UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission file number: 1-7182

 

MERRILL LYNCH & CO., INC.

(Exact name of Registrant as specified in its charter)

 

 

 

See the full list of securities listed on the NYSE Arca and The NASDAQ Stock Market on the pages directly following this cover.

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

X     YES             NO

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

 

       YES      X     NO

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

X     YES             NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

       YES             NO

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     X

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

       YES      X     NO

 

As of the close of business on June 30, 2009, there was no voting common equity held by non-affiliates. The company has no non-voting common stock.

 

As of the close of business on March 8, 2010, there were 1,000 shares of Common Stock outstanding, all of which were held by Bank of America Corporation.

 

The registrant is a wholly owned subsidiary of Bank of America Corporation and meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form with a reduced disclosure format as permitted by Instruction I (2).

 

Securities registered pursuant to Section 12(b) of the Act and listed on the NYSE Arca are as follows:

Accelerated Return Bear Market Notes

Accelerated Return Bear Market Notes Linked to the S&P 500^® Index due January 21, 2010

Accelerated Return Bear Market Notes Linked to the S&P 500^® Index due January 29, 2010

Accelerated Return Notes^®

Accelerated Return Notes Linked to the S&P 500^® Index due January 21, 2010

Accelerated Return Notes Linked to the Consumer Staples Select Sector Index due January 29, 2010

Accelerated Return Notes Linked to the MSCI^® EAFE^® Index due January 29, 2010

Accelerated Return Notes Linked to the S&P 500^® Index due January 29, 2010

Bear Market Strategic Accelerated Redemption Securities^®

Bear Market Strategic Accelerated Redemption Securities Linked to the SPDR^® S&P^® Retail Exchange Traded Fund due May 4, 2010

Bear Market Strategic Accelerated Redemption Securities Linked to the iShares^® Dow Jones^® U.S. Real Estate Index Fund due June 2, 2010

Callable Stock Return Income Debt Securities^® (STRIDES^®)

11% Callable STRIDES Due February 8, 2010 (payable on the stated maturity date with The Home Depot, Inc. common stock)

9% Callable STRIDES Due March 1, 2010 (payable on the stated maturity date with Google Inc. common stock)

12% Callable STRIDES due March 26, 2010 (payable on the stated maturity date with Monsanto Company common stock)

9.25% Callable STRIDES due September 1, 2010 (payable on the maturity date with Oracle Corporation common stock)

Capped Leveraged Index Return Notes^®

Capped Leveraged Index Return Notes Linked to the MSCI Brazil Index^sm due January 20, 2010

Capped Leveraged Index Return Notes Linked to the Russell 2000^® Index due January 20, 2010

Capped Leveraged Index Return Notes Linked to the MSCI Emerging Markets Index^sm due January 29, 2010

Capped Leveraged Index Return Notes Linked to the S&P 500^® Index due February 26, 2010

Capped Leverage Index Return Notes Linked to the S&P 500^® Index due April 5, 2010

Capped Leveraged Index Return Notes Linked to the S&P 500^® Index due April 30, 2010

Capped Leveraged Index Return Notes Linked to the S&P 500^® Index due May 28, 2010

Strategic Accelerated Redemption Securities^®

Strategic Accelerated Redemption Securities Linked to the S&P 500^® Index due March 8, 2010

Strategic Accelerated Redemption Securities Linked to the Dow Jones Industrial Average^sm Due April 2, 2010

Strategic Accelerated Redemption Securities Linked to the Russell 2000^® Index Due April 2, 2010

Strategic Accelerated Redemption Securities Linked to the S&P 500^® Index Due May 4, 2010

Strategic Accelerated Redemption Securities Linked to the S&P 500^® Index Due June 25, 2010

Strategic Accelerated Redemption Securities Linked to the Dow Jones Industrial Average^sm due July 7, 2010

Strategic Accelerated Redemption Securities Linked to the S&P 500^® Index Due August 3, 2010

Strategic Accelerated Redemption Securities Linked to the Dow Jones Industrial Average^sm due August 31, 2010

Strategic Accelerated Redemption Securities Linked to the S&P 500^® Index due October 5, 2010

Strategic Accelerated Redemption Securities Linked to the iShares^® MSCI^® EAFE^® Index due October 5, 2010

Market Index Target-Term Securities^® (MITTS^®)

Nikkei^® 225 MITTS due April 5, 2010

Dow Jones EURO STOXX 50^SM Index MITTS due June 28, 2010

Monthly Income Strategic Return Notes^®

8% Monthly Income Strategic Return Notes Linked to the CBOE^® S&P 500^® BuyWrite Index due January 3, 2011

8% Monthly Income Strategic Return Notes Linked to the CBOE^® S&P 500^® BuyWrite Index due June 7, 2010

8% Monthly Income Strategic Return Notes Linked to the CBOE^® DJIA^® BuyWrite Index due November 9, 2010

Strategic Return Notes^®

Strategic Return Notes Linked to the Industrial 15 Index due February 2, 2012

Strategic Return Notes Linked to the Select Ten Index due March 8, 2012

Strategic Return Notes Linked to the Select Ten Index due May 10, 2012

Strategic Return Notes Linked to the Select 10 Index due July 5, 2012

Strategic Return Notes Linked to the Value 30 Index due July 6, 2011

Strategic Return Notes Linked to the Value 30 Index due August 8, 2011

Strategic Return Notes Linked to the Industrial 15 Index due August 9, 2010

Strategic Return Notes Linked to the Baby Boomer Consumption Index due September 6, 2011

Strategic Return Notes Linked to the Merrill Lynch Factor Model^® due November 7, 2012;

Strategic Return Notes Linked to the Select Ten Index due November 8, 2011

Strategic Return Notes Linked to the Merrill Lynch Factor Model^® due December 6, 2012

Securities registered pursuant to Section 12(b) of the Act and listed on The NASDAQ Stock Market are as follows:

MITTS

Nikkei^®225 MITTS Securities due March 8, 2011

S&P 500^® MITTS Securities due June 3, 2010

S&P 500^® MITTS due June 7, 2010

S&P 500^® MITTS Securities due August 5, 2010

S&P 500 ^®MITTS Securities due August 31, 2011

Nikkei^® 225 MITTS Securities due September 30, 2010

Dow Jones Industrial Average ^SM MITTS Securities due December 27, 2010

97% Protected Notes

97% Protected Notes Linked to the performance of the Dow Jones Industrial Average ^SM due March 28, 2011

97% Protected Notes Linked to Global Equity Basket due February 14, 2012

Strategic Return Notes

Strategic Return Notes Linked to the Industrial 15 Index due April 25, 2011

 

S&P, SPDR, and S&P 500 are registered service marks of Standard & Poor’s Financial Services LLC; EAFE, MSCI, MSCI Brazil Index, and MSCI Emerging Markets Index are service marks of MSCI Inc.; Dow Jones, DJIA and DOW JONES INDUSTRIAL AVERAGE are service marks of Dow Jones & Company, Inc.; RUSSELL 2000 is a registered service mark of FRANK RUSSELL COMPANY; EURO STOXX 50 is a registered service mark of Stoxx Limited; NIKKEI is a registered service mark of KABUSHIKI KAISHA NIHON KEIZAI SHIMBUN SHA. iShares is a registered service mark of Blackrock Institutional Trust Company, National Association. CBOE is a registered service mark of Chicago Board Options Exchange, Incorporated. All other service marks are the property of Bank of America Corporation.

 

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS

 

 

 

 

Merrill Lynch was formed in 1914 and became a publicly traded company on June 23, 1971. In 1973, we created the holding company, ML & Co., a Delaware corporation that, through its subsidiaries, engages in capital markets, advisory and wealth and investment management activities. In addition, as of December 31, 2009, we owned approximately 34% of the economic interest of BlackRock, Inc. (“BlackRock”), a publicly traded investment management company with approximately $3.3 trillion in assets under management at December 31, 2009.

 

On January 1, 2009, we became a wholly-owned subsidiary of Bank of America Corporation (“Bank of America”). On the same date, we adopted calendar quarter-end and year-end reporting periods to coincide with those of Bank of America.

 

As a result of the acquisition of Merrill Lynch by Bank of America, certain information is not required in this Form 10-K as permitted by general Instruction I(2) of Form 10-K. We have also provided a brief description of our business activities in Item 1 as permitted by general Instruction I(2).

 

In connection with our acquisition by Bank of America, we evaluated the provisions of Accounting Standards Codification (“ASC”) 280, Segment Reporting (“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 our results, it was determined that Merrill Lynch does not contain any identifiable operating segments. As a result, the financial information of Merrill Lynch is presented as a single segment.

 

The following is a brief discussion of the nature and scope of our activities in 2009.

 

Capital Markets and Advisory Activities.  We conduct sales and trading activities for our clients and on a proprietary basis. We act as a market maker in securities, derivatives, currencies, and other financial instruments to satisfy client demands. In addition, we distribute fixed income, currency and energy commodity products and derivatives and equity and equity-related products. We provide clients with financing, securities clearing, settlement, and custody services and engage in principal investing in a variety of asset classes.

 

We also assist clients in raising capital through underwritings and private placements of equity, debt and related securities, and loan syndications and offer advisory services to clients on strategic issues, valuation, mergers, acquisitions and restructurings.

 

Wealth and Investment Management Activities.  We provide brokerage, investment advisory and financial planning services, offering a broad range of both proprietary and third-party wealth management products and services globally to individuals, small- to mid-size businesses, and employee benefit plans. We also create and manage wealth management products, including alternative investment products for clients, and maintain ownership positions in other investment management companies, including BlackRock.

 

Research.  We also provide a variety of research services on a global basis. These services are at the core of the value proposition we offer to institutional and individual investor clients and are an integral component of our product offerings.

 

Regulation

 

Certain aspects of our business, and the business of our competitors and the financial services industry in general, are subject to stringent regulation by U.S. federal and state regulatory agencies and securities exchanges and by various non-U.S. government agencies or regulatory bodies, securities

exchanges, self-regulatory organizations, and central banks, each of which has been charged with the protection of the financial markets and the interests of those participating in those markets.

