|
|
$
|
398
|
|
Carrying value of non-derivative hedges as of September 30,
2009
|
|
Long-term borrowings
|
|
$
|
609
|
|
|
$
|
609
|
|
Notional amount of hedging derivatives as of September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
11,058
|
|
|
$
|
11,058
|
|
in a liability position
|
|
|
|
$
|
11,266
|
|
|
$
|
11,266
|
|
|
|
Gains/(losses)
on non-trading derivatives not in hedge
relationships
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Account location
|
|
September 30,
2009
|
|
September 30,
2009
|
|
|
Interest rate risk
|
|
Interest expense
|
|
$
|
124
|
|
|
$
|
(594
|
)
|
Foreign currency risk
|
|
Other revenue
|
|
|
1,944
|
|
|
|
484
|
|
Credit risk
|
|
Other revenue
|
|
|
(218
|
)
|
|
|
(370
|
)
|
|
|
The above amounts represent net gains/(losses) on derivatives
that are not used for trading purposes and are not used in
hedging relationships. Interest rate risk primarily relates to
derivatives used to hedge long-term debt where hedge accounting
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 ASC
830-20
Foreign Currency Transactions (Foreign Currency
Transactions). 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.
45
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 September 30, 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
|
|
$
|
12,319,763
|
|
|
$
|
582,168
|
|
|
$
|
11,215,975
|
|
|
$
|
571,174
|
|
Futures and forwards
|
|
|
1,635,948
|
|
|
|
3,050
|
|
|
|
1,651,469
|
|
|
|
3,335
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,398,659
|
|
|
|
51,393
|
|
Purchased options
|
|
|
1,214,564
|
|
|
|
51,208
|
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
104,920
|
|
|
|
14,289
|
|
|
|
113,462
|
|
|
|
14,939
|
|
Spot, futures and forwards
|
|
|
315,051
|
|
|
|
13,314
|
|
|
|
292,323
|
|
|
|
11,935
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
292,876
|
|
|
|
12,760
|
|
Purchased options
|
|
|
304,853
|
|
|
|
12,821
|
|
|
|
-
|
|
|
|
-
|
|
Equity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
16,557
|
|
|
|
1,233
|
|
|
|
14,486
|
|
|
|
1,618
|
|
Futures and forwards
|
|
|
51,890
|
|
|
|
4,510
|
|
|
|
48,241
|
|
|
|
3,569
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
333,942
|
|
|
|
25,710
|
|
Purchased options
|
|
|
290,647
|
|
|
|
22,954
|
|
|
|
-
|
|
|
|
-
|
|
Commodity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
40,637
|
|
|
|
8,894
|
|
|
|
36,459
|
|
|
|
8,260
|
|
Futures and forwards
|
|
|
1,029,546
|
|
|
|
14,817
|
|
|
|
1,062,483
|
|
|
|
13,567
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
96,850
|
|
|
|
6,350
|
|
Purchased options
|
|
|
94,897
|
|
|
|
5,994
|
|
|
|
-
|
|
|
|
-
|
|
Credit derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased protection:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
|
1,211,026
|
|
|
|
87,250
|
|
|
|
603,170
|
|
|
|
24,229
|
|
Total return swaps
|
|
|
2,534
|
|
|
|
352
|
|
|
|
2,092
|
|
|
|
372
|
|
Other Credit Derivatives
|
|
|
5,547
|
|
|
|
52
|
|
|
|
-
|
|
|
|
-
|
|
Written protection:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
|
599,394
|
|
|
|
23,274
|
|
|
|
1,318,012
|
|
|
|
90,273
|
|
Total return swaps
|
|
|
2,613
|
|
|
|
1,884
|
|
|
|
11,870
|
|
|
|
4,491
|
|
Other Credit Derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
5,267
|
|
|
|
89
|
|
|
|
Gross derivative assets/liabilities
|
|
$
|
19,240,387
|
|
|
$
|
848,064
|
|
|
$
|
18,497,636
|
|
|
$
|
844,064
|
|
Less: Legally enforceable master netting
|
|
|
|
|
|
|
(759,009
|
)
|
|
|
|
|
|
|
(759,009
|
)
|
|
|
Less: Cash collateral applied