 

United States Regulatory Oversight and Supervision

 

Holding Company Supervision

 

As a wholly-owned subsidiary of Bank of America, a bank holding company that is also a financial holding company, we are subject to the oversight of, and inspection by, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”).

 

Broker-Dealer Regulation

 

Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), Merrill Lynch Professional Clearing Corp. (“ML Pro”) and certain other subsidiaries of ML & Co. are registered as broker-dealers with the Securities Exchange Commission (“SEC”) and, as such, are subject to regulation by the SEC and by self-regulatory organizations, such as the Financial Industry Regulatory Authority (“FINRA”). Certain of our subsidiaries and affiliates, including MLPF&S, are registered as investment advisers with the SEC.

 

Our subsidiaries that are broker-dealers registered with the SEC are subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (“Exchange Act”) which is designed to measure the general financial condition and liquidity of a broker-dealer. Under this rule, these entities are required to maintain the minimum net capital deemed necessary to meet broker-dealers’ continuing commitments to customers and others. Under certain circumstances, this rule limits the ability of such broker-dealers to allow withdrawal of such capital by ML & Co. or other Merrill Lynch subsidiaries. Additional information regarding certain net capital requirements is set forth in Note 18 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

Non-U.S. Regulatory Oversight and Supervision

 

Our business is also subject to extensive regulation by various non-U.S. regulators including governments, securities exchanges, central banks and regulatory bodies. Certain of our subsidiaries are regulated as broker-dealers under the laws of the jurisdictions in which they operate. Subsidiaries engaged in banking and trust activities outside the United States (“U.S.”) are regulated by various government entities in the particular jurisdiction where they are chartered, incorporated and/or conduct their business activities. In some cases, the legislative and regulatory developments outside the U.S. applicable to these subsidiaries may have an impact.

 

 

In the course of conducting our business operations, we are exposed to a variety of risks that are inherent to the financial services industry. The following discusses some of the key inherent risk factors that could affect our business and operations, as well as other risk factors which are particularly relevant to us in the current period of significant economic and market disruption. Other factors besides those discussed below or elsewhere in this report could also adversely affect our business and operations, and these risk factors should not be considered a complete list of potential risks that may affect us.

 

Our businesses and earnings have been, and may continue to be, negatively affected by adverse business and economic conditions.  Our businesses and earnings are affected by general business and economic conditions in the U.S. and abroad. General business and economic conditions that could affect us include the level and volatility of short-term and long-term interest rates, fluctuations in both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor confidence, and the strength of the U.S. economy and the other economies in which

we operate. The deterioration of any of these conditions could adversely affect the value of our assets, as well as our results of operations.

 

Economic conditions in the U.S. and abroad deteriorated significantly in 2008 and to a lesser extent in 2009. While there are early indications that these conditions are stabilizing, we do not expect them to significantly improve in the near future. A protracted continuation or worsening of these difficult business or economic conditions would likely exacerbate the adverse effects on us.

 

Adverse changes in legislative and regulatory initiatives may significantly impact our earnings, operations and ability to pursue business opportunities.  We are heavily regulated by regulatory agencies at the federal, state and international levels. As a result of the recent financial crisis and economic downturn, we have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us and the financial services industry in general.

 

In December 2009, the Basel Committee on Banking Supervision released consultative documents on both capital and liquidity. These proposals currently include a leverage ratio that could prove more restrictive than the current risk-based measure. The capital proposal would increase significantly the capital charges imposed on certain assets, including trading assets, thereby potentially making those businesses more expensive to conduct. Full implementation of these proposals is currently projected by the end of 2012, although delays are possible, and it is likely that many elements of the proposals will change prior to adoption. U.S. regulatory agencies have not opined on these proposals for U.S. implementation. We continue to assess the potential impact of these proposals.

 

As a result of the financial crisis, the financial services industry is facing the possibility of legislative and regulatory changes that could impose significant, adverse changes on our ability to serve our clients. A proposal is currently being considered to levy a tax or fee on financial institutions with assets in excess of $50 billion to repay the costs of the Troubled Asset Relief Program (“TARP”), although the proposed tax would continue even after those costs are repaid. If enacted as proposed, the tax could significantly affect our earnings, either by increasing the costs of our liabilities or causing us to reduce our assets. It remains uncertain whether the tax will be enacted, to whom it would apply, or the amount of the tax we would be required to pay. It is also unclear the extent to which the costs of such a tax could be recouped through higher pricing.

 

In addition, various proposals for broad-based reform of the financial regulatory system are pending. A majority of these proposals would not disrupt our core businesses, but a proposal could ultimately be adopted that adversely affects certain of our businesses. The proposals would require divestment of certain proprietary trading activities, or limit private equity investments. Other proposals, which include limiting the scope of an institution’s derivatives activities, or forcing certain derivatives activities to be traded on exchanges, would diminish the demand for, and profitability of, certain businesses. Several other proposals would require issuers to retain unhedged interests in any asset that is securitized, potentially severely restricting the secondary market as a source of funding for consumer or commercial lending. There are also numerous proposals pending on how to resolve a failed systemically important institution. Following the passage of a bill in the U.S. House of Representatives and the possibility of similar provisions in a U.S. Senate bill, one rating agency has placed the credit ratings of Bank of America, us and other banks on negative credit watch, and therefore adoption of such provisions may adversely affect Bank of America’s access to capital markets. It remains unclear whether any of these proposals will ultimately be enacted, and what form they may take.

 

In addition, other countries, including the United Kingdom (“U.K.”) and France, have proposed and in some cases adopted, certain reforms targeted at financial institutions, including, but not limited to, increased capital and liquidity requirements for local entities, including regulated U.K. subsidiaries of foreign companies and other financial institutions as well as branches of foreign banks located in the U.K., the creation and production of recovery and resolutions plans (commonly referred

to as living wills) by such entities, and a significant payroll tax on bank bonuses paid to employees over a certain threshold.

 

In addition, the U.S. Congress is currently considering reinstating income tax provisions that have recently expired whereby income of certain foreign subsidiaries would not be subject to current U.S. income tax as a result of long-standing deferral provisions applicable to active finance income. These provisions, which in the past have expired and been extended, expired for taxable years beginning on or after January 1, 2010. Absent an extension of these provisions, active financing income earned by our foreign subsidiaries after January 1, 2010 will generally be subject to a tax that considers the incremental U.S. income tax. The impact of the expiration of the provisions should they not be extended would be significant. The exact impact would depend upon the amount, composition and geographic mix of our future earnings.

 

Compliance with current or future legislative and regulatory initiatives could require us to change certain of our business practices, impose significant additional costs on us, limit the products that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value of assets that we hold or otherwise adversely affect our business, results of operations or financial condition. We have recently witnessed the introduction of an ever-increasing number of regulatory proposals that could substantially impact us and others in the financial services industry. The extent of changes imposed by, and frequency of adoption of, any regulatory initiatives could make it more difficult for us to comply in a timely manner, which could further limit our operations, increase compliance costs or divert management attention or other resources. The long-term impact of these initiatives on our business practices and revenues will depend upon the successful implementation of our strategies and competitors’ responses to such initiatives, both of which are difficult to predict.

 

We could suffer losses as a result of the actions of or deterioration in the commercial soundness of other financial services institutions and counterparties, including as a result of derivatives transactions.  Our ability to engage in routine trading and funding transactions could be adversely affected by the actions and commercial soundness of other market participants. Financial services institutions are interrelated as a result of trading, funding, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity disruptions and could lead to future losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of a counterparty or client, and our results of operations in 2008 and to a lesser extent in 2009 were materially affected by the credit valuation adjustments described in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — U.S. ABS CDO and Other Mortgage-Related Activities — Monoline Financial Guarantors”. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations or financial condition.

 

We are party to a large number of derivative transactions, including credit derivatives. Many of these derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling some positions difficult. Many credit derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be able to obtain, the underlying security, loan or other obligation. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to us.

Derivative contracts and other transactions entered into with third parties are not always confirmed by the counterparties on a timely basis. While the transaction remains unconfirmed, we are subject to heightened credit and operational risk and in the event of default may find it more difficult to enforce the contract. In addition, as new and more complex derivative products have been created, covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying contracts may arise, which could impair our ability to effectively manage our risk exposures from these products and subject us to increased costs.

 

For further discussion of our exposure to derivatives, see Note 6 to the Consolidated Financial Statements.

 

Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our financial results.  Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and financial results and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain.

 

Recently, the Financial Accounting Standards Board (“FASB”) and the SEC have adopted new guidance or rules relating to financial accounting such as, among other things, new FASB guidance on the consolidation of variable interest entities. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, the SEC and our independent registered public accounting firm) may amend or even reverse their previous interpretations or positions on how these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

 

For a further discussion of some of our significant accounting policies and recent accounting changes, see Note 1 to the Consolidated Financial Statements.

 

Our ability to attract and retain clients and employees could be adversely affected to the extent our reputation is harmed.  Our actual or perceived failure to address various issues could give rise to reputational risk that could harm us and our business prospects. These issues include, but are not limited to, legal and regulatory requirements, privacy, properly maintaining client and employee personal information, record keeping, money-laundering, sales and trading practices, ethical issues, appropriately addressing potential conflicts of interest, and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, reputational harm and legal risks, which could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.

 

We face substantial potential legal liability and significant regulatory action, which could have materially adverse financial consequences or cause significant reputational harm to us.  We face significant legal risks in our businesses, and the volume of claims, amount of damages and penalties claimed in litigation, and regulatory proceedings against us and other financial institutions remain high and are increasing. Increased litigation costs, substantial legal liability or significant regulatory action against Bank of America or us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. These litigation and regulatory matters and any related settlements could adversely impact our earnings.

For a further discussion of litigation risks, see Note 14 to the Consolidated Financial Statements.

 

Our liquidity could be impaired by an inability of Bank of America to access the capital markets on favorable terms.  Liquidity is essential to our businesses. Since we were acquired by Bank of America, we established intercompany lending and borrowing arrangements with Bank of America to facilitate centralized liquidity management and as a result, our liquidity risk is derived in large part from Bank of America’s liquidity risk. Bank of America’s liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that Bank of America or we may be unable to control, such as a general market disruption, negative views about the financial services industry generally, or an operational problem that affects third parties or us. Bank of America’s ability to raise certain types of funds has been and could continue to be adversely affected by conditions in the United States and international markets and economies. In 2009, global capital and credit markets continued to experience volatility and disruptions. As a result, Bank of America utilized several of the U.S. Government liquidity programs, which are temporary in nature, to enhance its liquidity position. Bank of America’s ability and our ability to borrow from other financial institutions or to engage in securitization funding transactions on favorable terms could be adversely affected by continued disruptions in the capital markets or other events, including actions by rating agencies or deteriorating investor expectations.

 

Our credit ratings and Bank of America’s credit ratings are important to our liquidity. Rating agencies regularly evaluate Bank of America and us. Their ratings of our long-term and short-term debt and other securities are based on a number of factors, including Bank of America’s and our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. During 2009, the rating agencies took numerous actions with respect to Bank of America’s and our credit ratings and outlooks, many of which were negative. The rating agencies have indicated that our credit ratings currently reflect their expectation that, if necessary, Bank of America would receive significant support from the U.S. Government. In February 2010, a rating agency affirmed our current credit ratings but revised the outlook to negative from stable, based on their belief that it is less certain whether the U.S. Government would be willing to provide extraordinary support to Bank of America. In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that we will maintain our current ratings. Failure to maintain those ratings could adversely affect our liquidity and competitive position, by materially increasing our borrowing costs or significantly limiting our access to the capital markets. A reduction in our credit ratings also could have a significant impact on certain trading revenues, particularly in those businesses where counterparty credit-worthiness is critical. In connection with certain trading agreements, we may be required to provide additional collateral in the event of a credit ratings downgrade.

 

For a further discussion of our liquidity position and other liquidity matters and the policies and procedures we use to manage our liquidity risks, see “Liquidity Risk” in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Changes in financial or capital market conditions could cause our earnings and the value of our assets to decline.  Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. As a result, we are directly and indirectly affected by changes in market conditions. For example, changes in interest rates could adversely affect our principal transaction revenues and net interest profit (which we view together as our trading revenues), which could in turn affect our net earnings. Market risk is inherent in the financial

instruments associated with our operations and activities including securities, derivatives, loans, deposits, short-term borrowings and long-term debt. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, changes in the implied volatility of interest rates, foreign exchange rates, credit spreads and price deterioration or changes in value due to changes in market perception or actual credit quality of either the issuer or its country of origin. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse effects on our results from operations and our overall financial condition. In addition, we also may incur significant unrealized gains or losses as a result of changes in our credit spreads or those of third parties, which may affect the fair value of derivative instruments and debt securities that we hold or issue.

 

The models that we use to assess and control our risk exposures reflect assumptions about the degree of correlation or lack thereof among prices of various asset classes or other market indicators. In times of market stress or other unforeseen circumstances, such as the market conditions experienced in 2008 and early 2009, previously uncorrelated indicators may become correlated, or previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets. To the extent that we make investments directly in securities that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions.

 

For a further discussion of our market risk and our risk management policies and procedures, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.

 

Our increased credit risk could result in higher credit losses and reduced earnings.  When we enter into trading positions, loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their agreements. A number of our products expose us to credit risk, including trading positions, derivatives, including credit default swaps, loans, and lending commitments.

 

We estimate and establish reserves or make credit valuation adjustments for credit risks and credit losses inherent in our credit exposure (including unfunded lending commitments). This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how our borrowers and counterparties will react to these conditions. The ability of our borrowers to repay their loans or counterparties to honor their obligations will likely be affected by changes in economic conditions, which in turn could impact the accuracy of our forecasts. As with any such assessments, there is also the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify.

 

In the ordinary course of our business, we also may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities, industries and countries may not function as we have anticipated. While our activities expose us to many different industries and counterparties, we routinely execute a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment funds and

insurers, including financial guarantors. This has resulted in significant credit concentration with respect to this industry.

 

For a further discussion of credit risk, see “Concentrations of Credit Risk” in Note 4 to the Consolidated Financial Statements.

 

Our ability to successfully identify and manage our compliance and other risks is an important factor that can significantly impact our results.  We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Accordingly, our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results. Recent economic conditions, increased legislative and regulatory scrutiny and increased complexity of our operations, among other things, have increased and made it more difficult for us to manage our operational, compliance and other risks. For a further discussion of our risk management policies and procedures, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.

 

We may be unable to compete successfully as a result of the evolving financial services industry and market conditions.  We operate in a highly competitive environment. Over time, there has been substantial consolidation among companies in the financial services industry, and this trend accelerated in 2008 and 2009 as the credit crisis has led to numerous mergers and asset acquisitions among industry participants and in certain cases reorganization, restructuring, or even bankruptcy. This trend also has hastened the globalization of the securities and financial services markets. We will continue to experience intense competition as continued consolidation in the financial services industry may produce larger and better-capitalized companies that are capable of offering a wider array of financial products and services at more competitive prices. To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to compete. Increased competition may affect our results by creating pressure to lower prices on our products and services and reducing market share.

 

Our continued ability to compete effectively in our businesses, including management of our existing businesses as well as expansion into new businesses and geographic areas, depends on our ability to retain and motivate our existing employees and attract new employees. We face significant competition for qualified employees both within and outside the financial services industry, including non-U.S. institutions and institutions not subject to compensation or hiring restrictions imposed under any U.S. government initiatives or not subject to the same regulatory scrutiny. This is particularly the case in emerging markets, where we are often competing for qualified employees with entities that may have a significantly greater presence or more extensive experience in the region. A substantial portion of our annual bonus compensation paid to our senior employees has in recent years been paid in the form of equity-based awards, which are now payable in Bank of America’s common stock. The value of these awards has been impacted by the significant decline in the market price of Bank of America’s common stock. We also reduced the number of employees across nearly all of our businesses in 2008 and 2009. In addition, the consolidation in the financial services industry has intensified the inherent challenges of cultural integration between differing types of financial services institutions. The combination of these events could have a significant adverse impact on our ability to retain and hire the most qualified employees.

 

We may be adversely impacted by business, economic and political conditions in the non-U.S. jurisdictions in which we operate.  We do business throughout the world, including in developing regions of the world commonly known as emerging markets. As a result, we are exposed to a number of risks in non-U.S. jurisdictions, including economic, market, reputational, litigation and regulatory risks. Our businesses and revenues derived from non-U.S. jurisdictions are subject to risk of

loss from currency fluctuations, social or political instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, unfavorable political and diplomatic developments and changes in legislation. Also, as in the United States, many non-U.S. jurisdictions in which we do business have been negatively impacted by recessionary conditions. While a number of these jurisdictions are showing signs of recovery, others continue to experience increasing levels of stress. In addition, the risk of default on sovereign debt in some non-U.S. jurisdictions is increasing and could expose us to losses.

 

In many countries, the laws and regulations applicable to the financial services industry are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could have a significant and negative effect not only on our business in that market but also on our reputation generally.

 

We also invest or trade in the securities of corporations and governments located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities may be subject to negative fluctuations as a result of the above factors. Furthermore, the impact of these fluctuations could be magnified, because generally non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.

 

We are subject to geopolitical risks, including acts or threats of terrorism, and actions taken by the United States or other governments in response and/or military conflicts could adversely affect business and economic conditions abroad as well as in the U.S.

 

Changes in governmental fiscal and monetary policy could adversely affect our business.  Our businesses and earnings are affected by domestic and international fiscal and monetary policy. For example, the Federal Reserve Board regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for lending, investing and capital raising activities and the return we earn on those loans and investments, both of which affect our net interest profit. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as debt securities, and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the U.S., non-U.S. governments and international agencies. Changes in domestic and international fiscal and monetary policies are beyond our control and difficult to predict.

 

We may suffer losses as a result of operational risk or technical system failures.  The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our internal processes, systems, relationships with third parties and the vast array of employees and key executives in our day-to-day and ongoing operations. Operational risk also encompasses the failure to implement strategic objectives in a successful, timely and cost-effective manner.

 

Failure to properly manage operational risk subjects us to risks of loss that may vary in size, scale and scope, including loss of clients. This also includes but is not limited to operational or technical failures, unlawful tampering with our technical systems, ineffectiveness or exposure due to interruption in third party support, the loss of key individuals or failure on the part of the key individuals to perform properly and losses resulting from unauthorized trading activity by our employees.

 

Our dependence upon funds from our subsidiaries and our parent could adversely impact our liquidity.  ML & Co. is a holding company that is a separate and distinct legal entity from its parent, Bank of America, and our broker-dealer, banking and non-banking subsidiaries. We therefore depend on dividends, distributions and borrowings or other payments from our subsidiaries and may depend in large part on financing from Bank of America to fund payments on our obligations, including debt obligations. Bank of America may in some instances, because of its regulatory requirements as a bank holding company, be unable to provide us with the funding we need to fund payments on our

obligations. Many of our subsidiaries are subject to laws that authorize regulatory agencies to block or reduce the flow of funds from those subsidiaries to us. Regulatory action of that kind could impede access to funds we need to make payments on our obligations.

 

 

There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.

 

 

We have offices in various locations throughout the world. Other than those described below as being owned, substantially all of our offices are located in leased premises. We believe that the facilities we own or lease are adequate for the purposes for which they are currently used and that they are well maintained. Set forth below is the location and the approximate square footage of our principal facilities. Information regarding our property lease commitments is set forth in “Operating Leases” in Note 14 to the Consolidated Financial Statements.

 

Principal Facilities in the United States

 

Following our acquisition by Bank of America, we changed our principal executive offices from 4 World Financial Center, New York, New York, to the Bank of America Corporate Center in Charlotte, North Carolina, which is owned by one of Bank of America’s subsidiaries. In addition, some of our employees are located at Bank of America Tower at One Bryant Park in New York, New York. We lease portions of 4 World Financial Center (1,800,000 square feet) and 2 World Financial Center (2,500,000 square feet); both leases expire in 2013. One of our subsidiaries is a partner in the partnership that holds the ground lessee’s interest in 4 World Financial Center. As of December 31, 2009, we occupied the entire 4 World Financial Center (other than retail areas) and approximately 27% of 2 World Financial Center.