|
|
|
|
|
|
|
(30,865
|
)
|
|
|
|
|
|
|
(43,615
|
)
|
|
|
Total derivative assets and liabilities
|
|
|
|
|
|
$
|
58,190
|
|
|
|
|
|
|
$
|
41,440
|
|
|
|
|
|
|
(1) |
|
These amounts include trading
derivatives, non-trading derivatives and bifurcated embedded
derivatives. |
46
Trading
revenues
Merrill Lynch enters into trading derivatives and non-derivative
cash instruments to facilitate client transactions, for
proprietary trading and financing 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 and non-trading activities including both derivatives
and non-derivative cash instruments categorized by primary risk
for the three and nine months ended September 30, 2009.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
For the Three Months
|
|
Principal
|
|
|
|
Other
|
|
Net Interest
|
|
|
Ended Sept. 30, 2009
|
|
Transactions
|
|
Commissions
|
|
Revenues(1)
|
|
Profit/(Loss)
|
|
Total
|
|
|
Interest Rate Risk
|
|
$
|
321
|
|
|
$
|
16
|
|
|
$
|
5
|
|
|
$
|
109
|
|
|
$
|
451
|
|
Foreign Exchange Risk
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
26
|
|
Equity Risk
|
|
|
567
|
|
|
|
781
|
|
|
|
34
|
|
|
|
188
|
|
|
|
1,570
|
|
Commodity Risk
|
|
|
146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
110
|
|
Credit Risk
|
|
|
1,494
|
|
|
|
15
|
|
|
|
218
|
|
|
|
326
|
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading related
|
|
|
2,536
|
|
|
|
812
|
|
|
|
257
|
|
|
|
605
|
|
|
|
4,210
|
|
Non-trading related
|
|
|
(2,322
|
)
|
|
|
504
|
|
|
|
1,095
|
|
|
|
(327
|
)
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
214
|
|
|
$
|
1,316
|
|
|
$
|
1,352
|
|
|
$
|
278
|
|
|
$
|
3,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
For the Nine Months
|
|
Principal
|
|
|
|
Other
|
|
Net Interest
|
|
|
Ended Sept. 30, 2009
|
|
Transactions
|
|
Commissions
|
|
Revenues(1)
|
|
Profit/(Loss)
|
|
Total
|
|
|
Interest Rate Risk
|
|
$
|
1,435
|
|
|
$
|
47
|
|
|
$
|
17
|
|
|
$
|
445
|
|
|
$
|
1,944
|
|
Foreign Exchange Risk
|
|
|
271
|
|
|
|
-
|
|
|
|
1
|
|
|
|
12
|
|
|
|
284
|
|
Equity Risk
|
|
|
2,248
|
|
|
|
2,522
|
|
|
|
63
|
|
|
|
(378
|
)
|
|
|
4,455
|
|
Commodity Risk
|
|
|
762
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(132
|
)
|
|
|
630
|
|
Credit Risk
|
|
|
3,445
|
|
|
|
45
|
|
|
|
441
|
|
|
|
1,071
|
|
|
|
5,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading related
|
|
|
8,161
|
|
|
|
2,614
|
|
|
|
522
|
|
|
|
1,018
|
|
|
|
12,315
|
|
Non-trading related
|
|
|
(4,114
|
)
|
|
|
1,435
|
|
|
|
1,873
|
|
|
|
(344
|
)
|
|
|
(1,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,047
|
|
|
$
|
4,049
|
|
|
$
|
2,395
|
|
|
$
|
674
|
|
|
$
|
11,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other income and
other-than-temporary impairment losses on
available-for-sale
debt securities. |
Derivatives
as guarantees
Merrill Lynch enters into certain derivative contracts that meet
the definition of a guarantee under ASC 460, Guarantees
(Guarantees Accounting). Guarantees are defined
to include derivative contracts that contingently require a
guarantor to make payment to a guaranteed party based on
47
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
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.
Merrill Lynchs derivatives that act as guarantees at
September 30, 2009 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Payout/
|
|
Less than
|
|
|
|
|
|
|
|
Carrying
|
|
|
Notional
|
|
1 year
|
|
1+
- 3 years
|
|
3+
- 5 years
|
|
Over 5 years
|
|
Value(1)
|
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|