 

We own a 760,000 square foot building at 222 Broadway, New York and occupy 92% of this building. We also own 1,251,000 square feet of office space, 273,000 square feet of ancillary buildings in Hopewell, New Jersey and the underlying land upon which the Hopewell facilities are located. We also own a 54-acre campus in Jacksonville, Florida, with four buildings.

 

Principal Facilities Outside the United States

 

In London, we lease and occupy 100% of our 576,626 square foot London headquarters facility known as Merrill Lynch Financial Centre; this lease expires in 2022. In addition, we lease approximately 305,086 square feet in other London locations with various terms, the longest of which lasts until 2020. We occupy 134,375 square feet of this space and have sublet the remainder. In Tokyo, we have leased 292,349 square feet until 2014 for our Japan headquarters. Other leased facilities in the Pacific Rim are located in Hong Kong, Singapore, Seoul, South Korea, Mumbai and Chennai, India, and Sydney and Melbourne, Australia.

 

 

Refer to Note 14 to the Consolidated Financial Statements in Part II, Item 8 for a discussion of litigation and regulatory matters.

 

 

 

We made no purchases of our common stock during the year ended December 31, 2009. There were 1,000 shares of Common Stock outstanding as of December 31, 2009, all of which were held by Bank of America Corporation.

 

Dividends Per Common Share

 

Prior to the acquisition by Bank of America, the principal market on which ML & Co. common stock was traded was the New York Stock Exchange. ML & Co. common stock was also listed on the Chicago Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange. Following the acquisition by Bank of America, there is no longer an established public trading market for ML & Co. common stock. Information relating to the amount of cash dividends declared for the two most recent fiscal years is set forth below.

 

 

As of the date of this report, Bank of America is the sole holder of the outstanding common stock of ML & Co. With the exception of regulatory restrictions on subsidiaries’ abilities to pay dividends, there were no restrictions on ML & Co.’s present ability to pay dividends on common stock, other than ML & Co.’s obligation to make payments on its mandatory convertible preferred stock, junior subordinated debt related to trust preferred securities, and the governing provisions of Delaware General Corporation Law.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

As a result of the acquisition by Bank of America, there are no equity securities of ML & Co. that are authorized for issuance under any equity compensation plans. Refer to Note 15 and Note 16 of the Consolidated Financial Statements for further information on employee benefit and equity compensation plans.

 

 

Not required pursuant to instruction I(2).

 

Forward-Looking Statements and Non-GAAP Financial Measures

 

We have included certain statements in this report which may be considered forward-looking, including those about management expectations and intentions, the impact of off-balance sheet exposures, significant contractual obligations and anticipated results of litigation and regulatory investigations and proceedings. These forward-looking statements represent only Merrill Lynch & Co., Inc.’s (“ML & Co.” and, together with its subsidiaries, “Merrill Lynch”, the “Company”, the “Corporation”, “we”, “our” or “us”) beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond our control, which affect our operations, performance, business strategy and results and could cause our actual results and experience to differ materially from the expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to, actions and initiatives taken by both current and potential competitors and counterparties, general economic conditions, market conditions, the effects of current, pending and future legislation, regulation and regulatory actions, the actions of rating agencies and the other risks and uncertainties detailed in this report. See “Risk Factors” in Part I, Item 1A of this Form 10-K. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures we may make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

From time to time, we may also disclose financial information on a non-GAAP basis where management uses this information and believes this information will be valuable to investors in gauging the quality of our financial performance, identifying trends in our results and providing more meaningful period-to-period comparisons.

 

Merrill Lynch was formed in 1914 and became a publicly traded company on June 23, 1971. In 1973, we created the holding company, ML & Co., a Delaware corporation that, through its subsidiaries, is one of the world’s leading capital markets, advisory and wealth management companies. We are a leading global trader and underwriter of securities and derivatives across a broad range of asset classes, and we serve as a strategic advisor to corporations, governments, institutions and individuals worldwide. In addition, as of December 31, 2009, we owned approximately 34 percent of the economic interest of BlackRock, Inc. (“BlackRock”), one of the world’s largest publicly traded investment management companies with approximately $3.3 trillion in assets under management at December 31, 2009. See “Executive Overview — Other Events” for additional information regarding our investment in BlackRock.

 

Bank of America Acquisition and Basis of Presentation

 

On January 1, 2009, Merrill Lynch was acquired by Bank of America Corporation (“Bank of America”) through the merger of a wholly owned subsidiary of Bank of America with and into ML & Co. with ML & Co. continuing as the surviving corporation and a wholly owned subsidiary of Bank of America. Upon completion of the acquisition, each outstanding share of ML & Co. common stock was converted into 0.8595 shares of Bank of America common stock. As of the completion of the acquisition, ML & Co. Series 1 through Series 8 preferred stock were converted into Bank of America preferred stock with substantially identical terms to the corresponding series of Merrill Lynch preferred stock (except for additional voting rights provided to the Bank of America securities). The Merrill Lynch 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 2, and 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 3 that was outstanding immediately prior to the completion of the acquisition remained issued and outstanding subsequent to the acquisition, but are now convertible into Bank of America common stock.

Bank of America’s cost of acquiring Merrill Lynch has been pushed down to form a new accounting basis for Merrill Lynch. Accordingly, the Consolidated Financial Statements appearing in Part II, Item 8 of this Form 10-K are presented for Merrill Lynch for periods occurring prior to the acquisition by Bank of America (the “Predecessor Company”) and subsequent to the January 1, 2009 acquisition (the “Successor Company”). The Predecessor Company and Successor Company periods have been separated by a vertical line on the face of the Consolidated Financial Statements to highlight the fact that the financial information for such periods has been prepared under two different cost bases of accounting.

 

Effective January 1, 2009, Merrill Lynch adopted calendar quarter-end and year-end reporting periods to coincide with those of Bank of America. As a result, the following discussion of the results of operations for the 2009 year-end refers to the period from January 1, 2009 through December 31, 2009. The 2008 year-end refers to the period from December 29, 2007 through December 26, 2008. The intervening period between Merrill Lynch’s previous fiscal year end (December 26, 2008) and the beginning of its 2009 year (January 1, 2009) is presented separately on the Consolidated Statements of Earnings/(Loss).

 

In connection with Merrill Lynch’s acquisition by Bank of America, we evaluated the provisions of Accounting Standards Codification (“ASC”) 280, Segment Reporting (“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 our results, it was determined that Merrill Lynch does not contain any identifiable operating segments. As a result, the financial information of Merrill Lynch is presented as a single segment.

 

As a result of the acquisition of Merrill Lynch by Bank of America, certain information is not required in this Form 10-K as permitted by general Instruction I(2) of Form 10-K. We have also abbreviated Management’s Discussion and Analysis of Financial Condition and Results of Operations as permitted by general Instruction I(2).

 

Company Results

 

We reported net earnings from continuing operations for the year ended December 31, 2009 of $4.7 billion compared with net losses from continuing operations of $27.6 billion the year ended December 26, 2008. Revenues, net of interest expense (“net revenues”) for 2009 were $23.3 billion compared with negative net revenues of $12.6 billion in 2008. Pre-tax earnings from continuing operations were $3.9 billion in 2009. The pre-tax loss from continuing operations was $41.8 billion for 2008.

 

The results for the year ended December 31, 2009 primarily reflected improved sales and trading results as compared with the prior year. Net revenues increased due primarily to our fixed income trading activities, including mortgage and credit products, which generated positive trading revenues in the current year as compared with the significant net write-downs recorded in 2008. In 2009, net earnings also benefited from a $1.1 billion pre-tax gain associated with our investment in BlackRock (see “Executive Overview — Other Events”), a decline in compensation and non-compensation expenses, and a lower effective income tax rate. These items were partially offset by net losses of $5.2 billion due to the impact of the narrowing of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities, primarily structured notes. Our net revenues for 2009 also reflected lower investment banking and managed account and other fee-based revenues as compared with the prior year.

 

In 2008, our net revenues and net earnings were materially affected by a number of significant items, which included: net losses of $10.4 billion due to credit valuation adjustments (“CVA”) related to certain hedges with financial guarantors; net write-downs of $10.2 billion (excluding CVA) on U.S. asset-backed collateralized debt obligations (“ABS CDOs”); net write-downs of approximately $10.8 billion related to other-than-temporary impairment charges on our investment securities portfolio, losses related to leveraged finance loans and commitments, losses related to certain government-sponsored entities and the default of a major U.S. broker-dealer and other market dislocations; net losses of $6.5 billion resulting primarily from write-downs and losses on asset sales across residential mortgage-related exposures and commercial real estate exposures; net losses of $2.1 billion due to write-downs on private equity investments; net gains of $5.1 billion due to the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities; a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P., a $2.6 billion foreign currency gain related to currency hedges of U.K. deferred tax assets; a $2.5 billion non-deductible payment to affiliates and transferees of Temasek Holdings (Private) Limited (“Temasek”) related to our July 2008 offering of common stock; a $2.3 billion goodwill impairment charge related to our fixed income and investment banking businesses; a $0.5 billion expense, including a $125 million fine, arising from Merrill Lynch’s offer to repurchase auction rate securities (“ARS”) from our private clients and the associated settlement with regulators; and a $486 million restructuring charge associated with headcount reduction initiatives conducted during 2008.

 

Our net earnings applicable to common shareholders for 2009 were $4.6 billion as compared with net losses applicable to common shareholders of $30.5 billion in 2008. The net loss applicable to common shareholders in 2008 included $2.1 billion of additional preferred dividends associated with the exchange of Merrill Lynch’s mandatory convertible preferred stock, which occurred in July 2008.

 

Transactions with Bank of America

 

Asset and Liability Transfers

 

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 the integration of certain trading activities with Bank of America and 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, credit and mortgage products trading businesses. During the year ended December 31, 2009, these transfers included approximately $56 billion of assets and $52 billion of liabilities transferred from Merrill Lynch to Bank of America, primarily U.S. matched book repurchase positions and credit and mortgage positions. Approximately $44 billion of assets and $20 billion of liabilities were transferred from Bank of America to Merrill Lynch, primarily equity-related positions. In the future, Merrill Lynch and Bank of America may continue to transfer certain assets and liabilities to (and from) each other. In addition to these transfers, Merrill Lynch also sold two of its bank subsidiaries to Bank of America and acquired a broker-dealer subsidiary from Bank of America during 2009, which is discussed further below.

 

Sale of U.S. Banks to Bank of America

 

During the second quarter of 2009, the separate boards of directors of Merrill Lynch Bank USA (“MLBUSA”) and Merrill Lynch Bank & Trust Co., FSB (“MLBT-FSB”) approved the sale of their respective entities to a subsidiary of Bank of America.

 

In both transactions, Merrill Lynch sold the shares of the respective entity to Bank of America. The sale price of each entity was equal to its net book value as of the date of transfer. Consideration for the sale of MLBUSA was in the form of an $8.9 billion floating rate demand note payable from Bank of America to Merrill Lynch, while MLBT-FSB was sold for cash of approximately $4.4 billion. The demand note received by Merrill Lynch in connection with the MLBUSA sale had a stated interest rate that was a market rate at the time of sale.

 

The MLBUSA sale was completed on July 1, 2009. At that time, MLBUSA was merged into Bank of America, N.A., a subsidiary of Bank of America. The sale of MLBT-FSB was completed on November 2, 2009. At that time, MLBT-FSB was also merged into Bank of America, N.A.

 

Acquisition of Banc of America Investment Services, Inc. (“BAI”) from Bank of America

 

In October 2009, Bank of America contributed the shares of BAI, one of Bank of America’s wholly-owned broker-dealer subsidiaries, to ML & Co. Subsequent to the transfer, BAI was merged into Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned broker-dealer subsidiary of ML&Co. The net amount contributed by Bank of America to ML&Co. was equal to BAI’s net book value of approximately $263 million. In accordance with ASC 805-10, Business Combinations, Merrill Lynch’s results of operations for the year ended December 31, 2009 include the results of BAI as if the contribution from Bank of America had occurred on January 1, 2009. BAI’s impact on Merrill Lynch’s 2009 pre-tax earnings and net earnings was not material. Refer to Note 22 to the Consolidated Financial Statements for further information.

 

Other Events

 

On December 1, 2009, BlackRock completed its purchase of Barclays Global Investors from Barclays, Plc. This acquisition had the effect of diluting our ownership interest in BlackRock, which for accounting purposes was treated as a sale of a portion of our ownership interest. As a result, upon the closing of this transaction, we recorded an adjustment to our investment in BlackRock, which resulted in a pre-tax gain of $1.1 billion. In addition, our economic interest in BlackRock was reduced from approximately 50 percent to approximately 34 percent.

 

On September 21, 2009, Bank of America reached an agreement to terminate its term sheet with the U.S. Government under which the U.S. Government agreed in principle to provide protection against the possibility of unusually large losses on a pool of Bank of America’s financial instruments that were acquired as a result of the acquisition of Merrill Lynch. In connection with the termination of the term sheet, Bank of America paid a total of $425 million in the third quarter to the U.S. Government to be allocated among the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation.

 

N/M = Not meaningful.

N/A = Earnings per share information is not applicable to the Successor Company period since Merrill Lynch is now a wholly-owned subsidiary of Bank of America.

Consolidated Results of Operations

 

Our net earnings from continuing operations for 2009 were $4.7 billion compared with a net loss of $27.6 billion for 2008. Net revenues for the year ended December 31, 2009 were $23.3 billion compared with negative $12.6 billion for the year ended December 26, 2008. The results in 2009 primarily reflected improved performance from our fixed income trading businesses. The year’s results also included a $5.2 billion loss due to the impact of the narrowing of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities, primarily structured notes. The net losses for the year ended December 26, 2008 were primarily driven by the significant write-downs recorded during that period, and were materially impacted by the challenging market environment that existed in 2008. Losses incurred during 2008 included: CVA of $10.4 billion primarily related to certain hedges with financial guarantors; net write-downs of $10.2 billion related to U.S. ABS CDOs; net losses of $6.5 billion related to certain residential and commercial mortgage exposures; net losses of $4.1 billion in the investment securities portfolio; and $4.2 billion of write-downs on leveraged finance loans and commitments. These net losses were partially offset by a net gain of $5.1 billion from the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities and a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P.

 

2009 Compared With 2008

 

Principal transactions revenues include both realized and unrealized gains and losses on trading assets and trading liabilities and investment securities classified as trading. Principal transactions revenues were $4.0 billion for the year ended December 31, 2009 compared with negative $27.2 billion for the year ended December 26, 2008. The increase in principal trading revenues primarily reflected higher revenues from fixed income trading activities. Revenues from mortgage products increased and reflected improved trading results in the current year as compared with the significant net write-downs recorded in the prior year. Credit products revenues also increased, reflecting significant spread tightening, while 2008’s results reflected a challenging market environment as a result of the global credit crisis. These increases were partially offset by lower revenues from equity products as a decline in revenues from equity financing and services was partially offset by higher revenues from equity derivative products. Revenues from commodity products also declined as compared with the prior year. In addition, principal transactions revenues for 2009 were adversely affected by a $5.2 billion loss due to the impact of the narrowing of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities, primarily structured notes, as compared with gains of $5.1 billion recorded in 2008 due to the widening of Merrill Lynch’s credit spreads. The negative principal trading revenues in 2008 were driven primarily by net losses within our fixed income business related to credit valuation adjustments related to hedges with financial guarantors, U.S. ABS CDOs, net losses associated with real estate-related assets, and net losses from credit spreads widening across most asset classes to significantly higher levels during the year. We also recorded net losses in 2008 on various positions as a result of severe market dislocations, including significant asset price declines, high levels of volatility and reduced levels of liquidity, particularly following the default of a major U.S. broker-dealer and the U.S. Government’s conservatorship of certain government sponsored entities. These losses were partially offset by positive net revenues generated from our interest rate and currencies, commodities and cash equities businesses.

 

Net interest profit is a function of (i) the level and mix of total assets and liabilities, including trading assets owned, deposits, financing and lending transactions, and trading strategies associated with our businesses, and (ii) the prevailing level, term structure and volatility of interest rates. Net interest profit is an integral component of trading activity. In assessing the profitability of our client facilitation and trading activities, we view principal transactions and net interest profit in the aggregate as net trading revenues. Changes in the composition of trading inventories and hedge positions can cause the mix of principal transactions and net interest profit to fluctuate from period to period. Net interest profit was $632 million for the year ended December 31, 2009 as compared with $4.0 billion for the year ended December 26, 2008. Interest revenues declined as a result of lower asset levels and stated interest rates on those assets. Interest expense also decreased due to reduced funding levels and lower interest rates

on such funding in our sales and trading businesses. The decline in net interest profit also reflected interest expenses of $2.2 billion associated with the amortization of purchase accounting adjustments related to the fair value of certain long-term borrowings that were recorded in connection with the acquisition of Merrill Lynch by Bank of America.

 

Commissions revenues primarily arise from agency transactions in listed and OTC equity securities and commodities and options. Commissions revenues also include distribution fees for promoting and distributing mutual funds. Commissions revenues were $5.9 billion for the year ended December 31, 2009, down 15% from the prior year period, driven primarily by lower revenues from our global cash equity trading business resulting from lower transaction volumes. Commission revenues from our global wealth management activities also declined as compared with the prior year. These decreases were partially offset by the addition of commission revenues from BAI.

 

Managed accounts and other fee-based revenues primarily consist of asset-priced portfolio service fees earned from the administration of separately managed and other investment accounts for retail investors, annual account fees, and certain other account-related fees. Managed accounts and other fee-based revenues were $4.3 billion for the year ended December 31, 2009, a decrease of 22% from the prior year period primarily due to lower fee-based revenues from our global wealth management activities. The decline was driven by lower levels of fee-based assets, which were adversely affected by the difficult market conditions and net outflows of client assets that occurred during the first half of 2009.

 

Investment banking revenues include (i) origination revenues representing fees earned from the underwriting of debt, equity and equity-linked securities, as well as loan syndication and commitment fees and (ii) strategic advisory services revenues including merger and acquisition and other investment banking advisory fees. Investment banking revenues were $3.6 billion for the year ended December 31, 2009, down 4% from the prior year period. Underwriting revenues increased 13% to $2.7 billion. Revenues from strategic advisory services declined 36% to $846 million, reflecting an industry-wide decline in transaction volumes. As a result of Bank of America’s acquisition of Merrill Lynch, beginning in 2009, certain debt origination activities that were formerly conducted by Merrill Lynch are now being conducted within the Bank of America platform, while certain equity origination activities that were formerly conducted by Bank of America are now being conducted within the Merrill Lynch platform.

 

Earnings from equity method investments include our pro rata share of income and losses associated with investments accounted for under the equity method of accounting. Earnings from equity method investments were $1.7 billion for the year ended December 31, 2009 compared with $4.5 billion for the year ended December 26, 2008. The results for 2009 primarily consisted of a $1.1 billion pre-tax gain associated with our investment in BlackRock, which resulted from BlackRock’s acquisition of Barclays Global Investors. The results for 2008 included a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P. Excluding the gains from BlackRock and Bloomberg, L.P., the year-over-year increase primarily reflected higher revenues from certain investments, including partnerships and alternative investment management companies. Refer to Note 8 to the Consolidated Financial Statements for further information on equity method investments.

 

Other revenues include gains and losses on investment securities, including certain available-for-sale securities, gains and losses on private equity investments, and gains and losses on loans and other miscellaneous items. Other revenues were $3.2 billion for the year ended December 31, 2009 compared with negative $10.1 billion in the prior year period. Other revenues in 2009 were primarily associated with a net increase in the fair value of certain private equity investments. The negative revenues for 2008 were primarily due to other-than-temporary impairment charges on available-for-sale securities within our investment securities portfolio of $4.1 billion, write-downs on our leveraged finance loans and commitments of $4.2 billion, and net losses of $1.9 billion related to our private equity investments due primarily to the decline in the value of private and public investments.

 

Compensation and benefits expenses were $12.0 billion for the year ended December 31, 2009 and $14.8 billion in the prior year period. The decrease primarily reflected lower compensation costs as a result of reduced headcount levels. Amortization expense associated with prior year stock-based

compensation awards also decreased as a result of the revaluation of these awards due to purchase accounting adjustments that were recorded in connection with the acquisition of Merrill Lynch by Bank of America. In addition, the decline in compensation expense reflected a change in compensation that delivers a greater portion of incentive compensation over time.

 

In December 2009, the U.K. Government announced its intention to introduce a new employer payroll tax of 50% on bonuses awarded to employees of applicable banking entities, including Merrill Lynch, between December 9, 2009 and April 5, 2010. The exact nature and scope of the payroll tax is still being clarified by the U.K. tax authorities and the draft proposals are subject to potential revision before they are enacted into law. Merrill Lynch has estimated that if this U.K. payroll tax is enacted as currently proposed, the potential impact in 2010 could be approximately $500 million.

 

Non-compensation expenses were $7.3 billion for the year ended December 31, 2009 and $14.5 billion in the prior year period. Non-compensation expenses in 2008 included a $2.5 billion non-tax deductible payment to Temasek related to the July 2008 common stock offering; a $2.3 billion goodwill impairment charge related to our fixed income and investment banking businesses; a $0.5 billion expense, including a $125 million fine, arising from Merrill Lynch’s offer to repurchase ARS from our private clients and the associated settlement with regulators; and a $0.5 billion restructuring charge associated with headcount reduction initiatives conducted during that period. Excluding the aforementioned items in 2008, non-compensation expenses declined by $1.3 billion, or 15%, in 2009. Brokerage, clearing and exchange fees were $1.0 billion, down 25% primarily associated with decreased transaction volumes. Advertising and market development costs were $363 million, down 44% primarily due to lower travel and entertainment expenses as well as lower promotion and marketing expenses. Professional fees were $607 million, down 43% primarily due to lower legal and consulting fees. Other expenses were $2.1 billion, a decrease of 14% from the prior year. Other expenses for 2008 included the $0.5 billion expense related to the ARS settlement previously discussed. Excluding this item, the increase in other expenses primarily reflected an additional $350 million of amortization expense due to intangible assets that were recorded in connection with the acquisition of Merrill Lynch by Bank of America and an additional $370 million of expense associated with non-controlling interests of certain principal investments, including private equity investments, partially offset by lower litigation-related expenses of $700 million.

 

The income tax benefit from continuing operations was $838 million for the year ended December 31, 2009 compared with a benefit of $14.3 billion for 2008, resulting in effective tax rates of (21.5)% and 34.1%, respectively. The effective tax rate for 2009 was driven by net permanent tax benefits, primarily a release of a valuation allowance provided for a U.S. federal capital loss carryforward tax benefit, a loss on certain foreign subsidiary stock, foreign earnings taxed at rates below the U.S. rate and audit settlements. During 2009, Bank of America recognized capital gains against which a portion of Merrill Lynch’s U.S. capital loss carryforward was utilized, resulting in a release of $650 million of a valuation allowance attributable to Merrill Lynch’s U.S. capital loss carryforward. For 2008, the effective tax rate reflected the tax benefit of Merrill Lynch’s pre-tax losses and the tax benefit attributable to a loss on foreign subsidiary stock. These benefits were partially offset by the geographic mix of our earnings and a non-deductible expense related to the Temasek payment.

 

The income of certain foreign subsidiaries has not been subject to U.S. income tax as a result of long-standing deferral provisions applicable to active finance income. These provisions expired for taxable years beginning on or after January 1, 2010. On December 9, 2009, the U.S. House of Representatives passed a bill that would extend these provisions as well as certain other expiring tax provisions through December 31, 2010 and certain U.S. Senate members subsequently stated their intent to reinstate these expiring tax provisions in 2010. Absent an extension of these provisions, this active financing income earned by foreign subsidiaries after January 1, 2010 will generally be subject to a tax that considers the incremental U.S. income tax. The impact of the expiration of these provisions would depend upon the amount, composition and geographic mix of our future earnings and could increase Merrill Lynch’s annual income tax expense by up to $1.0 billion.

 

For further information on income taxes, see Note 17 to the Consolidated Financial Statements.

U.S. ABS CDO and Other Mortgage-Related Activities

 

Despite the difficult conditions that existed during the early part of the year, capital markets showed some signs of improvement in 2009. Market dislocations that occurred throughout 2008 continued to impact our results in 2009, but to a much lesser extent in comparison with the losses we incurred on CDOs and other mortgage related products in 2008. The following discussion details our activities and net exposures as of December 31, 2009.

 

Residential Mortgage, U.S. Super Senior ABS CDO and Commercial Mortgage-Related Activities (excluding the Investment Securities Portfolio)

 

The following table provides a summary of our U.S. super senior ABS CDO, residential and commercial mortgage-related net exposures, excluding net exposures to residential and commercial mortgage-backed securities held in our investment securities portfolio, which are described in the Investment Securities Portfolio section below.

 

 

U.S. ABS CDO Activities

 

In September 2008, we sold $30.6 billion gross notional amount of U.S. super senior ABS CDOs (the “Portfolio”) to an entity owned and controlled by Lone Star Funds (“Lone Star”) for a sales price of $6.7 billion. We provided a financing loan to the purchaser for approximately 75% of the purchase price. The recourse on this loan, which is not included in the table above, 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 $4.4 billion at December 31, 2009. Events of default under the loan are customary events of default, including failure to pay interest when due and failure to pay principal at maturity. As of December 31, 2009, all scheduled payments on the loan have been received.

 

Monoline Financial Guarantors

 

We hedge a portion of our long exposures to U.S. super senior ABS CDOs with various market participants, including financial guarantors. We define financial guarantors as monoline insurance companies that provide credit support for a security either through a financial guaranty insurance policy on a particular security or through an instrument such as a credit default swap (“CDS”). Under a CDS, the financial guarantor generally agrees to compensate the counterparty to the swap for the deterioration in the value of the underlying security upon an occurrence of a credit event, such as a failure by the underlying obligor on the security to pay principal and/or interest.

 

We hedged a portion of our long exposures to U.S. super senior ABS CDOs with certain financial guarantors through the execution of CDS that are structured to replicate standard financial guaranty insurance policies, which provide for timely payment of interest and/or ultimate payment of principal at their scheduled maturity date. CDS gains and losses are based on the fair value of the referenced ABS CDOs. Based on the creditworthiness of the financial guarantor hedge counterparties, we record credit valuation adjustments in estimating the fair value of the CDS.

 

At December 31, 2009, the carrying value of our hedges with financial guarantors related to U.S. super senior ABS CDOs was $0.9 billion.

 

In addition to hedges with financial guarantors on U.S. super senior ABS CDOs, we also have hedges on certain long exposures related to corporate CDOs, Collateralized Loan Obligations (“CLOs”), Residential Mortgage-Backed Securities (“RMBS”) and Commercial Mortgage-Backed Securities (“CMBS”). At December 31, 2009, the carrying value of our hedges with financial guarantors related to these types of exposures was $4.0 billion, of which approximately 33% pertains to CLOs and various high grade basket trades. The other 67% relates primarily to CMBS and RMBS in the U.S. and Europe.

 

The following table provides a summary of our total financial guarantor exposures to other referenced assets, as described above, other than U.S. super senior ABS CDOs, as of December 31, 2009.

 

 

Investment Securities Portfolio

 

Historically, the investment securities portfolio had primarily consisted of investment securities comprising various asset classes held by MLBUSA and MLBT-FSB (the “Investment Securities Portfolio”). The net exposure of this portfolio was $1.6 billion at December 31, 2009 and $10.4 billion at December 26, 2008. The decline primarily reflected asset sales and the sales of MLBUSA and MLBT-FSB to Bank of America during 2009 (see “Executive Overview — Transactions with Bank of America — Sale of U.S. Banks to Bank of America” for further information). The cumulative balances in other comprehensive income/(loss) as of December 26, 2008 associated with this portfolio were eliminated as of January 1, 2009 as a result of purchase accounting adjustments recorded in connection with the acquisition of Merrill Lynch by Bank of America. We regularly (at least quarterly) evaluate each security whose value has declined below amortized cost to assess whether the decline in fair value is other-than-temporary. We value RMBS based on observable prices and where prices are not observable, values are based on modeling the present value of projected cash flows that we expect to receive, based on the actual and projected performance of the mortgages underlying a particular securitization. Key determinants affecting our estimates of future cash flows include estimates for borrower prepayments, delinquencies, defaults, and loss severities.

 

A decline in a debt security’s fair value is considered to be other-than-temporary if it is probable that not all amounts contractually due will be collected. In assessing whether it is probable that all amounts contractually due will not be collected, we consider the following:

 

 

Refer to Note 1 to the Consolidated Financial Statements for additional information.

 

The following table provides a summary of the Investment Securities Portfolio’s net exposures and activity during 2009.

 

 

As a part of our normal operations, we enter into various off-balance sheet arrangements that may require future payments. The table and discussion below outline our significant off-balance sheet arrangements, as well as their future expirations, as of December 31, 2009. Refer to Note 14 to the Consolidated Financial Statements for further information.

 

 

Standby Liquidity Facilities

 

We provide standby liquidity facilities to certain municipal bond securitization special purpose entities (“SPEs”). In these arrangements, we are required to fund these standby liquidity facilities if the fair value of the assets held by the SPE declines below par value and certain other contingent events take place. In those instances where the residual interest in the securitized trust is owned by a third party, any payments under the facilities are offset by economic hedges entered into by Merrill Lynch. In those instances where the residual interest in the securitized trust is owned by Merrill Lynch, any requirement to pay under the facilities is considered remote because we, in most instances, will purchase the senior interests issued by the trust at fair value as part of its dealer market-making activities. However, we will have exposure to these purchased senior interests. Refer to Note 9 to the Consolidated Financial Statements for further information.

 

Auction Rate Security Guarantees

 

Under the terms of its announced purchase program as augmented by the global agreement reached with the New York Attorney General, the Securities and Exchange Commission, the Massachusetts Securities Division and other state securities regulators, we agreed to purchase ARS at par from its retail clients, including individual, not-for-profit, and small business clients. Certain retail clients with less than $4 million in assets with Merrill Lynch as of February 13, 2008 were eligible to sell eligible ARS to us starting on October 1, 2008. Other eligible retail clients meeting specified asset requirements were eligible to sell ARS to us beginning on January 2, 2009. The final date of the ARS purchase program was January 15, 2010. Under the ARS purchase program, the eligible ARS held in accounts of eligible retail clients at Merrill Lynch as of December 31, 2009 was $198 million. As of December 31, 2009, we had purchased $8.4 billion of ARS from eligible clients. In addition, under the ARS purchase program, Merrill Lynch has agreed to purchase ARS from retail clients who purchased their securities from Merrill Lynch and transferred their accounts to other brokers prior to February 13, 2008. At December 31, 2009, a liability of $24 million has been recorded for our estimated exposure related to this guarantee.

 

Residual Value Guarantees

 

At December 31, 2009, residual value guarantees of $416 million consist of amounts associated with certain power plant facilities.

 

Standby Letters of Credit and Other Guarantees

 

At December 31, 2009, we provided guarantees to certain counterparties in the form of standby letters of credit in the amount of $0.9 billion.

In connection with residential mortgage loan and other securitization transactions, we typically make representations and warranties about the underlying assets. If there is a material breach of such representations and warranties, we may have an obligation to repurchase the assets or indemnify the purchaser against any loss. For residential mortgage loan and other securitizations, the maximum potential amount that could be required to be repurchased is the current outstanding asset balance. Specifically related to First Franklin activities, there is currently approximately $25.1 billion (including loans serviced by others) of outstanding loans that First Franklin sold in various asset sales and securitization transactions where there may be an obligation to repurchase the asset or indemnify the purchaser against the loss if claims are made and it is ultimately determined that there has been a material breach related to such loans.

 

Derivatives

 

We record all derivative transactions at fair value on our Consolidated Balance Sheets. We do not monitor our exposure to derivatives based on the notional amount because that amount is not a relevant indicator of our exposure to these contracts, as it is generally not indicative of the amount that we would owe on the contract. Instead, a risk framework is used to define risk tolerances and establish limits to help to ensure that certain risk-related losses occur within acceptable, predefined limits. Since derivatives are recorded on the Consolidated Balance Sheets at fair value and the disclosure of the notional amounts is not a relevant indicator of risk, notional amounts are not provided for the off-balance sheet exposure on derivatives. Derivatives that meet the accounting definition of a guarantee and credit derivatives are included in Note 6 to the Consolidated Financial Statements.

 

Involvement with SPEs

 

We transact with SPEs in a variety of capacities, including those that we help establish as well as those initially established by third parties. Our involvement with SPEs can vary and, depending upon the accounting definition of the SPE (i.e., voting rights entity (“VRE”), variable interest entity (“VIE”) or qualified special purpose entity (“QSPE”)), we may be required to reassess prior consolidation and disclosure conclusions. An interest in a VRE requires reconsideration when our equity interest or management influence changes, an interest in a VIE requires reconsideration when an event occurs that was not originally contemplated (e.g., a purchase of the SPE’s assets or liabilities), and an interest in a QSPE requires reconsideration if the entity no longer meets the definition of a QSPE. Refer to Note 1 to the Consolidated Financial Statements for a discussion of our consolidation accounting policies and for information regarding new VIE accounting rules that became effective on January 1, 2010. Types of SPEs with which we have historically transacted include:

 

 

 

Our involvement with SPEs includes off-balance sheet arrangements discussed above, as well as the following activities:

 

 

Funding

 

We fund our assets primarily with a mix of secured and unsecured liabilities through a globally coordinated funding strategy with Bank of America. We fund a portion of our trading assets with secured liabilities, including repurchase agreements, securities loaned and other short-term secured borrowings, which are less sensitive to our credit ratings due to the underlying collateral. Refer to Note 12 to the Consolidated Financial Statements for additional information regarding our borrowings.

 

Credit Ratings

 

Our credit ratings affect the cost and availability of our unsecured funding, and it is our objective to maintain high quality credit ratings. In addition, credit ratings are important when we compete in certain markets and when we seek to engage in certain transactions, including OTC derivatives. Following the acquisition by Bank of America, the major credit rating agencies have indicated that the primary drivers of Merrill Lynch’s credit ratings are Bank of America’s credit ratings. During 2009, the rating agencies took numerous actions to adjust our credit ratings and outlooks, many of which were negative. The rating agencies have indicated that our credit ratings currently reflect their expectation that, if necessary, we would receive significant support from the U.S. government. In February 2010, Standard & Poor’s affirmed our current credit ratings but revised the outlook to negative from stable, based on their belief that it is less certain whether the U.S. government would be willing to provide extraordinary support. In addition to Bank of America’s credit ratings, other factors that influence our credit ratings include rating agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, our reputation, our liquidity position, the level and volatility of our earnings, our corporate governance and risk management policies, and our capital position. Management maintains an active dialogue with the rating agencies.

 

Bank of America has not assumed or guaranteed the long-term debt that was issued or guaranteed by ML & Co. or its subsidiaries prior to the acquisition of Merrill Lynch by Bank of America. Beginning late in the third quarter of 2009, in connection with the update or renewal of certain Merrill Lynch international securities offering programs, Bank of America agreed to guarantee debt securities, warrants and/or certificates issued by certain subsidiaries of ML & Co. on a going forward basis. All existing ML & Co. guarantees of securities issued by those same Merrill Lynch subsidiaries under various international securities offering programs will remain in full force and effect as long as those securities are outstanding, and Bank of America has not assumed any of those prior ML & Co. guarantees or otherwise guaranteed such securities. There were approximately $900 million of securities guaranteed by Bank of America at December 31, 2009. In addition, Bank of America has guaranteed the performance of Merrill Lynch on certain derivative transactions. The aggregate amount of such derivative liabilities was approximately $2.5 billion at December 31, 2009.

 

The following table sets forth ML & Co.’s unsecured credit ratings as of March 8, 2010:

 

 

In connection with certain OTC derivatives transactions and other trading agreements, we could be required to provide additional collateral to or terminate transactions with certain counterparties in the event of a downgrade of the senior debt ratings of ML & Co. The amount of additional collateral required depends on the contract and is usually a fixed incremental amount and/or an amount related to the market value of the exposure. At December 31, 2009, the amount of additional collateral and termination payments that would be required for such derivatives transactions and trading agreements was approximately $1.3 billion in the event of a downgrade to low single-A by all credit agencies. A further downgrade of ML & Co.’s long-term senior debt credit rating to the BBB+ or equivalent level would require approximately $0.6 billion of additional collateral. Our liquidity risk analysis considers the impact of additional collateral outflows due to changes in ML & Co. credit ratings, as well as for collateral that is owed by us and is available for payment, but has not been called for by our counterparties.

Liquidity Risk

 

Following the completion of Bank of America’s acquisition of Merrill Lynch, ML & Co. became a subsidiary of Bank of America and established intercompany lending and borrowing arrangements to facilitate centralized liquidity management. Included in these intercompany agreements is a $75 billion one year, revolving unsecured line of credit that allows ML & Co. to borrow funds from Bank of America for operating requirements at a spread to LIBOR that is reset periodically and is consistent with other intercompany agreements. This credit line was renewed effective January 1, 2010 with a maturity date of January 1, 2011. The credit line will automatically be extended by one year to the succeeding January 1st unless Bank of America provides written notice not to extend at least 45 days prior to the maturity date. The agreement does not contain any financial or other covenants. During 2009, ML & Co. periodically borrowed against the line of credit. There were no outstanding borrowings against the line of credit at December 31, 2009.

 

Unencumbered Loans and Securities

 

At December 31, 2009, certain of our subsidiaries, including broker-dealer subsidiaries, maintained $70 billion of unencumbered securities, including $8 billion of customer margin securities. These unencumbered securities are an important source of liquidity for broker-dealer activities and other individual subsidiary financial commitments, and are generally restricted from transfer and therefore unavailable to support liquidity needs of ML & Co. or other subsidiaries. Proceeds from encumbering customer margin securities are further limited to supporting qualifying customer activities.

 

At December 31, 2009 and December 26, 2008, unencumbered liquid assets at our regulated bank subsidiaries were $12 billion and $58 billion, respectively. The $46 billion reduction from December 26, 2008 primarily reflected the sale of MLBUSA and MLBT-FSB to Bank of America, N.A. in 2009. The remaining unencumbered assets are maintained at our international regulated bank subsidiaries and are available to meet potential deposit obligations, business activity demands and stressed liquidity needs of the bank subsidiaries.

 

Committed Credit Facilities

 

Prior to Merrill Lynch’s acquisition by Bank of America, we maintained committed unsecured and secured credit facilities to cover regular and contingent funding needs. Following the completion of Bank of America’s acquisition of Merrill Lynch on January 1, 2009, certain sources of liquidity were centralized. During the quarter ended March 31, 2009, ML & Co. repaid all outstanding amounts and terminated all of its external committed unsecured and secured credit facilities.

 

U.S. Government Liquidity Facilities

 

The U.S. Government created several temporary programs to enhance liquidity and provide stability to the financial markets following the deterioration of the credit markets in 2008. Merrill Lynch participated in a number of these programs. As of December 31, 2009, we had no outstanding borrowings under these programs. Following the completion of Bank of America’s acquisition of Merrill Lynch and resulting integration activities, Merrill Lynch is no longer eligible to directly access certain liquidity facilities or issue new securities under the programs. In response, we established intercompany arrangements with Bank of America to ensure access to liquidity in the event of contingent funding requirements.

 

Market Risk Management

 

Merrill Lynch defines market risk as the potential change in value of financial instruments caused by fluctuations in interest rates, exchange rates, equity and commodity prices, credit spreads, and related risks.

 

Control and Governance Structure

 

On January 1, 2009, pursuant to the acquisition of Merrill Lynch by Bank of America, Merrill Lynch adopted Bank of America’s risk management and governance practices to maintain consistent risk measurement and disciplined risk taking. Bank of America’s risk management structure is described below.

 

Bank of America’s Global Risk Committee (“GRC”), chaired by Bank of America’s Global Markets Risk Executive, has been designated by its Asset and Liability Market Risk Committee (“ALMRC”) as the primary governance authority for its Global Markets Risk Management, including trading risk management. The GRC’s focus is to take a forward-looking view of the primary credit and market risks impacting Bank of America’s Global Markets business (which includes Merrill Lynch’s sales and trading businesses) and prioritize those that need a proactive risk mitigation strategy. Market risks that impact lines of business outside of the Global Markets business are monitored and governed by their respective governance authorities.

 

At the GRC meetings, the committee considers significant daily revenues and losses by business along with an explanation of the primary driver of the revenue or loss. Thresholds are established for each of Bank of America’s businesses in order to determine if the revenue or loss is considered to be significant for that business. If any of the thresholds are exceeded, an explanation of the variance is made to the GRC. The thresholds are developed in coordination with the respective risk managers to highlight those revenues or losses which exceed what is considered to be normal daily income statement volatility.

 

Value-at-Risk (“VaR”)

 

Merrill Lynch uses a variety of quantitative methods to assess the risk of its positions and portfolios. To evaluate risk in our trading activities, management focuses on the actual and potential volatility of individual positions as well as portfolios. Value-at-Risk (“VaR”) is a key statistic used to measure market risk.

 

A VaR model simulates the value of a portfolio under a range of hypothetical scenarios in order to generate a distribution of potential gains and losses. The VaR represents the worst loss the portfolio is expected to experience based on historical trends with a given level of confidence and depends on the volatility of the positions in the portfolio and on how strongly their risks are correlated. Within any VaR model, there are significant and numerous assumptions that will differ from company to company. In addition, the accuracy of a VaR model depends on the availability and quality of historical data for each of the positions in the portfolio. A VaR model may require additional modeling assumptions for new products which do not have extensive historical price data, or for illiquid positions for which accurate daily prices are not consistently available. The VaR model uses a historical simulation approach based on three years of historical data and an expected shortfall methodology equivalent to a 99 percent confidence level. Statistically, this means that losses will exceed VaR, on average, one out of 100 trading days, or two to three times each year.

 

A VaR model is an effective tool in estimating ranges of potential gains and losses on trading portfolios. There are, however, many limitations inherent in a VaR model as it utilizes historical results over a defined time period to estimate future performance. Historical results may not always be indicative of future results and changes in market conditions or in the composition of the underlying portfolio could have a material impact on the accuracy of the VaR model. To ensure that the VaR model reflects current market conditions, the historical data underlying the VaR model is updated on a bi-weekly basis, and the assumptions underlying the model are reviewed regularly.

 

Due to the limitations mentioned above, we have historically used the VaR model as only one of the components in managing trading risk and also use other techniques such as stress testing and desk

level limits. Periods of extreme market stress influence the reliability of these techniques to various degrees.

 

The accompanying table presents year-end, average, high and low daily trading VaR for the year ended December 31, 2009, as well as a comparison to year end 2008. During 2009, we made certain modifications to our calculation of VaR in order to conform with the VaR model utilized by Bank of America. The VaR statistics in the table below for 2008 year end also have been computed under the Bank of America VaR model.

 

2009 Trading Activities Market Risk VaR

 

 

During 2009, certain assets were transferred between Merrill Lynch and Bank of America in connection with the integration of certain trading activities with Bank of America and efforts to manage risk in a more effective and efficient manner at the consolidated Bank of America level. These transfers contributed to risk changes across all risk categories. For year end 2009, trading VaR decreased to $182 million from $209 million primarily due to a decrease in the credit risk category, partially offset by increases in the foreign exchange, real estate/mortgage, and equities categories. The decrease in credit risk VaR resulted from narrower credit spreads and the transfer of certain assets from Merrill Lynch to Bank of America. For a further discussion on the asset transfers, see Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

VaR Backtesting

 

The accuracy of the VaR methodology is reviewed by backtesting (i.e., comparing actual results against expectations derived from historical data) the VaR results against the daily profit and loss. Backtesting excesses occur when trading losses exceed the VaR. Trading losses incurred on a single day did not exceed Merrill Lynch’s daily 99% trading VaR during the year ended December 31, 2009.

 

Non-Trading Market Risk

 

Interest rate risk associated with our funding activities represents the most significant market risk exposure to our non-trading exposures. The interest rate risk associated with the non-trading positions, together with funding activities, is expressed as sensitivity to changes in the general level of interest rates. This change in economic value is a measurement of economic risk which may differ significantly in magnitude and timing from the actual profit or loss that would be realized under generally accepted accounting principles.

 

At December 31, 2009, the net interest rate sensitivity of these positions was a pre-tax gain in economic value of $10 million for a parallel one basis point increase in interest rates across all yield

curves, compared to a pre-tax gain in economic value of less than $1 million at December 26, 2008. The year-over-year change was driven mainly by the sale of interest-rate-sensitive assets held by MLBUSA and MLBT-FSB to a subsidiary of Bank of America during 2009. For further information on these sales, see Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

Counterparty Credit Risk

 

In making credit decisions, we consider risk rating, collateral, country, industry and single name concentration limits while also balancing the total borrower or counterparty relationship. Our lines of business and risk management personnel use a variety of tools to continuously monitor the ability of a borrower or counterparty to perform under its obligations.

 

Commercial credit risk is evaluated and managed with a goal that concentrations of credit exposure do not result in undesirable levels of risk. We review, measure and manage concentrations of credit exposure by industry, product, geography and customer relationship. Distribution of loans by loan size is an additional measure of portfolio risk diversification. We also review, measure and manage commercial real estate loans by geographic location and property type. In addition, within our non-U.S. portfolio, we evaluate borrowings by region and by country. Additionally, we utilize syndication of exposure to third parties, loan sales, hedging and other risk mitigation techniques to manage the size and risk profile of the loan portfolio. In some cases, we enter into single name and index credit default swaps to mitigate credit exposure related to funded and unfunded commercial loans. The notional value of these swaps totaled $3.2 billion and $13.2 billion at December 31, 2009 and December 26, 2008, respectively. See Note 10 to the consolidated financial statements for additional information on these swaps.

 

Credit risk management for the consumer portfolio begins with the initial underwriting and continues throughout a borrower’s credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, operating processes and metrics to quantify and balance risks and returns. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience. These models are a component of our consumer credit risk management process and are used in part to help determine both new and existing credit decisions, portfolio management strategies including authorizations and line management, collection practices and strategies, determination of the allowance for loan losses, and economic capital allocations for credit risk.

 

Derivatives

 

We enter into International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements or their equivalent (“master netting agreements”) with almost all of our derivative counterparties. Master netting agreements provide protection in bankruptcy in certain circumstances and, in some cases, enable receivables and payables with the same counterparty to be offset for risk management purposes. Agreements are generally negotiated bilaterally and can require complex terms. While we make reasonable efforts to execute such agreements, it is possible that a counterparty may be unwilling to sign such an agreement and, as a result, would subject us to additional credit risk. The enforceability of master netting agreements under bankruptcy laws in certain countries or in certain industries is not free from doubt, and receivables and payables with counterparties in these countries or industries are accordingly recorded on a gross basis.

 

To reduce the risk of loss, we require collateral, principally cash and U.S. Government and agency securities, on certain derivative transactions. From an economic standpoint, we evaluate risk exposures net of related collateral that meets specified standards. In addition to obtaining collateral, we attempt to mitigate counterparty default risk on derivatives whenever possible by entering into transactions with provisions that enable us to terminate or reset the terms of our derivative contracts.

 

 

To the Board of Directors and Stockholder of Merrill Lynch and Co., Inc.:

 

In our opinion, the accompanying consolidated balance sheet as of December 31, 2009 and the related consolidated statements of earnings/(loss), of changes in stockholders’ equity, of comprehensive income/(loss), and of cash flows for the year ended December 31, 2009 and the consolidated statements of earnings/(loss) and of comprehensive income/(loss) for the period from December 27, 2008 to December 31, 2008 present fairly, in all material respects, the financial position of Merrill Lynch & Co., Inc. and its subsidiaries (‘the Company’) at December 31, 2009 and the results of their operations and their cash flows for the year ended December 31, 2009 and the results of their operations for the period December 27, 2008 — December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

New York, New York

February 26, 2010

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Merrill Lynch & Co., Inc.:

 

We have audited the accompanying consolidated balance sheet of Merrill Lynch & Co., Inc. and subsidiaries (“Merrill Lynch”) as of December 26, 2008, and the related consolidated statements of earnings/(loss), changes in stockholders’ equity, comprehensive income/(loss) and cash flows for the years ended December 26, 2008 and December 28, 2007. These financial statements are the responsibility of Merrill Lynch’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such 2008 and 2007 consolidated financial statements present fairly, in all material respects, the financial position of Merrill Lynch as of December 26, 2008, and the results of their operations and their cash flows for each of the years ended December 26, 2008 and December 28, 2007, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1, Merrill Lynch became a wholly-owned subsidiary of Bank of America Corporation on January 1, 2009.

 

As discussed in Note 3, the disclosures in the accompanying 2008 and 2007 financial statements have been retrospectively adjusted for a change in the composition of reportable segments.

 

/s/ Deloitte & Touche LLP

New York, New York

February 23, 2009

(March 10, 2010 as to Note 3)

 

 

 See Notes to Consolidated Financial Statements.

 

 

Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets