UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
|
|
|
X
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the fiscal
year ended December 31, 2009
|
Commission file number: 1-7182
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
13-2740599
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina
|
|
28255
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
|
(704)
386-5681
|
|
Registrants telephone number, including area code:
|
|
|
|
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which
Registered
|
|
|
Trust Preferred Securities of Merrill Lynch Capital
Trust I (and the guarantee of the registrant with respect
thereto); Trust Preferred Securities of Merrill Lynch
Capital Trust II (and the guarantee of the registrant with
respect thereto); Trust Preferred Securities of Merrill
Lynch Capital Trust III (and the guarantee of the
registrant with respect thereto)
|
|
New York Stock Exchange
|
Convertible Securities Exchangeable into Pharmaceutical HOLDRs
due September 7, 2010
|
|
NYSE Alternext US LLC
|
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 Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. X
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated filer
|
Accelerated filer
|
Non-accelerated
filer X
|
Smaller reporting company
|
(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
Indexsm
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
Indexsm
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
Averagesm
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
Averagesm
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
Averagesm
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
50SM
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
i
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 & Poors 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.
ii
ANNUAL
REPORT ON
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
12
|
|
|
|
|
12
|
|
|
|
|
12
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
13
|
|
|
|
|
14
|
|
|
|
|
14
|
|
|
|
|
16
|
|
|
|
|
18
|
|
|
|
|
25
|
|
|
|
|
27
|
|
|
|
|
30
|
|
|
|
|
33
|
|
|
|
|
33
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
38
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
42
|
|
|
|
|
59
|
|
|
|
|
61
|
|
|
|
|
63
|
|
|
|
|
81
|
|
|
|
|
83
|
|
|
|
|
92
|
|
|
|
|
94
|
|
|
|
|
98
|
|
|
|
|
106
|
|
|
|
|
111
|
|
|
|
|
113
|
|
|
|
|
117
|
|
|
|
|
121
|
|
|
|
|
134
|
|
|
|
|
142
|
|
|
|
|
148
|
|
|
|
|
153
|
|
|
|
|
154
|
|
|
|
|
155
|
|
|
|
|
156
|
|
|
|
|
156
|
|
|
|
|
158
|
|
|
|
|
161
|
|
|
|
|
161
|
|
|
|
|
163
|
|
1
PART I
Merrill Lynch was formed in 1914 and became a publicly traded
company on June 23, 1971. In 1973, we created the holding
company, ML & Co., a Delaware corporation that,
through its subsidiaries, 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
3
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
4
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 institutions 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 Americas 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
5
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 Managements Discussion and
Analysis of Financial Condition and Results of
Operations U.S. ABS CDO and Other
Mortgage-Related Activities Monoline Financial
Guarantors. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized or
is liquidated at prices not sufficient to recover the full
amount of the loan or derivative exposure due to us. There is no
assurance that any such losses would not materially and
adversely affect our 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.
6
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.
7
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
Americas liquidity risk. Bank of Americas liquidity
could be impaired by an inability to access the capital markets
or by unforeseen outflows of cash, including deposits. This
situation may arise due to circumstances that Bank of America or
we may be unable to control, such as a general market
disruption, negative views about the financial services industry
generally, or an operational problem that affects third parties
or us. Bank of Americas ability to raise 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 Americas 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 Americas 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 Americas 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 Americas 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 Managements 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
8
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
9
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
Americas common stock. The value of these awards has been
impacted by the significant decline in the market price of Bank
of Americas common stock. We also 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
10
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
11
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.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
There are no unresolved written comments that were received from
the SEC staff 180 days or more before the end of our fiscal
year relating to our periodic or current reports under the
Exchange Act.
We have offices in various locations throughout the world. Other
than those described below as being owned, substantially all of
our offices are located in leased premises. We believe that the
facilities we own or lease are adequate for the purposes for
which they are currently used and that they are well maintained.
Set forth below is the location and the approximate square
footage of our principal facilities. 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
Americas 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 lessees 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.
|
|
Item 3.
|
Legal
Proceedings
|
Refer to Note 14 to the Consolidated Financial Statements
in Part II, Item 8 for a discussion of litigation and
regulatory matters.
12
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
(Declared and Paid)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
2009
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
2008
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the date of this report, Bank of America is the sole
holder of the outstanding common stock of ML & Co.
With the exception of regulatory restrictions on
subsidiaries abilities to pay dividends, there were no
restrictions on ML & Co.s present ability to pay
dividends on common stock, other than ML & Co.s
obligation to make payments on its mandatory convertible
preferred stock, junior subordinated debt related to trust
preferred securities, and the governing provisions of Delaware
General Corporation Law.
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.
|
|
Item 6.
|
Selected
Financial Data.
|
Not required pursuant to instruction I(2).
13
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements and Non-GAAP Financial Measures
We have included certain statements in this report which may be
considered forward-looking, including those about management
expectations and intentions, the impact of off-balance sheet
exposures, significant contractual obligations and anticipated
results of litigation and regulatory investigations and
proceedings. These forward-looking statements represent only
Merrill Lynch & Co., Inc.s (ML &
Co. and, together with its subsidiaries, Merrill
Lynch, the Company, the
Corporation, we, our or
us) beliefs regarding future performance, which is
inherently uncertain. There are a variety of factors, many of
which are beyond our control, which affect our operations,
performance, business strategy and results and could cause our
actual results and experience to differ materially from the
expectations and objectives expressed in any forward-looking
statements. These factors include, but are not limited to,
actions and initiatives taken by both current and potential
competitors and counterparties, general economic conditions,
market conditions, the effects of current, pending and future
legislation, regulation and regulatory actions, the actions of
rating agencies and the other risks and uncertainties detailed
in this report. See Risk Factors in Part I,
Item 1A of this
Form 10-K.
Accordingly, you should not place undue reliance on
forward-looking statements, which speak only as of the dates on
which they are made. We do not undertake to update
forward-looking statements to reflect the impact of
circumstances or events that arise after the dates they are
made. The reader should, however, consult further disclosures we
may make in future filings of our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K.
From time to time, we may also disclose financial information on
a non-GAAP basis where management uses this information and
believes this information will be valuable to investors in
gauging the quality of our financial performance, identifying
trends in our results and providing more meaningful
period-to-period
comparisons.
Introduction
Merrill Lynch was formed in 1914 and became a publicly traded
company on June 23, 1971. In 1973, we created the holding
company, ML & Co., a Delaware corporation that,
through its subsidiaries, is one of the worlds leading
capital markets, advisory and wealth management companies. 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 worlds 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.
14
Bank of Americas 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 Lynchs
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 Lynchs 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 Managements Discussion and
Analysis of Financial Condition and Results of Operations as
permitted by general Instruction I(2).
15
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 Lynchs 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
Lynchs credit spreads on the carrying value of certain of
our long-term debt liabilities; a net pre-tax gain of
$4.3 billion from the sale of our 20% ownership stake in
Bloomberg, L.P., a $2.6 billion foreign currency gain
related to currency hedges of 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 Lynchs 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 Lynchs 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
16
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 Americas 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
BAIs net book value of approximately $263 million. In
accordance with ASC
805-10,
Business Combinations, Merrill Lynchs 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. BAIs impact on Merrill
Lynchs 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 Americas 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.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
% Change between the
|
|
|
Successor Company
|
|
|
Predecessor
Company(2)
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Dec. 31, 2009 and the Year
|
|
|
Dec. 31, 2009
|
|
|
Dec. 26, 2008
|
|
|
Ended Dec. 26, 2008
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
3,953
|
|
|
|
$
|
(27,225
|
)
|
|
|
|
N/M
|
%
|
Commissions
|
|
|
5,885
|
|
|
|
|
6,895
|
|
|
|
|
(15
|
)
|
Managed account and other fee-based revenues
|
|
|
4,315
|
|
|
|
|
5,544
|
|
|
|
|
(22
|
)
|
Investment banking
|
|
|
3,573
|
|
|
|
|
3,733
|
|
|
|
|
(4
|
)
|
Earnings from equity method investments
|
|
|
1,686
|
|
|
|
|
4,491
|
|
|
|
|
(62
|
)
|
Other(1)
|
|
|
3,242
|
|
|
|
|
(10,065
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
22,654
|
|
|
|
|
(16,627
|
)
|
|
|
|
N/M
|
|
Interest and dividend revenues
|
|
|
11,405
|
|
|
|
|
33,383
|
|
|
|
|
(66
|
)
|
Less interest expense
|
|
|
10,773
|
|
|
|
|
29,349
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
632
|
|
|
|
|
4,034
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
23,286
|
|
|
|
|
(12,593
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
12,040
|
|
|
|
|
14,763
|
|
|
|
|
(18
|
)
|
Communications and technology
|
|
|
1,918
|
|
|
|
|
2,201
|
|
|
|
|
(13
|
)
|
Occupancy and related depreciation
|
|
|
1,189
|
|
|
|
|
1,267
|
|
|
|
|
(6
|
)
|
Brokerage, clearing, and exchange fees
|
|
|
1,046
|
|
|
|
|
1,394
|
|
|
|
|
(25
|
)
|
Advertising and market development
|
|
|
363
|
|
|
|
|
652
|
|
|
|
|
(44
|
)
|
Professional fees
|
|
|
607
|
|
|
|
|
1,058
|
|
|
|
|
(43
|
)
|
Office supplies and postage
|
|
|
161
|
|
|
|
|
215
|
|
|
|
|
(25
|
)
|
Other
|
|
|
2,064
|
|
|
|
|
2,402
|
|
|
|
|
(14
|
)
|
Payment related to price reset on common stock offering
|
|
|
-
|
|
|
|
|
2,500
|
|
|
|
|
N/M
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
|
2,300
|
|
|
|
|
N/M
|
|
Restructuring charge
|
|
|
-
|
|
|
|
|
486
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
19,388
|
|
|
|
|
29,238
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings/(loss) from continuing operations
|
|
|
3,898
|
|
|
|
|
(41,831
|
)
|
|
|
|
N/M
|
|
Income tax benefit
|
|
|
(838
|
)
|
|
|
|
(14,280
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) from continuing operations
|
|
|
4,736
|
|
|
|
|
(27,551
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from discontinued operations
|
|
|
-
|
|
|
|
|
(141
|
)
|
|
|
|
N/M
|
|
Income tax benefit
|
|
|
-
|
|
|
|
|
(80
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
-
|
|
|
|
|
(61
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
|
$
|
4,736
|
|
|
|
$
|
(27,612
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
153
|
|
|
|
|
2,869
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) applicable to common stockholders
|
|
$
|
4,583
|
|
|
|
$
|
(30,481
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share from continuing operations
|
|
|
N/A
|
|
|
|
$
|
(24.82
|
)
|
|
|
|
N/M
|
|
Basic loss per common share from discontinued operations
|
|
|
N/A
|
|
|
|
|
(0.05
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
|
N/A
|
|
|
|
$
|
(24.87
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share from continuing operations
|
|
|
N/A
|
|
|
|
$
|
(24.82
|
)
|
|
|
|
N/M
|
|
Diluted loss per common share from discontinued operations
|
|
|
N/A
|
|
|
|
|
(0.05
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
|
N/A
|
|
|
|
$
|
(24.87
|
)
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
|
N/A
|
|
|
|
$
|
7.12
|
|
|
|
|
N/M
|
|
|
|
|
|
|
(1) |
|
Successor Company amounts
include other income and
other-than-temporary
impairment losses on
available-for-sale
debt securities. The
other-than-temporary
impairment losses were $656 million for the year ended
December 31, 2009. |
(2) |
|
Does not include results for the
period from December 27, 2008 to December 31, 2008,
which are presented separately on the Consolidated Statements of
Earnings/(Loss). |
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.
18
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 years
results also included a $5.2 billion loss due to the impact
of the narrowing of Merrill Lynchs 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 Lynchs 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
2008s 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 Lynchs 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 Lynchs 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. Governments 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
19
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 Americas 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
BlackRocks 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
20
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
Lynchs offer to repurchase ARS from our private clients
and the associated settlement with regulators; and a
$0.5 billion restructuring charge associated with headcount
reduction initiatives 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 Lynchs
U.S. capital loss carryforward was utilized, resulting in a
release of $650 million of a valuation allowance
attributable to Merrill Lynchs U.S. capital loss
carryforward. For 2008, the effective tax rate reflected the tax
benefit of Merrill Lynchs 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 Lynchs annual income tax
expense by up to $1.0 billion.
For further information on income taxes, see Note 17 to the
Consolidated Financial Statements.
21
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.
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Net
|
|
|
Net
|
|
|
exposures as
|
|
|
exposures as
|
|
|
of Dec. 31,
|
|
|
of Dec. 26,
|
|
|
2009
|
|
|
2008
|
|
(Excluding the investment securities portfolio)
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-Related
|
|
|
|
|
|
|
|
|
|
U.S.
Prime(1)
|
|
$
|
770
|
|
|
|
$
|
34,799
|
|
|
|
|
|
|
|
|
|
|
|
Other Residential:
|
|
|
|
|
|
|
|
|
|
U.S.
Sub-prime
|
|
$
|
(312
|
)
|
|
|
$
|
195
|
|
U.S. Alt-A
|
|
|
(9
|
)
|
|
|
|
27
|
|
Non-U.S.
|
|
|
2,903
|
|
|
|
|
3,380
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
Residential(2)
|
|
$
|
2,582
|
|
|
|
$
|
3,602
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Super Senior ABS CDO
|
|
$
|
110
|
|
|
|
$
|
708
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
Whole Loans/Conduits
|
|
$
|
3,282
|
|
|
|
$
|
3,845
|
|
Securities and Derivatives
|
|
|
(593
|
)
|
|
|
|
174
|
|
Real Estate
Investments(3)
|
|
|
3,571
|
|
|
|
|
5,685
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Real Estate, excluding First Republic
Bank
|
|
$
|
6,260
|
|
|
|
$
|
9,704
|
|
|
|
|
|
|
|
|
|
|
|
First Republic Bank, Commercial Real
Estate(4)
|
|
$
|
-
|
|
|
|
$
|
3,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009,
net exposures primarily consisted of prime loans originated with
clients of our global wealth management business. The decrease
in U.S. Prime exposure from December 26, 2008 was primarily
due to the sale of MLBUSA and MLBT-FSB to Bank of America during
2009. |
(2) |
|
Includes warehouse lending,
whole loans and residential mortgage-backed
securities. |
(3) |
|
Merrill Lynch makes debt and
equity investments in entities whose underlying assets are real
estate. The amounts presented are net investments and therefore
exclude the amounts that have been consolidated but for which
Merrill Lynch does not consider itself to have economic
exposure. |
(4) |
|
First Republic Bank was
included in the sale of MLBT-FSB to Bank of America during
2009. |
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
22
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
Mark-to-
|
|
|
|
|
|
|
|
|
|
|
Market Prior
|
|
Life-to-Date
|
|
|
Credit Default Swaps with
Financial
|
|
|
|
|
|
to Credit
|
|
Credit
|
|
|
Guarantors (Excluding U.S. Super Senior
|
|
Notional of
|
|
Net
|
|
Valuation
|
|
Valuation
|
|
Carrying
|
ABS CDO)
|
|
CDS(1)
|
|
Exposure(2)
|
|
Adjustments
|
|
Adjustments
|
|
Value(4)
|
|
|
By counterparty credit
quality(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$
|
(11,875
|
)
|
|
$
|
(10,020
|
)
|
|
$
|
1,855
|
|
|
$
|
(61
|
)
|
|
$
|
1,794
|
|
Non-investment grade or unrated
|
|
|
(21,385
|
)
|
|
|
(15,124
|
)
|
|
|
6,261
|
|
|
|
(4,016
|
)
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial guarantor exposures
|
|
$
|
(33,260
|
)
|
|
$
|
(25,144
|
)
|
|
$
|
8,116
|
|
|
$
|
(4,077
|
)
|
|
$
|
4,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the gross notional
amount of CDS purchased as protection to hedge predominantly
Corporate CDOs, CLOs, RMBS and CMBS exposure. Amounts do not
include exposure to financial guarantors on U.S. super senior
ABS CDOs, which are reported separately above. |
(2) |
|
Represents the notional of the
total CDS, net of gains prior to credit valuation
adjustments. |
(3) |
|
Represents Standard &
Poors Ratings Services rating band as of December 31,
2009. |
(4) |
|
The total carrying value as of
December 26, 2008 was $7.8 billion. The decrease in
carrying value from December 26, 2008 primarily reflected a
$3.7 billion decrease in CLOs, corporate CDOs, CMBS and
RMBS carrying value. |
23
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 securitys fair value is considered to
be
other-than-temporary
if it is probable that not all amounts contractually due will be
collected. In assessing whether it is probable that all amounts
contractually due will not be collected, we consider the
following:
|
|
|
The period of time over which it is estimated that the fair
value will increase from the current level to at least the
amortized cost level, or until principal and interest is
estimated to be received;
|
|
The period of time a securitys fair value has been below
amortized cost;
|
|
The amount by which the securitys fair value is below
amortized cost;
|
|
The financial condition of the issuer; and
|
|
Managements intention to sell the security or if it is
more likely than not that Merrill Lynch will be required to sell
the security before the recovery of its amortized cost.
|
Refer to Note 1 to the Consolidated Financial Statements
for additional information.
The following table provides a summary of the Investment
Securities Portfolios net exposures and activity during
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Company -
|
|
|
|
|
|
|
|
|
|
Company -
|
|
|
Net
|
|
Sale of
|
|
Net gains
|
|
Unrealized
|
|
|
|
Net
|
|
|
exposures as
|
|
MLBUSA
|
|
reported
|
|
gains/(losses)
|
|
Other net
|
|
exposures as
|
|
|
of Dec. 26,
|
|
and
|
|
in
|
|
included in
|
|
changes in net
|
|
of Dec, 31,
|
|
|
2008
|
|
MLBT-FSB
|
|
income
|
|
OCI (pre-tax)
|
|
exposures(1)
|
|
2009
|
|
|
Investment Securities Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime
residential mortgage-backed securities
|
|
$
|
2,013
|
|
|
$
|
(12
|
)
|
|
$
|
50
|
|
|
$
|
166
|
|
|
$
|
(1,328
|
)
|
|
$
|
889
|
|
Alt-A residential mortgage-backed securities
|
|
|
2,295
|
|
|
|
(264
|
)
|
|
|
55
|
|
|
|
490
|
|
|
|
(2,252
|
)
|
|
|
324
|
|
Commercial mortgage-backed securities
|
|
|
3,125
|
|
|
|
(1,491
|
)
|
|
|
149
|
|
|
|
109
|
|
|
|
(1,892
|
)
|
|
|
-
|
|
Prime residential mortgage-backed securities
|
|
|
1,845
|
|
|
|
(140
|
)
|
|
|
22
|
|
|
|
180
|
|
|
|
(1,593
|
)
|
|
|
314
|
|
Non-residential asset-backed securities
|
|
|
626
|
|
|
|
(276
|
)
|
|
|
57
|
|
|
|
(4
|
)
|
|
|
(403
|
)
|
|
|
-
|
|
Non-residential CDOs
|
|
|
329
|
|
|
|
(16
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(293
|
)
|
|
|
23
|
|
Other
|
|
|
198
|
|
|
|
(95
|
)
|
|
|
8
|
|
|
|
(10
|
)
|
|
|
(101
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,431
|
|
|
$
|
(2,294
|
)
|
|
$
|
345
|
|
|
$
|
930
|
|
|
$
|
(7,862
|
)
|
|
$
|
1,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily represents sales and
principal paydowns. |
24
Off-Balance
Sheet Exposures
As a part of our normal operations, we enter into various
off-balance sheet arrangements that may require future payments.
The table and discussion below outline our significant
off-balance sheet arrangements, as well as their future
expirations, as of December 31, 2009. Refer to Note 14
to the Consolidated Financial Statements for further information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Expiration
|
|
|
|
|
Less than
|
|
1 - 3
|
|
3 - 5
|
|
Over 5
|
|
|
Total
|
|
1 Year
|
|
Years
|
|
Years
|
|
Years
|
|
|
Standby liquidity facilities
|
|
$
|
4,906
|
|
|
$
|
2,124
|
|
|
$
|
-
|
|
|
$
|
2,750
|
|
|
$
|
32
|
|
Auction rate security guarantees
|
|
|
198
|
|
|
|
198
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residual value guarantees
|
|
|
416
|
|
|
|
-
|
|
|
|
96
|
|
|
|
320
|
|
|
|
-
|
|
Standby letters of credit and other guarantees
|
|
|
26,645
|
|
|
|
894
|
|
|
|
156
|
|
|
|
71
|
|
|
|
25,524
|
|
|
|
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.
25
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 SPEs assets or liabilities), and an
interest in a QSPE requires reconsideration if the entity no
longer meets the definition of a QSPE. Refer to Note 1 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:
|
|
|
|
|
Municipal bond securitization SPEs: SPEs that issue
medium-term paper, purchase municipal bonds as collateral and
purchase a guarantee to enhance the creditworthiness of the
collateral.
|
|
|
|
Asset-backed securities SPEs: SPEs that issue
different classes of debt, from super senior to subordinated,
and equity and purchase assets as collateral, including
residential mortgages, commercial mortgages, auto leases and
credit card receivables.
|
|
|
|
ABS CDOs: SPEs that issue different classes of debt,
from super senior to subordinated, and equity and purchase
asset-backed securities collateralized by residential mortgages,
commercial mortgages, auto leases and credit card receivables.
|
|
|
|
Synthetic CDOs: SPEs that issue different classes of
debt, from super senior to subordinated, and equity, purchase
high-grade assets as collateral and enter into a portfolio of
credit default swaps to synthetically create the credit risk of
the issued debt.
|
26
|
|
|
|
|
Credit-linked note SPEs: SPEs that issue notes
linked to the credit risk of a company, purchase high-grade
assets as collateral and enter into credit default swaps to
synthetically create the credit risk to pay the return on the
notes.
|
|
|
|
Tax planning SPEs: SPEs are sometimes used to
legally isolate transactions for the purpose of obtaining a
particular tax treatment for our clients as well as ourselves.
The assets and capital structure of these entities vary for each
structure.
|
|
|
|
Trust preferred security SPEs: These SPEs hold
junior subordinated debt issued by ML & Co. or our
subsidiaries, and issue preferred stock on substantially the
same terms as the junior subordinated debt to third party
investors. We also provide a parent guarantee, on a junior
subordinated basis, of the distributions and other payments on
the preferred stock to the extent that the SPEs have funds
legally available. The debt we issue into the SPE is classified
as long-term borrowings on our Consolidated Balance Sheets. The
ML & Co. parent guarantees of its own subsidiaries are
not required to be recorded in the Consolidated Financial
Statements.
|
|
|
|
Conduits: Generally, entities that issue commercial
paper and subordinated capital, purchase assets, and enter into
total return swaps or repurchase agreements with higher-rated
counterparties, particularly banks. The Conduits generally have
a liquidity
and/or
credit facility to further enhance the credit quality of the
commercial paper issuance. A single seller conduit will execute
total return swaps, repurchase agreements, and liquidity and
credit facilities with one financial institution. A multi-seller
Conduit will execute total return swaps, repurchase agreements,
and liquidity and credit facilities with numerous financial
institutions.
|
Our involvement with SPEs includes off-balance sheet
arrangements discussed above, as well as the following
activities:
|
|
|
|
|
Holder of Issued Debt and Equity: Merrill Lynch
invests in debt of third party securitization vehicles that are
SPEs and also invests in SPEs that we establish. In Merrill
Lynch formed SPEs, we may be the holder of debt and equity of an
SPE. These holdings will be classified as trading assets, loans,
notes and mortgages or investment securities. Such holdings may
change over time at our discretion and rarely are there
contractual obligations that require us to purchase additional
debt or equity interests. Significant obligations are disclosed
in the off-balance sheet arrangements table above.
|
|
|
|
Warehousing of Loans and Securities: Warehouse loans
and securities represent amounts maintained on our balance sheet
that are intended to be sold into a trust for the purposes of
securitization. We may retain these loans and securities on our
balance sheet for the benefit of a CDO managed by a third party.
Warehoused loans are carried as held for sale and warehoused
securities are carried as trading assets.
|
|
|
|
Securitizations: In the normal course of business,
we securitize: commercial and residential mortgage loans;
municipal, government, and corporate bonds; and other types of
financial assets. Securitizations involve the selling of assets
to SPEs, which in turn issue debt and equity securities with
those assets as collateral. We may retain interests in the
securitized financial assets through holding issuances of the
securitization. See Note 9 to the Consolidated Financial
Statements.
|
Funding and
Liquidity
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.
27
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 Lynchs credit ratings are Bank of Americas
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 &
Poors 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
Americas credit ratings, other factors that influence our
credit ratings include rating agencies assessment of the
general operating environment, our relative positions in the
markets in which we compete, our reputation, our liquidity
position, the level and volatility of our earnings, our
corporate governance and risk management policies, and our
capital 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
Subordinated
|
|
Trust
|
|
Commercial
|
|
Long-Term Debt
|
|
|
Debt
|
|
Debt
|
|
Preferred
|
|
Paper
|
|
Ratings
|
Rating Agency
|
|
Ratings
|
|
Ratings
|
|
Ratings
|
|
Ratings
|
|
Outlook
|
|
|
Dominion Bond Rating Service Ltd.
|
|
A
|
|
A (low)
|
|
A (low)
|
|
R-1 (middle)
|
|
Stable
|
Fitch Ratings
|
|
A+
|
|
A
|
|
BB
|
|
F1+
|
|
Stable
|
Moodys Investors Service, Inc.
|
|
A2
|
|
A3
|
|
Baa3
|
|
P-1
|
|
Stable
|
Rating & Investment Information, Inc. (Japan)
|
|
A+
|
|
A
|
|
Not rated
|
|
a-1
|
|
Negative
|
Standard & Poors Ratings Services
|
|
A
|
|
A-
|
|
BB
|
|
A-1
|
|
Negative
|
|
|
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.
28
Liquidity
Risk
Following the completion of Bank of Americas 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 Lynchs 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 Americas 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
Americas 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.
29
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
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
Americas risk management and governance practices to
maintain consistent risk measurement and disciplined risk
taking. Bank of Americas risk management structure is
described below.
Bank of Americas Global Risk Committee (GRC),
chaired by Bank of Americas 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 GRCs focus is to take a
forward-looking view of the primary credit and market risks
impacting Bank of Americas Global Markets business (which
includes Merrill Lynchs 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 Americas 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
30
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2009
|
|
Daily
|
|
2009
|
|
2009
|
|
2008
|
|
|
Year End
|
|
Average
|
|
High
|
|
Low
|
|
Year
End(3)
|
|
|
Trading
value-at-risk(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
|
$
|
36
|
|
|
$
|
18
|
|
|
$
|
56
|
|
|
$
|
2
|
|
|
$
|
17
|
|
Interest rate
|
|
|
45
|
|
|
|
49
|
|
|
|
69
|
|
|
|
30
|
|
|
|
42
|
|
Credit
|
|
|
171
|
|
|
|
130
|
|
|
|
277
|
|
|
|
73
|
|
|
|
271
|
|
Real estate/Mortgage
|
|
|
56
|
|
|
|
37
|
|
|
|
57
|
|
|
|
24
|
|
|
|
40
|
|
Commodities
|
|
|
21
|
|
|
|
20
|
|
|
|
29
|
|
|
|
16
|
|
|
|
22
|
|
Equities
|
|
|
58
|
|
|
|
43
|
|
|
|
77
|
|
|
|
22
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal(2)
|
|
|
387
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
439
|
|
Diversification benefit
|
|
|
(205
|
)
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall
|
|
$
|
182
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on a 99% confidence level
and a
one-day
holding period. |
(2) |
|
Subtotals are not provided for
highs and lows as they are not meaningful. |
(3) |
|
Represents VaR calculated as of
January 1, 2009. |
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 Lynchs 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
31
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
borrowers 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.
32
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 Companys 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 Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express
opinions on these financial statements and on the Companys
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 companys 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 companys
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
companys 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
33
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 Lynchs management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 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)
34
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of
Earnings/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 27, 2008 to
|
|
For the Year Ended
|
|
For the Year Ended
|
(dollars in millions, except per share amounts)
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
December 26, 2008
|
|
December 28, 2007
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
3,953
|
|
|
|
$
|
(280
|
)
|
|
$
|
(27,225
|
)
|
|
$
|
(12,067
|
)
|
Commissions
|
|
|
5,885
|
|
|
|
|
22
|
|
|
|
6,895
|
|
|
|
7,284
|
|
Managed accounts and other fee-based revenues
|
|
|
4,315
|
|
|
|
|
22
|
|
|
|
5,544
|
|
|
|
5,465
|
|
Investment banking
|
|
|
3,573
|
|
|
|
|
12
|
|
|
|
3,733
|
|
|
|
5,582
|
|
Earnings from equity method investments
|
|
|
1,686
|
|
|
|
|
-
|
|
|
|
4,491
|
|
|
|
1,627
|
|
Other income/(loss)
|
|
|
3,898
|
|
|
|
|
19
|
|
|
|
(10,065
|
)
|
|
|
(2,190
|
)
|
Other-than-temporary
impairment losses on AFS debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
impairment losses on AFS debt securities
|
|
|
(660
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Portion of
other-than-temporary
impairment losses recognized in OCI on AFS debt securities
|
|
|
4
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
22,654
|
|
|
|
|
(205
|
)
|
|
|
(16,627
|
)
|
|
|
5,701
|
|
Interest and dividend revenues
|
|
|
11,405
|
|
|
|
|
34
|
|
|
|
33,383
|
|
|
|
56,974
|
|
Less interest expense
|
|
|
10,773
|
|
|
|
|
-
|
|
|
|
29,349
|
|
|
|
51,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest profit
|
|
|
632
|
|
|
|
|
34
|
|
|
|
4,034
|
|
|
|
5,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
23,286
|
|
|
|
|
(171
|
)
|
|
|
(12,593
|
)
|
|
|
11,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
12,040
|
|
|
|
|
64
|
|
|
|
14,763
|
|
|
|
15,903
|
|
Communications and technology
|
|
|
1,918
|
|
|
|
|
-
|
|
|
|
2,201
|
|
|
|
2,057
|
|
Occupancy and related depreciation
|
|
|
1,189
|
|
|
|
|
-
|
|
|
|
1,267
|
|
|
|
1,139
|
|
Brokerage, clearing, and exchange fees
|
|
|
1,046
|
|
|
|
|
10
|
|
|
|
1,394
|
|
|
|
1,415
|
|
Advertising and market development
|
|
|
363
|
|
|
|
|
-
|
|
|
|
652
|
|
|
|
785
|
|
Professional fees
|
|
|
607
|
|
|
|
|
-
|
|
|
|
1,058
|
|
|
|
1,027
|
|
Office supplies and postage
|
|
|
161
|
|
|
|
|
-
|
|
|
|
215
|
|
|
|
233
|
|
Other
|
|
|
2,064
|
|
|
|
|
-
|
|
|
|
2,402
|
|
|
|
1,522
|
|
Payment related to price reset on common stock offering
|
|
|
-
|
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
-
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
|
-
|
|
|
|
2,300
|
|
|
|
-
|
|
Restructuring charge
|
|
|
-
|
|
|
|
|
-
|
|
|
|
486
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
19,388
|
|
|
|
|
74
|
|
|
|
29,238
|
|
|
|
24,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings/(loss) from continuing operations
|
|
|
3,898
|
|
|
|
|
(245
|
)
|
|
|
(41,831
|
)
|
|
|
(12,831
|
)
|
Income tax benefit
|
|
|
(838
|
)
|
|
|
|
(92
|
)
|
|
|
(14,280
|
)
|
|
|
(4,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) from continuing operations
|
|
|
4,736
|
|
|
|
|
(153
|
)
|
|
|
(27,551
|
)
|
|
|
(8,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss)/earnings from discontinued operations
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(141
|
)
|
|
|
1,397
|
|
Income tax (benefit)/expense
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(80
|
)
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/earnings from discontinued operations
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(61
|
)
|
|
|
860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
|
$
|
4,736
|
|
|
|
$
|
(153
|
)
|
|
$
|
(27,612
|
)
|
|
$
|
(7,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
153
|
|
|
|
|
-
|
|
|
|
2,869
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss) applicable to common stockholders
|
|
$
|
4,583
|
|
|
|
$
|
(153
|
)
|
|
$
|
(30,481
|
)
|
|
$
|
(8,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share from continuing operations
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(24.82
|
)
|
|
$
|
(10.73
|
)
|
Basic (loss)/earnings per common share from discontinued
operations
|
|
|
N/A
|
|
|
|
|
-
|
|
|
|
(0.05
|
)
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(24.87
|
)
|
|
$
|
(9.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share from continuing operations
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(24.82
|
)
|
|
$
|
(10.73
|
)
|
Diluted (loss)/earnings per common share from discontinued
operations
|
|
|
N/A
|
|
|
|
|
-
|
|
|
|
(0.05
|
)
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
|
N/A
|
|
|
|
$
|
(0.10
|
)
|
|
$
|
(24.87
|
)
|
|
$
|
(9.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid per common share
|
|
|
N/A
|
|
|
|
$
|
-
|
|
|
$
|
1.40
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in computing losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
|
|
1,600.3
|
|
|
|
1,225.6
|
|
|
|
830.4
|
|
Diluted
|
|
|
N/A
|
|
|
|
|
1,600.3
|
|
|
|
1,225.6
|
|
|
|
830.4
|
|
See Notes to Consolidated
Financial Statements.
35
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
December 31,
|
|
|
December 26,
|
(dollars in millions, except
per share amounts)
|
|
2009
|
|
|
2008
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,005
|
|
|
|
$
|
68,403
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
20,430
|
|
|
|
|
32,923
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements (includes $41,740 in 2009
and $62,146 in 2008 measured at fair value in accordance with
the fair value option election)
|
|
|
69,738
|
|
|
|
|
93,247
|
|
Receivables under securities borrowed transactions (includes
$2,888 in 2009 and $853 in 2008 measured at fair value in
accordance with the fair value option election)
|
|
|
45,422
|
|
|
|
|
35,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,160
|
|
|
|
|
128,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, at fair value (includes securities
pledged as collateral that can be sold or repledged of $25,901
in 2009 and $18,663 in 2008):
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
49,582
|
|
|
|
|
89,477
|
|
Equities and convertible debentures
|
|
|
34,501
|
|
|
|
|
26,160
|
|
Non-U.S.
governments and agencies
|
|
|
21,256
|
|
|
|
|
6,107
|
|
Corporate debt and preferred stock
|
|
|
16,779
|
|
|
|
|
30,829
|
|
Mortgages, mortgage-backed, and asset-backed
|
|
|
7,971
|
|
|
|
|
13,786
|
|
U.S. Government and agencies
|
|
|
1,458
|
|
|
|
|
5,253
|
|
Municipals, money markets and physical commodities
|
|
|
8,778
|
|
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,325
|
|
|
|
|
175,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (includes $253 in 2009 and $2,770
in 2008 measured at fair value in accordance with the fair value
option election) (includes securities pledged as collateral that
can be sold or repledged of $0 in 2009 and $2,557 in 2008)
|
|
|
32,840
|
|
|
|
|
57,007
|
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral, at fair value
|
|
|
16,346
|
|
|
|
|
11,658
|
|
Receivables from Bank of America
|
|
|
20,619
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
|
|
|
|
|
|
|
Customers (net of allowance for doubtful accounts of $10 in 2009
and $143 in 2008)
|
|
|
31,818
|
|
|
|
|
51,131
|
|
Brokers and dealers
|
|
|
5,998
|
|
|
|
|
12,410
|
|
Interest and other
|
|
|
14,251
|
|
|
|
|
26,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,067
|
|
|
|
|
89,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes, and mortgages (net of allowances for loan
losses of $33 in 2009 and $2,072 in 2008) (includes $4,649 in
2009 and $979 in 2008 measured at fair value in accordance with
the fair value option election)
|
|
|
37,663
|
|
|
|
|
69,190
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and facilities (net of accumulated depreciation
and amortization of $726 in 2009 and $5,856 in 2008)
|
|
|
2,324
|
|
|
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
8,883
|
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
17,533
|
|
|
|
|
29,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
479,195
|
|
|
|
$
|
667,543
|
|
|
|
|
|
|
|
|
|
|
|
36
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
December 31,
|
|
|
December 26,
|
(dollars in millions, except per
share amounts)
|
|
2009
|
|
|
2008
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements (includes $37,325 in 2009
and $32,910 in 2008 measured at fair value in accordance with
the fair value option election)
|
|
$
|
66,260
|
|
|
|
$
|
92,654
|
|
Payables under securities loaned transactions
|
|
|
24,915
|
|
|
|
|
24,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,175
|
|
|
|
|
117,080
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (includes $813 in 2009 and $3,387
in 2008 measured at fair value in accordance with the fair value
option election)
|
|
|
853
|
|
|
|
|
37,895
|
|
Deposits
|
|
|
15,187
|
|
|
|
|
96,107
|
|
Trading liabilities, at fair value
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
35,120
|
|
|
|
|
71,363
|
|
Equities and convertible debentures
|
|
|
13,654
|
|
|
|
|
7,871
|
|
Non-U.S.
governments and agencies
|
|
|
12,844
|
|
|
|
|
4,345
|
|
Corporate debt and preferred stock
|
|
|
1,903
|
|
|
|
|
1,318
|
|
U.S. Government and agencies
|
|
|
1,296
|
|
|
|
|
3,463
|
|
Municipals, money markets and other
|
|
|
643
|
|
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,460
|
|
|
|
|
89,471
|
|
|
|
|
|
|
|
|
|
|
|
Obligation to return securities received as collateral, at
fair value
|
|
|
16,346
|
|
|
|
|
11,658
|
|
Payables to Bank of America
|
|
|
23,550
|
|
|
|
|
-
|
|
Other payables
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
39,307
|
|
|
|
|
44,924
|
|
Brokers and dealers
|
|
|
14,148
|
|
|
|
|
12,553
|
|
Interest and other (includes $240 in 2009 measured at fair value
in accordance with the fair value option election)
|
|
|
17,080
|
|
|
|
|
32,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,535
|
|
|
|
|
90,395
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings (includes $47,040 in 2009 and
$49,521 in 2008 measured at fair value in accordance with the
fair value option election)
|
|
|
151,399
|
|
|
|
|
199,678
|
|
Junior subordinated notes (related to trust preferred
securities)
|
|
|
3,552
|
|
|
|
|
5,256
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
438,057
|
|
|
|
|
647,540
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred Stockholders Equity; authorized
25,000,000 shares;
|
|
|
|
|
|
|
|
|
|
(liquidation preference of $30,000 per share; issued:
2008 244,100 shares; liquidation preference of
$1,000 per share; issued: 2008 115,000 shares;
liquidation preference of $100,000 per share; issued:
2009 17,000 shares; issued: 2008
17,000 shares)
|
|
|
1,541
|
|
|
|
|
8,605
|
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Common stock (par value
$1.331/3
per share; authorized: 3,000,000,000 shares; issued:
2009 1,000 shares; issued: 2008
2,031,995,436 shares)
|
|
|
-
|
|
|
|
|
2,709
|
|
Paid-in capital
|
|
|
35,126
|
|
|
|
|
47,232
|
|
Accumulated other comprehensive (loss) (net of tax)
|
|
|
(112
|
)
|
|
|
|
(6,318
|
)
|
Retained earnings/(Accumulated deficit)
|
|
|
4,583
|
|
|
|
|
(8,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,597
|
|
|
|
|
35,020
|
|
|
|
|
|
|
|
|
|
|
|
Less: Treasury stock, at cost (2009 None;
2008 431,742,565 shares)
|
|
|
-
|
|
|
|
|
23,622
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
|
39,597
|
|
|
|
|
11,398
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
41,138
|
|
|
|
|
20,003
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
479,195
|
|
|
|
$
|
667,543
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated
Financial Statements.
37
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Amounts
|
|
Shares
|
|
|
For the Year Ended
|
|
For the Year Ended
|
(dollars in millions)
|
|
December 31, 2009
|
|
December 31, 2009
|
|
Preferred Stock, net
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
8,605
|
|
|
|
363,445
|
|
Effect of BAC acquisition
|
|
|
(7,064
|
)
|
|
|
(346,445
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,541
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
Shares Exchangeable into Common Stock
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
-
|
|
|
|
8,189
|
|
Effect of BAC acquisition
|
|
|
|
|
|
|
(8,189
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
2,709
|
|
|
|
2,031,995,436
|
|
Effect of BAC acquisition
|
|
|
(2,709
|
)
|
|
|
(2,031,994,436
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
-
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Paid-in Capital
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
47,232
|
|
|
|
|
|
Effect of Purchase Accounting Adjustments
|
|
|
(19,669
|
)
|
|
|
|
|
Cash Capital Contribution from BAC
|
|
|
6,850
|
|
|
|
|
|
BAC contribution of BAI
|
|
|
263
|
|
|
|
|
|
Capital contribution associated with amortization of employee
stock grants
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
35,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment (net of tax)
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(745
|
)
|
|
|
|
|
Effect of BAC acquisition
|
|
|
745
|
|
|
|
|
|
Translation adjustment
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains (Losses) on Investment Securities
|
|
|
|
|
|
|
|
|
Available-for-Sale
(net of tax)
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(6,038
|
)
|
|
|
|
|
Effect of BAC acquisition
|
|
|
6,038
|
|
|
|
|
|
Net unrealized gains on
available-for-sale
securities
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Gains (losses) on Cash Flow Hedges (net of tax)
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
81
|
|
|
|
|
|
Effect of BAC acquisition
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and postretirement plans (net of tax)
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
384
|
|
|
|
|
|
Effect of BAC acquisition
|
|
|
(384
|
)
|
|
|
|
|
Decrease in funded status
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(8,756
|
)
|
|
|
|
|
Effect of BAC acquisition
|
|
|
8,756
|
|
|
|
|
|
Net earnings
|
|
|
4,736
|
|
|
|
|
|
Preferred stock dividends declared
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
4,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, at cost
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(23,622
|
)
|
|
|
(431,742,565
|
)
|
Effect of BAC acquisition
|
|
|
23,622
|
|
|
|
431,742,565
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
$
|
39,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
$
|
41,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated
Financial Statements.
38
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
Amounts
|
|
Shares
|
|
|
For the Period from
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
|
December 26,
|
|
|
|
|
|
December 26,
|
|
|
|
|
|
|
2008 to
|
|
For the Year Ended
|
|
For the Year Ended
|
|
2008 to
|
|
For the Year Ended
|
|
For the Year Ended
|
|
|
December 31,
|
|
December 26,
|
|
December 28,
|
|
December 31,
|
|
December 26,
|
|
December 28,
|
(dollars in millions)
|
|
2008
|
|
2008
|
|
2007
|
|
2008
|
|
2008
|
|
2007
|
|
Preferred Stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
8,605
|
|
|
$
|
4,383
|
|
|
$
|
3,145
|
|
|
|
363,445
|
|
|
|
257,134
|
|
|
|
104,928
|
|
Issuances
|
|
|
-
|
|
|
|
10,814
|
|
|
|
1,615
|
|
|
|
-
|
|
|
|
172,100
|
|
|
|
165,000
|
|
Redemptions
|
|
|
-
|
|
|
|
(6,600
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(66,000
|
)
|
|
|
-
|
|
Shares (repurchased) re-issuances
|
|
|
-
|
|
|
|
8
|
|
|
|
(377
|
)
|
|
|
-
|
|
|
|
211
|
|
|
|
(12,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,605
|
|
|
$
|
8,605
|
|
|
$
|
4,383
|
|
|
|
363,445
|
|
|
|
363,445
|
|
|
|
257,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Exchangeable into Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
-
|
|
|
$
|
39
|
|
|
$
|
39
|
|
|
|
8,189
|
|
|
|
2,552,982
|
|
|
|
2,659,926
|
|
Exchanges
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,544,793
|
)
|
|
|
(106,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
8,189
|
|
|
|
8,189
|
|
|
|
2,552,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
2,709
|
|
|
|
1,805
|
|
|
|
1,620
|
|
|
|
2,031,995,436
|
|
|
|
1,354,309,819
|
|
|
|
1,215,381,006
|
|
Capital issuance and
acquisition(1)(2)
|
|
|
-
|
|
|
|
648
|
|
|
|
122
|
|
|
|
-
|
|
|
|
486,166,666
|
|
|
|
91,576,096
|
|
Preferred stock conversion
|
|
|
-
|
|
|
|
236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
177,322,917
|
|
|
|
-
|
|
Shares issued to employees
|
|
|
-
|
|
|
|
20
|
|
|
|
63
|
|
|
|
-
|
|
|
|
14,196,034
|
|
|
|
47,352,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
2,709
|
|
|
|
2,709
|
|
|
|
1,805
|
|
|
|
2,031,995,436
|
|
|
|
2,031,995,436
|
|
|
|
1,354,309,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
47,232
|
|
|
|
27,163
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital issuance and
acquisition(1)(2)
|
|
|
-
|
|
|
|
11,544
|
|
|
|
4,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock conversion
|
|
|
-
|
|
|
|
6,970
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plan activity and other
|
|
|
-
|
|
|
|
(553
|
)
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of employee stock grants
|
|
|
-
|
|
|
|
2,108
|
|
|
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
47,232
|
|
|
|
47,232
|
|
|
|
27,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(745
|
)
|
|
|
(441
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
-
|
|
|
|
(304
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(745
|
)
|
|
|
(745
|
)
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains/(Losses) on Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
(net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(6,038
|
)
|
|
|
(1,509
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on
available-for-sale
securities
|
|
|
-
|
|
|
|
(7,617
|
)
|
|
|
(2,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply the Fair Value Option
Election(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
adjustments(4)
|
|
|
-
|
|
|
|
3,088
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(6,038
|
)
|
|
|
(6,038
|
)
|
|
|
(1,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Gains/(Losses) on Cash Flow Hedges (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
81
|
|
|
|
83
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred (losses) gains on cash flow hedges
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
81
|
|
|
|
81
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and postretirement plans (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
384
|
|
|
|
76
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains
|
|
|
-
|
|
|
|
306
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to apply Compensation Retirement Benefits
change in measurement
date(3)
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
384
|
|
|
|
384
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(6,318
|
)
|
|
|
(6,318
|
)
|
|
|
(1,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(8,603
|
)
|
|
|
23,737
|
|
|
|
33,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses
|
|
|
(153
|
)
|
|
|
(27,612
|
)
|
|
|
(7,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends declared
|
|
|
-
|
|
|
|
(2,869
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends declared
|
|
|
-
|
|
|
|
(1,853
|
)
|
|
|
(1,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply Fair Value Accounting
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to apply Compensation Retirement Benefits
change in measurement date
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply the Fair Value Option Election
|
|
|
-
|
|
|
|
-
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply Income Tax Accounting
|
|
|
-
|
|
|
|
-
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(8,756
|
)
|
|
|
(8,603
|
)
|
|
|
23,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(23,622
|
)
|
|
|
(23,404
|
)
|
|
|
(17,118
|
)
|
|
|
(431,742,565
|
)
|
|
|
(418,270,289
|
)
|
|
|
(350,697,271
|
)
|
Shares repurchased
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,272
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(62,112,876
|
)
|
Shares reacquired from employees and
other(5)
|
|
|
-
|
|
|
|
(363
|
)
|
|
|
(1,014
|
)
|
|
|
-
|
|
|
|
(16,017,069
|
)
|
|
|
(5,567,086
|
)
|
Share exchanges
|
|
|
-
|
|
|
|
145
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,544,793
|
|
|
|
106,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(23,622
|
)
|
|
|
(23,622
|
)
|
|
|
(23,404
|
)
|
|
|
(431,742,565
|
)
|
|
|
(431,742,565
|
)
|
|
|
(418,270,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
$
|
11,245
|
|
|
$
|
11,398
|
|
|
$
|
27,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
$
|
19,850
|
|
|
$
|
20,003
|
|
|
$
|
31,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The 2008 activity relates to the
July 28, 2008 public offering and additional shares issued
to Davis Selected Advisors and Temasek Holdings. |
|
(2) |
|
The 2007 activity relates to the
acquisition of First Republic Bank and to additional shares
issued to Davis Selected Advisors and Temasek
Holdings. |
|
(3) |
|
These adjustments are not
reflected in the 2008 and 2007 Statements of Comprehensive
Income/(Loss). |
|
(4) |
|
Other adjustments in 2008 and
2007 primarily relate to income taxes, policyholder liabilities
and deferred policy acquisition costs. |
|
(5) |
|
Share amounts are net of
reacquisitions from employees of 19,057,068 and
12,490,283 shares in 2008 and 2007, respectively. |
See Notes to Consolidated
Financial Statements.
39
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Comprehensive
Income/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
|
|
|
|
December 26,
|
|
|
|
|
|
|
For the Year Ended
|
|
|
2008 to
|
|
For the Year Ended
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
December 31,
|
|
December 26,
|
|
December 28,
|
(dollars in millions)
|
|
2009
|
|
|
2008
|
|
2008
|
|
2007
|
Net Earnings/(Loss)
|
|
$
|
4,736
|
|
|
|
$
|
(153
|
)
|
|
$
|
(27,612
|
)
|
|
$
|
(7,777
|
)
|
Other Comprehensive Income/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (losses)/gains
|
|
|
(597
|
)
|
|
|
|
-
|
|
|
|
694
|
|
|
|
(282
|
)
|
Income tax benefit/(expense)
|
|
|
691
|
|
|
|
|
-
|
|
|
|
(998
|
)
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
94
|
|
|
|
|
-
|
|
|
|
(304
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) on investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains/(losses) arising during the period
|
|
|
91
|
|
|
|
|
-
|
|
|
|
(11,916
|
)
|
|
|
(2,291
|
)
|
Reclassification adjustment for realized losses/(gains) included
in net earnings/(loss)
|
|
|
14
|
|
|
|
|
-
|
|
|
|
4,299
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) on investment securities
available-for-sale:
|
|
|
105
|
|
|
|
|
-
|
|
|
|
(7,617
|
)
|
|
|
(2,460
|
)
|
Policyholder liabilities
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
Income tax (expense)/benefit
|
|
|
(58
|
)
|
|
|
|
-
|
|
|
|
3,088
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
47
|
|
|
|
|
-
|
|
|
|
(4,529
|
)
|
|
|
(1,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gains/(losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gains on cash flow hedges
|
|
|
72
|
|
|
|
|
-
|
|
|
|
240
|
|
|
|
162
|
|
Reclassification adjustment for realized gains included in net
earnings/(loss)
|
|
|
(71
|
)
|
|
|
|
-
|
|
|
|
(241
|
)
|
|
|
(30
|
)
|
Income tax expense
|
|
|
(1
|
)
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (losses)/gains
|
|
|
(417
|
)
|
|
|
|
-
|
|
|
|
489
|
|
|
|
353
|
|
Prior service cost
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
6
|
|
Reclassification adjustment for realized (gains)/losses included
in net earnings/(loss)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
23
|
|
Income tax benefit/(expense)
|
|
|
164
|
|
|
|
|
-
|
|
|
|
(174
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(253
|
)
|
|
|
|
-
|
|
|
|
306
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Loss
|
|
|
(112
|
)
|
|
|
|
-
|
|
|
|
(4,529
|
)
|
|
|
(1,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income/(Loss)
|
|
$
|
4,624
|
|
|
|
$
|
(153
|
)
|
|
$
|
(32,141
|
)
|
|
$
|
(8,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated
Financial Statements.
40
Merrill
Lynch & Co., Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
December 26,
|
|
December 28,
|
(dollars in millions)
|
|
2009
|
|
|
2008
|
|
2007
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
|
$
|
4,736
|
|
|
|
$
|
(27,612
|
)
|
|
$
|
(7,777
|
)
|
Adjustments to reconcile net earnings/(loss) to cash provided by
(used for) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of MLIG
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(316
|
)
|
Depreciation and amortization
|
|
|
1,075
|
|
|
|
|
886
|
|
|
|
901
|
|
Share-based compensation expense
|
|
|
1,433
|
|
|
|
|
2,044
|
|
|
|
1,795
|
|
Payment related to price reset on common stock offering
|
|
|
-
|
|
|
|
|
2,500
|
|
|
|
-
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
|
2,300
|
|
|
|
-
|
|
Deferred taxes
|
|
|
754
|
|
|
|
|
(16,086
|
)
|
|
|
(4,924
|
)
|
Gain on sale of Bloomberg L.P.
|
|
|
-
|
|
|
|
|
(4,296
|
)
|
|
|
-
|
|
(Earnings)/loss from equity method investments
|
|
|
(1,443
|
)
|
|
|
|
306
|
|
|
|
(1,409
|
)
|
Other
|
|
|
(402
|
)
|
|
|
|
13,556
|
|
|
|
160
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
29,902
|
|
|
|
|
59,064
|
|
|
|
(29,650
|
)
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
3,469
|
|
|
|
|
(6,214
|
)
|
|
|
(8,886
|
)
|
Receivables from Bank of America
|
|
|
(50,452
|
)
|
|
|
|
-
|
|
|
|
-
|
|
Receivables under resale agreements
|
|
|
33,971
|
|
|
|
|
128,370
|
|
|
|
(43,247
|
)
|
Receivables under securities borrowed transactions
|
|
|
(9,781
|
)
|
|
|
|
98,063
|
|
|
|
(14,530
|
)
|
Customer receivables
|
|
|
1,989
|
|
|
|
|
19,561
|
|
|
|
(21,280
|
)
|
Brokers and dealers receivables
|
|
|
6,412
|
|
|
|
|
10,236
|
|
|
|
(3,744
|
)
|
Proceeds from loans, notes, and mortgages held for sale
|
|
|
9,237
|
|
|
|
|
21,962
|
|
|
|
72,054
|
|
Other changes in loans, notes, and mortgages held for sale
|
|
|
(7,212
|
)
|
|
|
|
2,700
|
|
|
|
(86,894
|
)
|
Trading liabilities
|
|
|
(24,184
|
)
|
|
|
|
(34,338
|
)
|
|
|
23,878
|
|
Payables under repurchase agreements
|
|
|
(20,894
|
)
|
|
|
|
(143,071
|
)
|
|
|
13,101
|
|
Payables under securities loaned transactions
|
|
|
489
|
|
|
|
|
(31,480
|
)
|
|
|
12,414
|
|
Payables to Bank of America
|
|
|
23,550
|
|
|
|
|
-
|
|
|
|
-
|
|
Customer payables
|
|
|
(5,625
|
)
|
|
|
|
(18,658
|
)
|
|
|
14,135
|
|
Brokers and dealers payables
|
|
|
1,625
|
|
|
|
|
(11,946
|
)
|
|
|
113
|
|
Trading investment securities
|
|
|
-
|
|
|
|
|
3,216
|
|
|
|
9,333
|
|
Other, net
|
|
|
6,082
|
|
|
|
|
(31,588
|
)
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) operating activities
|
|
|
4,731
|
|
|
|
|
39,475
|
|
|
|
(72,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of
available-for-sale
securities
|
|
|
6,989
|
|
|
|
|
7,250
|
|
|
|
13,362
|
|
Sales of
available-for-sale
securities
|
|
|
11,311
|
|
|
|
|
29,537
|
|
|
|
39,327
|
|
Purchases of
available-for-sale
securities
|
|
|
(1,901
|
)
|
|
|
|
(31,017
|
)
|
|
|
(58,325
|
)
|
Proceeds from the sale of discontinued operations
|
|
|
-
|
|
|
|
|
12,576
|
|
|
|
1,250
|
|
Equipment and facilities, net
|
|
|
(256
|
)
|
|
|
|
(630
|
)
|
|
|
(719
|
)
|
Loans, notes, and mortgages held for investment
|
|
|
3,440
|
|
|
|
|
(13,379
|
)
|
|
|
5,113
|
|
Sale of MLBT-FSB to Bank of America
|
|
|
4,450
|
|
|
|
|
-
|
|
|
|
-
|
|
Other investments
|
|
|
3,999
|
|
|
|
|
1,336
|
|
|
|
(5,049
|
)
|
Acquisitions, net of cash
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(2,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) investing activities
|
|
|
28,032
|
|
|
|
|
5,673
|
|
|
|
(7,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and short-term borrowings
|
|
|
(36,631
|
)
|
|
|
|
12,981
|
|
|
|
6,316
|
|
Issuance and resale of long-term borrowings
|
|
|
7,555
|
|
|
|
|
70,194
|
|
|
|
165,107
|
|
Settlement and repurchases of long-term borrowings
|
|
|
(56,089
|
)
|
|
|
|
(109,731
|
)
|
|
|
(93,258
|
)
|
Capital contributions from Bank of America
|
|
|
6,850
|
|
|
|
|
-
|
|
|
|
-
|
|
Deposits
|
|
|
8,088
|
|
|
|
|
(7,880
|
)
|
|
|
9,884
|
|
Derivative financing transactions
|
|
|
19
|
|
|
|
|
543
|
|
|
|
848
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
|
9,899
|
|
|
|
4,787
|
|
Issuance of preferred stock, net
|
|
|
-
|
|
|
|
|
9,281
|
|
|
|
1,123
|
|
Common stock repurchases
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(5,272
|
)
|
Other common stock transactions
|
|
|
-
|
|
|
|
|
(833
|
)
|
|
|
(60
|
)
|
Excess tax benefits related to share-based compensation
|
|
|
-
|
|
|
|
|
39
|
|
|
|
715
|
|
Dividends
|
|
|
(153
|
)
|
|
|
|
(2,584
|
)
|
|
|
(1,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used for) provided by financing activities
|
|
|
(70,361
|
)
|
|
|
|
(18,091
|
)
|
|
|
88,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents
|
|
|
(37,598
|
)
|
|
|
|
27,057
|
|
|
|
9,237
|
|
Cash and cash equivalents, beginning of
period(1)
|
|
|
52,603
|
|
|
|
|
41,346
|
|
|
|
32,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
15,005
|
|
|
|
$
|
68,403
|
|
|
$
|
41,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (net of refunds)
|
|
$
|
778
|
|
|
|
$
|
1,518
|
|
|
$
|
1,846
|
|
Interest paid
|
|
|
9,543
|
|
|
|
|
30,397
|
|
|
|
49,881
|
|
Non-cash investing and financing activities:
In connection with the acquisition of Merrill Lynch by Bank
of America, Merrill Lynch recorded purchase accounting
adjustments in the year ended December 31, 2009, which were
recorded as non-cash capital contributions. In addition, during
2009 Bank of America contributed the net assets of Banc of
America Investment Services, Inc. to Merrill Lynch. See
Note 2.
In connection with the sale of Merrill Lynch Bank USA to a
subsidiary of Bank of America during 2009, Merrill Lynch
received a note receivable as consideration for the net book
value of the assets and liabilities transferred to Bank of
America. See Note 2.
As a result of the conversion of $6.6 billion of Merrill
Lynchs mandatory convertible preferred stock,
series 1, Merrill Lynch recorded additional preferred
dividends of $2.1 billion in 2008. The preferred dividends
were paid in additional shares of common and preferred stock.
In 2008, in satisfaction of Merrill Lynchs obligations
under the reset provisions contained in the investment agreement
with Temasek, Merrill Lynch paid Temasek $2.5 billion
through the issuance of common stock.
As a result of the sale of Merrill Lynchs 20% ownership
stake in Bloomberg, L.P. in 2008, Merrill Lynch recorded a
$4.3 billion pre-tax gain and received notes totaling
approximately $4.3 billion.
|
|
|
(1) |
|
Amount for Successor Company is
as of January 1, 2009. |
See Notes to Consolidated
Financial Statements.
41
Merrill
Lynch & Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009
Note 1. Summary of Significant Accounting
Policies
Description
of Business
Merrill Lynch & Co. Inc. (ML &
Co.) and together with its subsidiaries (Merrill
Lynch), provides investment, financing and other related
services to individuals and institutions on a global basis
through its broker, dealer, banking and other financial services
subsidiaries. Its principal subsidiaries include:
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
(MLPF&S), a
U.S.-based
broker-dealer in securities and futures commission merchant;
|
|
|
Merrill Lynch International (MLI), a United Kingdom
(U.K.)-based
broker-dealer in securities and dealer in equity and credit
derivatives;
|
|
|
Merrill Lynch Capital Services, Inc., a
U.S.-based
dealer in interest rate, currency, commodity and credit
derivatives;
|
|
|
Merrill Lynch International Bank Limited (MLIB), an
Ireland-based bank;
|
|
|
Merrill Lynch Japan Securities Co., Ltd. (MLJS), a
Japan-based broker-dealer;
|
|
|
Merrill Lynch Derivative Products, AG, a Switzerland-based
derivatives dealer; and
|
|
|
ML IBK Positions Inc., a
U.S.-based
entity involved in private equity and principal investing.
|
Services provided to clients by Merrill Lynch and other
activities include:
|
|
|
|
|
Securities brokerage, trading and underwriting;
|
|
|
Investment banking, strategic advisory services (including
mergers and acquisitions) and other corporate finance activities;
|
|
|
Wealth management products and services, including financial,
retirement and generational planning;
|
|
|
Investment management and advisory and related record-keeping
services;
|
|
|
Origination, brokerage, dealer, and related activities in swaps,
options, forwards, exchange-traded futures, other derivatives,
commodities and foreign exchange products;
|
|
|
Securities clearance, settlement financing services and prime
brokerage;
|
|
|
Private equity and other principal investing activities; and
|
|
|
Research services on a global basis
|
Bank of
America Acquisition
On January 1, 2009, Merrill Lynch (the Predecessor
Company) was acquired by Bank of America Corporation
(Bank of America or BAC) through the
merger of a wholly-owned subsidiary of Bank of America with and
into ML & Co. with ML & Co. (the
Successor Company) continuing as the surviving
corporation and a wholly-owned subsidiary of Bank of America.
Upon completion of the acquisition, each outstanding share of
ML & Co. common stock was converted into
0.8595 shares of Bank of America common stock. As of the
completion of the acquisition, ML & Co. Series 1
through Series 8 preferred stock were converted into Bank
of America preferred stock with substantially identical terms to
the corresponding series of Merrill Lynch preferred stock
(except for additional voting rights provided to the Bank of
America securities). The Merrill Lynch 9.00% Non-Voting
Mandatory Convertible Non-Cumulative Preferred Stock,
Series 2, and 9.00% Non-Voting Mandatory Convertible
Non-Cumulative Preferred Stock, Series 3 that were
outstanding immediately prior to the
42
completion of the acquisition remained issued and outstanding
subsequent to the acquisition, but are now convertible into Bank
of America common stock.
Bank of Americas cost of acquiring Merrill Lynch has been
pushed down to form a new accounting basis for Merrill Lynch.
Accordingly, the accompanying Consolidated Financial Statements
are presented for two periods, Predecessor and Successor, which
respectively correspond to the periods preceding and succeeding
the date of acquisition. The Predecessor and Successor periods
have been separated by a vertical line on the face of the
Consolidated Financial Statements to highlight the fact that the
financial information for such periods has been prepared under
two different cost bases of accounting. The components of the
Predecessor Companys shareholders equity (with the
exception of $1.5 billion of convertible preferred stock
discussed above) were reclassified to
paid-in-capital
on January 1, 2009.
Effective January 1, 2009, Merrill Lynch adopted calendar
quarter-end and year-end reporting periods to coincide with
those of Bank of America. The intervening period between Merrill
Lynchs previous fiscal year end (December 26,
2008) and the beginning of its 2009 year (January 1,
2009) (the stub period) is presented separately on
the accompanying Consolidated Statements of Earnings/(Loss).
Basis of
Presentation
The Consolidated Financial Statements include the accounts of
Merrill Lynch. The Consolidated Financial Statements are
presented in accordance with U.S. Generally Accepted
Accounting Principles (U.S. GAAP). Intercompany
transactions and balances within Merrill Lynch have been
eliminated. Transactions and balances with Bank of America have
not been eliminated.
The Consolidated Financial Statements are presented in
U.S. dollars. Many
non-U.S. subsidiaries
have a functional currency (i.e., the currency in which
activities are primarily conducted) that is other than the
U.S. dollar, often the currency of the country in which a
subsidiary is domiciled. Subsidiaries assets and
liabilities are translated to U.S. dollars at year-end
exchange rates, while revenues and expenses are translated at
average exchange rates during the year. Adjustments that result
from translating amounts in a subsidiarys functional
currency and related hedging, net of related tax effects, are
reported in stockholders equity as a component of
accumulated other comprehensive loss. All other translation
adjustments are included in earnings. Merrill Lynch uses
derivatives to manage the currency exposure arising from
activities in
non-U.S. subsidiaries.
See the Derivatives section for additional information on
accounting for derivatives.
Merrill Lynch offers a broad array of products and services to
its diverse client base of individuals, small to mid-size
businesses, employee benefit plans, corporations, financial
institutions, and governments around the world. These products
and services are offered from a number of locations globally. In
some cases, the same or similar products and services may be
offered to both individual and institutional clients, utilizing
the same infrastructure. In other cases, a single infrastructure
may be used to support multiple products and services offered to
clients. When Merrill Lynch analyzes its profitability, it does
not focus on the profitability of a single product or service.
Instead, Merrill Lynch views the profitability of businesses
offering an array of products and services to various types of
clients. The profitability of the products and services offered
to individuals, small to mid-size businesses, and employee
benefit plans is analyzed separately from the profitability of
products and services offered to corporations, financial
institutions, and governments, regardless of whether there is
commonality in products and services infrastructure. As such,
Merrill Lynch does not separately disclose the costs associated
with the products and services sold or general and
administrative costs either in total or by product.
43
When determining the prices for products and services, Merrill
Lynch considers multiple factors, including prices being offered
in the market for similar products and services, the
competitiveness of its pricing compared to competitors, the
profitability of its businesses and its overall profitability,
as well as the profitability, creditworthiness, and importance
of the overall client relationships.
Shared expenses that are incurred to support products and
services and infrastructures are allocated to the businesses
based on various methodologies, which may include headcount,
square footage, and certain other criteria. Similarly, certain
revenues may be shared based upon agreed methodologies. When
evaluating the profitability of various businesses, Merrill
Lynch considers all expenses incurred, including overhead and
the costs of shared services, as all are considered integral to
the operation of the businesses.
Certain prior period amounts have been reclassified to conform
to the current period presentation. In addition, certain changes
have been made to classifications in the financial statements as
of and for the year ended December 31, 2009 to conform to
Bank of Americas presentation of similar transactions.
These changes include:
|
|
|
|
|
The reclassification of bifurcated embedded derivatives from the
balance sheet classification of the host instrument (e.g.,
long-term borrowings for structured notes) to derivative
contracts within trading assets and trading liabilities;
|
|
|
The reclassification of derivatives that had been used for asset
and liability management hedging from other assets and other
payables-interest and other to derivative contracts within
trading assets and trading liabilities;
|
|
|
The reclassification of certain loans designated as held for
trading, held for sale or held for investment to either held for
sale or held for investment; and
|
|
|
The reclassification of the financing provided to Bloomberg,
Inc. in connection with the sale of Merrill Lynchs
interest in Bloomberg, L.P. from investment securities to loans,
notes and mortgages.
|
Merrill Lynch did not make any significant changes to its
Predecessor Company accounting policies in order to conform with
the accounting policies utilized by Bank of America.
In July 2009, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Codification
(ASC) 105, Generally Accepted Accounting
Principles, (ASC 105), which approved the FASB Accounting
Standards Codification (the Codification) as the
single source of authoritative nongovernmental GAAP. The
Codification is effective for interim or annual periods ending
after September 15, 2009. All existing accounting standards
have been superseded and all other accounting literature not
included in the Codification will be considered
nonauthoritative. The adoption of ASC 105 did not impact Merrill
Lynchs financial condition or results of operations. All
accounting references within this report are in accordance with
the new Codification.
Consolidation
Accounting Policies
The Consolidated Financial Statements include the accounts of
Merrill Lynch, whose subsidiaries are generally controlled
through a majority voting interest. In certain cases, Merrill
Lynch subsidiaries may also be consolidated based on a risks and
rewards approach. Merrill Lynch does not consolidate those
special purpose entities that meet the criteria of a qualified
special purpose entity (QSPE).
Merrill Lynch determines whether it is required to consolidate
an entity by first evaluating whether the entity qualifies as a
voting rights entity (VRE), a variable interest
entity (VIE), or a QSPE.
44
VREs VREs are defined to include entities that have
both equity at risk that is sufficient to fund future operations
and have equity investors with decision making ability that
absorb the majority of the expected losses and expected returns
of the entity. In accordance with ASC 810, Consolidation,
(Consolidation Accounting), Merrill Lynch
generally consolidates those VREs where it holds a controlling
financial interest. For investments in limited partnerships and
certain limited liability corporations that Merrill Lynch does
not control, Merrill Lynch applies ASC 323,
Investments Equity Method and Joint Ventures
(Equity Method Accounting), which requires use
of the equity method of accounting for investors that have more
than a minor influence, which is typically defined as an
investment of greater than 3% of the outstanding equity in the
entity. For more traditional corporate structures, in accordance
with Equity Method Accounting, Merrill Lynch applies the equity
method of accounting where it has significant influence over the
investee. Significant influence can be evidenced by a
significant ownership interest (which is generally defined as a
voting interest of 20% to 50%), significant board of director
representation, or other contracts and arrangements.
VIEs Those entities that do not meet the VRE
criteria are generally analyzed for consolidation as either VIEs
or QSPEs. Merrill Lynch consolidates those VIEs in which it
absorbs the majority of the variability in expected losses
and/or the
variability in expected returns of the entity as required by
Consolidation Accounting. Merrill Lynch relies on a qualitative
and/or
quantitative analysis, including an analysis of the design of
the entity, to determine if it is the primary beneficiary of the
VIE and therefore must consolidate the VIE. Merrill Lynch
reassesses whether it is the primary beneficiary of a VIE upon
the occurrence of a reconsideration event.
QSPEs QSPEs are passive entities with significantly
limited permitted activities. QSPEs are generally used as
securitization vehicles and are limited in the type of assets
that they may hold, the derivatives into which they can enter
and the level of discretion that they may exercise through
servicing activities. In accordance with ASC 860, Transfers
and Servicing, (Financial Transfers and Servicing
Accounting), and Consolidation Accounting, Merrill Lynch
does not consolidate QSPEs. See the New Accounting
Pronouncements section of this note for information
regarding new VIE accounting rules that became effective on
January 1, 2010.
Securitization
Activities
In the normal course of business, Merrill Lynch has securitized
commercial and residential mortgage loans; municipal,
government, and corporate bonds; and other types of financial
assets. Merrill Lynch may retain interests in the securitized
financial assets through holding tranches of the securitization.
In accordance with Financial Transfers and Servicing Accounting,
Merrill Lynch recognizes transfers of financial assets where it
relinquishes control as sales to the extent of cash and any
proceeds received. Control is considered to be relinquished when
all of the following conditions have been met:
|
|
|
|
|
The transferred assets have been legally isolated from the
transferor even in bankruptcy or other receivership;
|
|
|
The transferee has the right to pledge or exchange the assets it
received, or if the entity is a QSPE the beneficial interest
holders have the right to pledge or exchange their beneficial
interests; and
|
|
|
The transferor does not maintain effective control over the
transferred assets (e.g., the ability to unilaterally cause the
holder to return specific transferred assets).
|
Revenue
Recognition
Principal transactions revenues include both realized and
unrealized gains and losses on trading assets and trading
liabilities, investment securities classified as trading
investments and fair value changes
45
associated with certain structured debt. These instruments are
recorded at fair value. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. Gains and
losses on sales are recognized on a trade date basis.
Commissions revenues include commissions, mutual fund
distribution fees and contingent deferred sales charge revenue,
which are all accrued as earned. Commissions revenues also
include mutual fund redemption fees, which are recognized at the
time of redemption. Commissions revenues earned from certain
customer equity transactions are recorded net of related
brokerage, clearing and exchange fees.
Managed accounts and other fee-based revenues primarily consist
of asset-priced portfolio service fees earned from the
administration of separately managed accounts and other
investment accounts for retail investors, annual account fees,
and certain other account-related fees.
Investment banking revenues include underwriting revenues and
fees for merger and acquisition advisory services, which are
accrued when services for the transactions are substantially
completed. Underwriting revenues are presented net of
transaction-related expenses. Transaction-related expenses,
primarily legal, travel and other costs directly associated with
the transaction, are deferred and recognized in the same period
as the related revenue from the investment banking transaction
to match revenue recognition.
Earnings from equity method investments include Merrill
Lynchs pro rata share of income and losses associated with
investments accounted for under the equity method. The
$1.1 billion pre-tax gain recorded in 2009 in connection
with Merrill Lynchs investment in BlackRock (see
Note 8) is also included within earnings from equity
method investments.
Other revenues include gains/(losses) on investment securities,
including sales and
other-than-temporary-impairment
losses associated with certain
available-for-sale
securities, gains/(losses) on private equity investments and
other principal investments and gains/(losses) on loans and
other miscellaneous items.
Contractual interest and dividends received and paid on trading
assets and trading liabilities, excluding derivatives, are
recognized on an accrual basis as a component of interest and
dividend revenues and interest expense. Interest and dividends
on investment securities are recognized on an accrual basis as a
component of interest and dividend revenues. Interest related to
loans, notes, and mortgages, securities financing activities and
certain short- and long-term borrowings are recorded on an
accrual basis with related interest recorded as interest revenue
or interest expense, as applicable. Contractual interest, if
any, on structured notes is recorded as a component of interest
expense.
Use of
Estimates
In presenting the Consolidated Financial Statements, management
makes estimates regarding:
|
|
|
|
|
Valuations of assets and liabilities requiring fair value
estimates;
|
|
|
The allowance for credit losses;
|
|
|
Determination of
other-than-temporary
impairments for
available-for-sale
investment securities;
|
|
|
The outcome of litigation;
|
|
|
Assumptions and cash flow projections used in determining
whether VIEs should be consolidated and the determination of the
qualifying status of QSPEs;
|
|
|
The realization of deferred taxes and the recognition and
measurement of uncertain tax positions;
|
|
|
The carrying amount of goodwill and intangible assets;
|
|
|
The amortization period of intangible assets with definite lives;
|
46
|
|
|
|
|
Incentive-based compensation accruals and valuation of
share-based payment compensation arrangements; and
|
|
|
Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements.
|
Estimates, by their nature, are based on judgment and available
information. Therefore, actual results could differ from those
estimates and could have a material impact on the Consolidated
Financial Statements, and it is possible that such changes could
occur in the near term. A discussion of certain areas in which
estimates are a significant component of the amounts reported in
the Consolidated Financial Statements follows:
Fair
Value Measurement
Merrill Lynch accounts for a significant portion of its
financial instruments at fair value or considers fair value in
their measurement. Merrill Lynch accounts for certain financial
assets and liabilities at fair value under various accounting
literature, including ASC 320, Investments Debt
and Equity Securities, (Investment Accounting),
ASC 815, Derivatives and Hedging, (Derivatives
Accounting), and the fair value option election in
accordance with ASC
825-10-25,
Financial Instruments Recognition,
(fair value option election). Merrill Lynch also
accounts for certain assets at fair value under applicable
industry guidance, namely ASC 940 Financial
Services Brokers and Dealers
(Broker-Dealer Guide) and ASC 946, Financial
Services Investment Companies (Investment
Company Guide).
ASC 820, Fair Value Measurements and Disclosures,
(Fair Value Accounting) defines fair value,
establishes a framework for measuring fair value, establishes a
fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair
value measurements.
Fair values for
over-the-counter
(OTC) derivative financial instruments, principally
forwards, options, and swaps, represent the present value of
amounts estimated to be received from or paid to a marketplace
participant in settlement of these instruments (i.e., the amount
Merrill Lynch would expect to receive in a derivative asset
assignment or would expect to pay to have a derivative liability
assumed). These derivatives are valued using pricing models
based on the net present value of estimated future cash flows
and directly observed prices from exchange-traded derivatives,
other OTC trades, or external pricing services, while taking
into account the counterpartys creditworthiness, or
Merrill Lynchs own creditworthiness, as appropriate.
Determining the fair value for OTC derivative contracts can
require a significant level of estimation and management
judgment.
New and/or
complex instruments may have immature or limited markets. As a
result, the pricing models used for valuation often incorporate
significant estimates and assumptions that market participants
would use in pricing the instrument, which may impact the
results of operations reported in the Consolidated Financial
Statements. For instance, on long-dated and illiquid contracts
extrapolation methods are applied to observed market data in
order to estimate inputs and assumptions that are not directly
observable. This enables Merrill Lynch to mark to fair value all
positions consistently when only a subset of prices are directly
observable. Values for OTC derivatives are verified using
observed information about the costs of hedging the risk and
other trades in the market. As the markets for these products
develop, Merrill Lynch continually refines its pricing models to
correlate more closely to the market price of these instruments.
The recognition of significant inception gains and losses that
incorporate unobservable inputs is reviewed by management to
ensure such gains and losses are derived from observable inputs
and/or
incorporate reasonable assumptions about the unobservable
component, such as implied bid-offer adjustments.
47
Certain financial instruments recorded at fair value are
initially measured using mid-market prices which results in
gross long and short positions valued at the same pricing level
prior to the application of position netting. The resulting net
positions are then adjusted to fair value representing the exit
price as defined in Fair Value Accounting. The significant
adjustments include liquidity and counterparty credit risk.
Liquidity
Merrill Lynch makes adjustments to bring a position from a
mid-market to a bid or offer price, depending upon the net open
position. Merrill Lynch values net long positions at bid prices
and net short positions at offer prices. These adjustments are
based upon either observable or implied bid-offer prices.
Counterparty
Credit Risk
In determining fair value, Merrill Lynch considers both the
credit risk of its counterparties, as well as its own
creditworthiness. Merrill Lynch attempts to mitigate credit risk
to third parties by entering into netting and collateral
arrangements. Net counterparty exposure (counterparty positions
netted by offsetting transactions and both cash and securities
collateral) is then valued for counterparty creditworthiness and
this resultant value is incorporated into the fair value of the
respective instruments. Merrill Lynch generally calculates the
credit risk adjustment for derivatives based on observable
market credit spreads.
Fair Value Accounting also requires that Merrill Lynch consider
its own creditworthiness when determining the fair value of
certain instruments, including OTC derivative instruments and
certain structured notes carried at fair value under the fair
value option election. The approach to measuring the impact of
Merrill Lynchs credit risk on an instrument is done in the
same manner as for third party credit risk. The impact of
Merrill Lynchs credit risk is incorporated into the fair
value, even when credit risk is not readily observable, of
instruments such as OTC derivative contracts. OTC derivative
liabilities are valued based on the net counterparty exposure as
described above.
Legal
Reserves
Merrill Lynch is a party in various actions, some of which
involve claims for substantial amounts. Amounts are accrued for
the financial resolution of claims that have either been
asserted or are deemed probable of assertion if, in the opinion
of management, it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
In many cases, it is not possible to determine whether a
liability has been incurred or to estimate the ultimate or
minimum amount of that liability until the case is close to
resolution, in which case no accrual is made until that time.
Accruals are subject to significant estimation by management
with input from outside counsel.
Income
Taxes
Merrill Lynch provides for income taxes on all transactions that
have been recognized in the Consolidated Financial Statements in
accordance with ASC 740, Income Taxes (Income Tax
Accounting). Accordingly, deferred taxes are adjusted to
reflect the tax rates at which future taxable amounts will
likely be settled or realized. The effects of tax rate changes
on deferred tax liabilities and deferred tax assets, as well as
other changes in income tax laws, are recognized in net earnings
in the period during which such changes are enacted. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amounts that are more-likely-than-not to be
realized. Pursuant to Income Tax Accounting, Merrill Lynch may
assess various sources of evidence in the conclusion as to the
necessity of valuation allowances to reduce deferred
48
tax assets to amounts more-likely-than-not to be realized,
including the following: 1) past and projected earnings,
including losses, of Merrill Lynch and Bank of America, as
certain tax attributes such as U.S. net operating losses
(NOLs), U.S. capital loss carryforwards and
foreign tax credit carryforwards can be utilized by Bank of
America in certain income tax returns, 2) tax carryforward
periods, and 3) tax planning strategies and other factors
of the legal entities, such as the intercompany tax-allocation
policy. Included within Merrill Lynchs net deferred tax
assets are carryforward amounts generated in the U.S. and
the U.K. that are deductible in the future as NOLs. Merrill
Lynch has concluded that these deferred tax assets are
more-likely-than-not to be fully utilized prior to expiration,
based on the projected level of future taxable income of Merrill
Lynch and Bank of America, which is relevant due to the
intercompany tax-allocation policy. For this purpose, future
taxable income was projected based on forecasts, historical
earnings after adjusting for the past market disruptions and the
anticipated impact of the differences between pre-tax earnings
and taxable income.
Merrill Lynch recognizes and measures its unrecognized tax
benefits in accordance with Income Tax Accounting. Merrill Lynch
estimates the likelihood, based on their technical merits, that
tax positions will be sustained upon examination considering the
facts and circumstances and information available at the end of
each period. Merrill Lynch adjusts the level of unrecognized tax
benefits when there is more information available, or when an
event occurs requiring a change. In accordance with Bank of
Americas policy, any new or subsequent change in an
unrecognized tax benefit related to a Bank of America state
consolidated, combined or unitary return in which Merrill Lynch
is a member will not be reflected in Merrill Lynchs
balance sheet. However, upon Bank of Americas resolution
of the item, any material impact determined to be attributable
to Merrill Lynch will be reflected in Merrill Lynchs
balance sheet. Merrill Lynch accrues income-tax-related interest
and penalties, if applicable, within income tax expense.
Beginning with the 2009 tax year, Merrill Lynchs results
of operations are included in the U.S. federal income tax
return and certain state income tax returns of Bank of America.
The method of allocating income tax expense is determined under
the intercompany tax allocation policy of Bank of America. This
policy specifies that income tax expense will be computed for
all Bank of America subsidiaries generally on a separate pro
forma return basis, taking into account the tax position of the
consolidated group and the pro forma Merrill Lynch group. Under
this policy, tax benefits associated with net operating losses
(or other tax attributes) of Merrill Lynch are payable to
Merrill Lynch upon the earlier of the utilization in Bank of
Americas tax returns or the utilization in Merrill
Lynchs pro forma tax returns. See Note 17 for further
discussion of income taxes.
Goodwill
and Intangibles
Goodwill is the cost of an acquired company in excess of the
fair value of identifiable net assets at the acquisition date.
Goodwill is tested annually (or more frequently under certain
conditions) for impairment at the reporting unit level in
accordance with ASC 350, Intangibles Goodwill and
Other.
Intangible assets consist primarily of value assigned to
customer relationships and core deposits. Intangible assets with
definite lives are tested for impairment in accordance with ASC
360, Property, Plant and Equipment, whenever certain
conditions exist which would indicate the carrying amount of
such assets may not be recoverable. Intangible assets with
definitive lives are amortized over their respective estimated
useful lives.
Merrill Lynch makes certain complex judgments with respect to
its goodwill and intangible assets, including assumptions and
estimates used to determine fair value. Merrill Lynch also makes
assumptions and estimates in determining the useful lives of its
intangible assets with definite lives. Refer to Note 11 for
further information.
49
Employee
Stock Options
Prior to January 1, 2009, the fair value of stock options
with vesting based solely on service requirements was estimated
as of the grant date based on a Black-Scholes option pricing
model, while the fair value of stock options with vesting that
was partially dependent on pre-determined increases in the price
of Merrill Lynchs common stock was estimated as of the
grant date using a lattice option pricing model. Subsequent to
January 1, 2009, in accordance with Bank of Americas
policy, the fair value of all stock options is estimated as of
the grant date using a lattice option pricing model, which takes
into account the exercise price and expected life of the option,
the current price of the underlying stock and its expected
volatility, expected dividends and the risk-free interest rate
for the expected term of the option. Judgment is required in
determining certain of the inputs to the model. The expected
life of the option is based on an analysis of historical
employee exercise behavior. The expected volatility is based on
Bank of Americas implied stock price volatility for the
same number of months as the expected life of the option. The
fair value of the option estimated at grant date is not adjusted
for subsequent changes in assumptions.
Balance
Sheet
Cash and
Cash Equivalents
Merrill Lynch defines cash equivalents as short-term, highly
liquid securities, federal funds sold, and interest-earning
deposits with maturities, when purchased, of 90 days or
less, that are not used for trading purposes. The amounts
recognized for cash and cash equivalents in the Consolidated
Balance Sheets approximate fair value.
Cash and
Securities Segregated for Regulatory Purposes or Deposited with
Clearing Organizations
Merrill Lynch maintains relationships with clients around the
world and, as a result, it is subject to various regulatory
regimes. As a result of its client activities, Merrill Lynch is
obligated by rules mandated by its primary regulators, including
the Securities and Exchange Commission (SEC) and the
Commodities Futures Trading Commission (CFTC) in the
United States and the Financial Services Authority
(FSA) in the U.K. to segregate or set aside cash
and/or
qualified securities to satisfy these regulations, which have
been promulgated to protect customer assets. In addition,
Merrill Lynch is a member of various clearing organizations at
which it maintains cash
and/or
securities required for the conduct of its
day-to-day
clearance activities. The amounts recognized for cash and
securities segregated for regulatory purposes or deposited with
clearing organizations in the Consolidated Balance Sheets
approximate fair value.
Securities
Financing Transactions
Merrill Lynch enters into repurchase and resale agreements and
securities borrowed and loaned transactions to accommodate
customers and earn interest rate spreads (also referred to as
matched-book transactions), obtain securities for
settlement and finance inventory positions.
Resale and repurchase agreements are accounted for as
collateralized financing transactions and may be recorded at
their contractual amounts plus accrued interest or at fair value
under the fair value option election. Resale and repurchase
agreements recorded at fair value are generally valued based on
pricing models that use inputs with observable levels of price
transparency.
50
Where the fair value option election has been made, changes in
the fair value of resale and repurchase agreements are reflected
in principal transactions revenues and the contractual interest
coupon is recorded as interest revenue or interest expense,
respectively. For further information refer to Note 4.
Resale and repurchase agreements recorded at their contractual
amounts plus accrued interest approximate fair value, as the
fair value of these items is not materially sensitive to shifts
in market interest rates because of the short-term nature of
these instruments
and/or
variable interest rates or to credit risk because the resale and
repurchase agreements are fully collateralized.
Merrill Lynchs policy is to obtain possession of
collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. To ensure that
the market value of the underlying collateral remains
sufficient, collateral is generally valued daily and Merrill
Lynch may require counterparties to deposit additional
collateral or may return collateral pledged when appropriate.
Substantially all repurchase and resale activities are
transacted under master repurchase agreements that give Merrill
Lynch the right, in the event of default, to liquidate
collateral held and to offset receivables and payables with the
same counterparty. Merrill Lynch offsets certain repurchase and
resale agreement balances with the same counterparty on the
Consolidated Balance Sheets.
Merrill Lynch may use securities received as collateral for
resale agreements to satisfy regulatory requirements such as
Rule 15c3-3
of the Securities Exchange Act of 1934.
Securities borrowed and loaned transactions may be recorded at
the amount of cash collateral advanced or received plus accrued
interest or at fair value under the fair value option election.
Securities borrowed transactions require Merrill Lynch to
provide the counterparty with collateral in the form of cash,
letters of credit, or other securities. Merrill Lynch receives
collateral in the form of cash or other securities for
securities loaned transactions. For these transactions, the fees
received or paid by Merrill Lynch are recorded as interest
revenue or expense. On a daily basis, Merrill Lynch monitors the
market value of securities borrowed or loaned against the
collateral value, and Merrill Lynch may require counterparties
to deposit additional collateral or may return collateral
pledged, when appropriate. The carrying value of these
instruments approximates fair value as these items are not
materially sensitive to shifts in market interest rates because
of their short-term nature
and/or their
variable interest rates.
All Merrill Lynch-owned securities pledged to counterparties
where the counterparty has the right, by contract or custom, to
sell or repledge the securities are disclosed parenthetically in
trading assets or, if applicable, in investment securities on
the Consolidated Balance Sheets.
In transactions where Merrill Lynch acts as the lender in a
securities lending agreement and receives securities that can be
pledged or sold as collateral, it recognizes an asset on the
Consolidated Balance Sheets carried at fair value, representing
the securities received (securities received as collateral), and
a liability for the same amount, representing the obligation to
return those securities (obligation to return securities
received as collateral). The amounts on the Consolidated Balance
Sheets result from non-cash transactions.
Trading
Assets and Liabilities
Merrill Lynchs trading activities consist primarily of
securities brokerage and trading; derivatives dealing and
brokerage; commodities trading and futures brokerage; and
securities financing transactions. Trading assets and trading
liabilities consist of cash instruments (e.g., securities and
loans) and derivative instruments. Trading assets and trading
liabilities also include commodities inventory. See Note 6
for additional information on derivative instruments.
51
Trading assets and liabilities are generally recorded on a trade
date basis at fair value. Included in trading liabilities are
securities that Merrill Lynch has sold but did not own and will
therefore be obligated to purchase at a future date (short
sales). Commodities inventory is recorded at the lower of
cost or market value. Changes in fair value of trading assets
and liabilities (i.e., unrealized gains and losses) are
recognized as principal transactions revenues in the current
period. Realized gains and losses and any related interest
amounts are included in principal transactions revenues and
interest revenues and expenses, depending on the nature of the
instrument.
Derivatives
A derivative is an instrument whose value is derived from an
underlying instrument or index, such as interest rates, equity
security prices, currencies, commodity prices or credit spreads.
Derivatives include futures, forwards, swaps, option contracts
and other financial instruments with similar characteristics.
Derivative contracts often involve future commitments to
exchange interest payment streams or currencies based on a
notional or contractual amount (e.g., interest rate swaps or
currency forwards) or to purchase or sell other financial
instruments at specified terms on a specified date (e.g.,
options to buy or sell securities or currencies). Refer to
Note 6 for further information.
Investment
Securities
Investment securities consist of marketable investment
securities and non-qualifying investments. Refer to Note 8.
Marketable
Investments
ML & Co. and certain of its non-broker-dealer
subsidiaries, including Merrill Lynch banks, certain of which
were sold to Bank of America during 2009, follow the guidance
within Investment Accounting for investments in debt and
publicly traded equity securities. Merrill Lynch classifies
those debt securities that it does not intend to sell as
held-to-maturity
securities.
Held-to-maturity
securities are carried at cost unless a decline in value is
deemed
other-than-temporary,
in which case the carrying value is reduced. For Merrill Lynch,
the trading classification under Investment Accounting generally
includes those securities that are bought and held principally
for the purpose of selling them in the near term, securities
that are economically hedged, or securities that may contain a
bifurcatable embedded derivative as defined in Derivatives
Accounting. Securities classified as trading are marked to fair
value through earnings. All other qualifying securities are
classified as
available-for-sale
and held at fair value with unrealized gains and losses reported
in accumulated other comprehensive income/(loss)
(OCI).
Realized gains and losses on investment securities are included
in current period earnings. For purposes of computing realized
gains and losses, the cost basis of each investment sold is
based on the specific identification method.
Merrill Lynch regularly (at least quarterly) evaluates each
held-to-maturity
and
available-for-sale
security whose value has declined below amortized cost to assess
whether the decline in fair value is
other-than-temporary.
A decline in a debt securitys fair value is considered to
be
other-than-temporary
if it is probable that all amounts contractually due will not be
collected or Merrill Lynch either plans to sell the security or
it is more likely than not that it will be required to sell the
security before recovery of its amortized cost. Beginning in
2009, for unrealized losses on debt securities that are deemed
other-than-temporary,
the credit component of an
other-than-temporary
impairment is recognized in earnings and the noncredit component
is recognized in OCI when Merrill Lynch does not
52
intend to sell the security and it is more likely than not that
Merrill Lynch will not be required to sell the security prior to
recovery. Prior to January 1, 2009, unrealized losses (both
the credit and non-credit components) on
available-for-sale
debt securities that were deemed
other-than-temporary
were included in current period earnings.
Merrill Lynchs impairment review generally includes:
|
|
|
Identifying securities with indicators of possible impairment;
|
|
|
Analyzing individual securities with fair value less than
amortized cost for specific factors including:
|
|
|
|
|
|
The estimated length of time to recover from fair value to
amortized cost;
|
|
|
|
The severity and duration of the fair value decline from
amortized cost;
|
|
|
|
Deterioration in the financial condition of the issuer;
|
|
|
|
Discussing evidential matter, including an evaluation of the
factors that could cause individual securities to have an
other-than-temporary
impairment;
|
|
|
Determining whether Merrill Lynch intends to sell the security
or if it is more likely than not that Merrill Lynch will be
required to sell the security before recovery of its amortized
cost; and
|
|
|
Documenting the analysis and conclusions.
|
Non-Qualifying
Investments
Non-qualifying investments are those investments that are not
within the scope of Investment Accounting and primarily include
private equity investments accounted for at fair value and other
equity securities carried at cost or under the equity method of
accounting.
Private equity investments that are held for capital
appreciation
and/or
current income are accounted for under the Investment Company
Guide and carried at fair value. Additionally, certain private
equity investments that are not accounted for under the
Investment Company Guide may be carried at fair value under the
fair value option election. The carrying value of private equity
investments reflects expected exit values based upon market
prices or other valuation methodologies including market
comparables of similar companies and expected cash flows.
Merrill Lynch has non-controlling investments in the common
shares of corporations and in partnerships that do not fall
within the scope of Investment Accounting or the Investment
Company Guide. Merrill Lynch accounts for these investments
using either the cost or the equity method of accounting based
on managements ability to influence the investees. See the
Consolidation Accounting Policies section of this Note for more
information.
For investments accounted for using the equity method, income is
recognized based on Merrill Lynchs share of the earnings
or losses of the investee. Dividend distributions are generally
recorded as reductions in the investment balance. Impairment
testing is based on the guidance provided in Equity Method
Accounting and the investment is reduced when an impairment is
deemed
other-than-temporary.
For investments accounted for at cost, income is recognized as
dividends are received. Impairment testing is based on the
guidance provided in Investment Accounting and the cost basis is
reduced when an impairment is deemed
other-than-temporary.
53
Loans,
Notes, and Mortgages, Net
Merrill Lynchs lending and related activities include loan
originations, syndications and securitizations. Loan
originations include corporate and institutional loans,
residential and commercial mortgages, asset-based loans, and
other loans to individuals and businesses. Merrill Lynch also
engages in secondary market loan trading (see the Trading Assets
and Liabilities section within this Note) and margin lending.
Loans included in loans, notes, and mortgages are classified for
accounting purposes as loans held for investment and loans held
for sale. Upon completion of the acquisition of Merrill Lynch by
Bank of America, certain loans carried by Merrill Lynch were
subject to the requirements of ASC
310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality (Acquired Impaired Loan Accounting). See
Note 10.
Loans held for investment are carried at amortized cost, less an
allowance for loan losses, which represents Merrill Lynchs
estimate of probable losses inherent in Merrill Lynchs
lending activities. Merrill Lynch performs periodic and
systematic detailed reviews of its lending portfolios to
identify credit risks and to assess overall collectability.
These reviews, which are updated on a quarterly basis in order
to incorporate information reflective of the current economic
environment, consider a variety of factors including, but not
limited to, historical loss experience, estimated defaults,
delinquencies, economic conditions, credit scores and the fair
value of any underlying collateral. Provisions for loan losses
are included in interest and dividend revenue in the
Consolidated Statements of Earnings/(Loss).
Merrill Lynchs estimate of loan losses includes judgment
about collectability based on available information at the
balance sheet date, and the uncertainties inherent in those
underlying assumptions. While management has based its estimates
on the best information available, future adjustments to the
allowance for loan losses may be necessary as a result of
changes in the economic environment or variances between actual
results and the original assumptions.
In general, loans that are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to
timely collection, including loans that are individually
identified as being impaired, are generally classified as
impaired unless well-secured and in the process of collection.
Commercial loans whose contractual terms have been restructured
in a manner which grants a concession to a borrower experiencing
financial difficulties are considered troubled debt
restructurings and are classified as impaired until the loans
have performed for an adequate period of time under the
restructured agreement. Interest accrued but not collected is
reversed when a commercial loan is classified as impaired.
Interest collections on commercial loans for which the ultimate
collectability of principal is uncertain are applied as
principal reductions; otherwise, such collections are credited
to income when received. Commercial loans may be restored to
non-impaired status when all principal and interest is current
and full repayment of the remaining contractual principal and
interest is expected, or when the loan otherwise becomes
well-secured and is in the process of collection.
Loans held for sale are carried at lower of cost or fair value.
The fair value option election has been made for certain held
for sale loans, notes and mortgages. Estimation is required in
determining these fair values. The fair value of loans made in
connection with commercial lending activity, consisting mainly
of senior debt, is primarily estimated using the market value of
publicly issued debt instruments or discounted cash flows.
Merrill Lynchs estimate of fair value for other loans,
notes, and mortgages is determined based on the individual loan
characteristics. For certain homogeneous categories of loans,
including residential mortgages, automobile loans, and home
equity loans, fair value is estimated using a whole loan
valuation or an as-if securitized price based on
market conditions. An as-if securitized price is
based on estimated performance of the underlying asset pool
collateral, rating agency credit structure assumptions and
market pricing for similar securitizations previously executed.
Declines in the carrying value of loans held for sale and loans
accounted for at fair value under the fair value option election
are included in other revenues in the Consolidated Statements of
Earnings/(Loss).
54
Nonrefundable loan origination fees, loan commitment fees, and
draw down fees received in conjunction with held for
investment loans are generally deferred and recognized over the
contractual life of the loan as an adjustment to the yield. If,
at the outset, or any time during the term of the loan, it
becomes probable that the repayment period will be extended, the
amortization is recalculated using the expected remaining life
of the loan. When the loan contract does not provide for a
specific maturity date, managements best estimate of the
repayment period is used. At repayment of the loan, any
unrecognized deferred fee is immediately recognized in earnings.
If the loan is accounted for as held for sale, the fees received
are deferred and recognized as part of the gain or loss on sale
in other revenues. If the loan is accounted for under the fair
value option election, the fees are included in the
determination of the fair value and included in other revenues.
Other
Receivables and Payables
Customer
Receivables and Payables
Customer securities transactions are recorded on a settlement
date basis. Receivables from and payables to customers include
amounts due on cash and margin transactions, including futures
contracts transacted on behalf of Merrill Lynch customers. Due
to their short-term nature, such amounts approximate fair value.
Securities owned by customers, including those that
collateralize margin or other similar transactions, are not
reflected on the Consolidated Balance Sheets.
Brokers
and Dealers Receivables and Payables
Receivables from brokers and dealers include amounts receivable
for securities not delivered by Merrill Lynch to a
purchaser by the settlement date (fails to deliver),
margin deposits, commissions, and net receivables arising from
unsettled trades. Payables to brokers and dealers include
amounts payable for securities not received by Merrill Lynch
from a seller by the settlement date (fails to
receive). Brokers and dealers receivables and payables
also include amounts related to futures contracts on behalf of
Merrill Lynch customers as well as net payables and receivables
from unsettled trades. Due to their short-term nature, the
amounts recognized for brokers and dealers receivables and
payables approximate fair value.
Interest
and Other Receivables and Payables
Interest and other receivables include interest receivable on
corporate and governmental obligations, customer or other
receivables, and stock-borrowed transactions. Also included are
receivables from income taxes, underwriting and advisory fees,
commissions and fees, and other receivables. Interest and other
payables include interest payable for stock-loaned transactions,
and short-term and long-term borrowings. Also included are
amounts payable for employee compensation and benefits, income
taxes, non-trading derivatives, dividends, other reserves, and
other payables.
Equipment
and Facilities
Equipment and facilities consist primarily of technology
hardware and software, leasehold improvements, and owned
facilities. Equipment and facilities are reported at historical
cost, net of accumulated depreciation and amortization, except
for land, which is reported at historical cost.
Depreciation and amortization are computed using the
straight-line method. Equipment is depreciated over its
estimated useful life, while leasehold improvements are
amortized over the lesser of the
55
improvements estimated economic useful life or the term of
the lease. Maintenance and repair costs are expensed as
incurred. Depreciation and amortization expense was
$726 million, $790 million and $652 million for
2009, 2008 and 2007, respectively.
Other
Assets
Other assets include deferred tax assets, the excess of the fair
value of pension assets over the related benefit obligations,
other prepaid expenses, and other deferred charges. Refer to
Note 15 for further information.
In addition, real estate purchased for investment purposes is
also included in other assets. Real estate held in this category
may be classified as either held and used or held for sale
depending on the facts and circumstances. Real estate held and
used is valued at cost, less depreciation, and real estate held
for sale is valued at the lower of cost or fair value, less
estimated costs to sell.
Deposits
Savings deposits are interest-bearing accounts that have no
maturity or expiration date, whereby the depositor is not
required by the deposit contract, but may at any time be
required by the depository institution, to give written notice
of an intended withdrawal not less than seven days before
withdrawal is made. Certificates of deposits are accounts that
have a stipulated maturity and interest rate. However,
depositors may recover their funds prior to the stated maturity
but may pay a penalty to do so. In certain cases, Merrill Lynch
enters into interest rate swaps to hedge the fair value risk in
these deposits. The carrying amount of deposits approximates
fair value amounts.
Short-
and Long-Term Borrowings
Merrill Lynchs general-purpose funding includes
medium-term and long-term borrowings. Commercial paper, when
issued at a discount, was recorded at the proceeds received and
accreted to its par value. Long-term borrowings are carried at
either the principal amount borrowed, net of unamortized
discounts or premiums, adjusted for the effects of fair value
hedges or fair value under the fair value option election.
Merrill Lynch issues structured debt instruments that have
coupons or repayment terms linked to the performance of debt or
equity securities, indices, currencies, or commodities,
generally referred to as hybrid debt instruments or structured
notes. The contingent payment components of these obligations
may meet the definition in Derivatives Accounting of an
embedded derivative. Structured notes are generally
accounted for under the fair value option election.
Merrill Lynch uses derivatives to manage the interest rate,
currency, equity, and other risk exposures of its borrowings.
See Note 6 for additional information on the accounting for
derivatives.
Stock-Based
Compensation
Merrill Lynch accounts for stock-based compensation expense in
accordance with ASC 718, Compensation Stock
Compensation, (Stock Compensation Accounting),
under which compensation expense for share-based awards that do
not require future service are recorded immediately, while those
that do require future service are amortized into expense over
the relevant service period. Further, expected forfeitures of
share-based compensation awards for non-retirement-eligible
employees are included in determining compensation expense.
56
New
Accounting Pronouncements
In December 2009, the FASB codified amendments to Financial
Transfers and Servicing Accounting, and Consolidation
Accounting. These amendments will be effective January 1,
2010. Among other things, the amendments to Financial Transfers
and Servicing Accounting eliminate the concept of a QSPE. As a
result, existing QSPEs will be subject to consolidation in
accordance with the guidance provided in the revised
Consolidation Accounting.
The amendments to Consolidation Accounting significantly change
the criteria by which an enterprise determines whether it must
consolidate a VIE. A VIE is an entity, typically an SPE, which
has insufficient equity at risk or which is not controlled
through voting rights held by equity investors. Consolidation
Accounting currently requires that a VIE be consolidated by the
enterprise that will absorb a majority of the expected losses or
expected residual returns of the VIE. This amendment updates
Consolidation Accounting to require that a VIE be consolidated
by the enterprise that has both the power to direct the
activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE. The revised Consolidation Accounting also requires
that an enterprise continually reassess, based on current facts
and circumstances, whether it should consolidate the VIEs with
which it is involved. See Note 9 for Merrill Lynchs
involvement with VIEs.
The adoption in January 2010 of the amended guidance in
Consolidation Accounting and Financial Transfers and Services
Accounting will result in the consolidation of certain QSPEs and
VIEs that are not currently recorded on Merrill Lynchs
Consolidated Balance Sheets. Based upon the evaluation performed
as of December 31, 2009, Merrill Lynch expects to
consolidate certain vehicles, including credit-linked note
entities, CDOs and municipal bond trusts, which hold aggregate
assets of approximately $15 billion. These consolidations
will primarily result in an increase in trading assets and
long-term borrowings. Merrill Lynch continues to evaluate other
VIEs with which it is involved to determine the impact of the
amendments to Consolidation Accounting.
In April 2009, the FASB amended Fair Value Accounting to provide
guidance for determining whether a market is inactive and a
transaction is distressed. Merrill Lynch elected to early adopt
the amendments effective January 1, 2009. The adoption did
not have a material impact on the Consolidated Financial
Statements.
In April 2009, the FASB amended Investment Accounting to require
that an entity recognize the credit component of an
other-than-temporary
impairment of a debt security in earnings and the noncredit
component in OCI when the entity does not intend to sell the
security and it is more likely than not that the entity will not
be required to sell the security prior to recovery. The
amendments also require expanded disclosures. Merrill Lynch
elected to early adopt the amendments effective January 1,
2009 and the adoption did not have a material impact on the
Consolidated Financial Statements, as any OCI that Merrill Lynch
previously recorded was eliminated upon Bank of Americas
acquisition of Merrill Lynch. The amendments did not change the
recognition of
other-than-temporary
impairment for equity securities.
In April 2009, the FASB amended ASC 825, Financial
Instruments, to require expanded disclosures for all
financial instruments within its scope, such as loans that are
not measured at fair value through earnings. Merrill Lynch
adopted the amendments during the second quarter of 2009. Since
the amendments only require certain additional disclosures, they
did not affect Merrill Lynchs consolidated financial
position, results of operations or cash flows. Refer to
Note 5 for further information.
In April 2009, the FASB amended ASC
805-10,
Business Combinations (Business Combinations
Accounting), whereby assets acquired and liabilities
assumed in a business combination that arise from contingencies
should be recognized at fair value on the acquisition date if
fair value can be determined during the measurement period. If
fair value cannot be determined, companies should typically
account for the acquired contingencies using existing guidance.
This new guidance is effective for new acquisitions consummated
on or after January 1, 2009. Bank of America applied this
57
guidance to its January 1, 2009 acquisition of Merrill
Lynch, and the effects of the adoption were not material to
these Consolidated Financial Statements.
In March 2008, the FASB amended Derivatives Accounting to
improve transparency in financial reporting by requiring
enhanced disclosures of an entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows. The
amendments apply to all derivative instruments within the scope
of Derivatives Accounting. The amendments also apply to
non-derivative hedging instruments and all hedged items
designated and qualifying as hedges under Derivatives
Accounting. The amendments require additional qualitative and
quantitative disclosures for derivative instruments and hedging
activities set forth in Derivatives Accounting and generally
increase the level of disaggregation required in an
entitys financial statements. Additional disclosures
include qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments, and
disclosures about credit-risk related contingent features in
derivative agreements. Merrill Lynch adopted the amendments to
Derivatives Accounting on January 1, 2009, effective
prospectively. Since the amendments only resulted in certain
additional disclosures, they did not have an effect on Merrill
Lynchs consolidated financial position, results of
operations or cash flows. See Note 6 for further
information regarding these disclosures.
In December 2007, the FASB amended Consolidation Accounting to
require noncontrolling interests in subsidiaries (formerly known
as minority interests) initially to be measured at
fair value and classified as a separate component of equity.
Under the amendments, gains or losses on sales of noncontrolling
interests in subsidiaries are not recognized; instead, sales of
noncontrolling interests are accounted for as equity
transactions. However, in a sale of a subsidiarys shares
that results in the deconsolidation of the subsidiary, a gain or
loss is recognized for the difference between the proceeds of
that sale and the carrying amount of the interest sold and a new
fair value basis is established for any remaining ownership
interest. The amendments were effective for Merrill Lynch
beginning in 2009; earlier application was prohibited. The
amendments were required to be adopted prospectively, with the
exception of certain presentation and disclosure requirements
(e.g., reclassifying noncontrolling interests to appear in
equity), which are required to be adopted retrospectively. The
adoption of the amendments did not have a material impact on the
Consolidated Financial Statements.
In December 2007, the FASB issued Business Combinations
Accounting, which significantly changed the financial accounting
and reporting for business combinations. Business Combinations
Accounting required, for example: (i) assets and
liabilities to be measured at fair value as of the acquisition
date, (ii) liabilities related to contingent consideration
to be remeasured at fair value in each subsequent reporting
period with changes reflected in earnings and not goodwill, and
(iii) all acquisition-related costs to be expensed as
incurred by the acquirer. Bank of America applied Business
Combinations Accounting to its January 1, 2009 acquisition
of Merrill Lynch, the effects of which are included in these
Consolidated Financial Statements.
58
Note 2. Acquisition and Subsequent
Transactions with Bank of America Corporation
As a result of the acquisition of Merrill Lynch by Bank of
America, Merrill Lynch recorded the following purchase
accounting adjustments. The allocation of the purchase price was
finalized upon completion of Bank of Americas analysis of
the fair values of Merrill Lynchs assets and liabilities
in accordance with the acquisition method of accounting.
|
|
|
|
|
(dollars in billions, except
per share amounts)
|
|
|
Purchase Price
|
|
|
|
|
Merrill Lynch common shares exchanged (in millions)
|
|
|
1,600
|
|
Exchange ratio
|
|
|
0.8595
|
|
|
|
|
|
|
Bank of Americas common shares issued (in millions)
|
|
|
1,375
|
|
Purchase price per share of Bank of Americas common
stock(1)
|
|
$
|
14.08
|
|
|
|
|
|
|
Total value of Bank of Americas common shares and cash
exchanged for fractional shares
|
|
$
|
19.4
|
|
Merrill Lynch preferred
stock(2)
|
|
|
8.6
|
|
Fair value of outstanding employee stock awards
|
|
|
1.1
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
29.1
|
|
|
|
|
|
|
Allocation of the purchase
price(3)
|
|
|
|
|
Merrill Lynch stockholders equity
|
|
$
|
19.9
|
|
Merrill Lynch goodwill and intangible assets
|
|
|
(2.6
|
)
|
Pre-tax adjustments to reflect acquired assets and liabilities
at fair value:
|
|
|
|
|
Securities and derivatives
|
|
|
(1.9
|
)
|
Loans
|
|
|
(6.1
|
)
|
Intangible
assets(4)(6)
|
|
|
5.4
|
|
Other assets/liabilities
|
|
|
(0.8
|
)
|
Long-term borrowings
|
|
|
16.0
|
|
|
|
|
|
|
Pre-tax total adjustments
|
|
|
12.6
|
|
Deferred income taxes
|
|
|
(5.9
|
)
|
|
|
|
|
|
After-tax total adjustments
|
|
|
6.7
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
24.0
|
|
|
|
|
|
|
Goodwill resulting from the acquisition by Bank of
America(5)(6)
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The value of the shares of
common stock exchanged with Merrill Lynch shareholders was based
upon the closing price of Bank of Americas common stock at
December 31, 2008, the last trading day prior to the date
of acquisition. |
|
|
|
(2) |
|
Represents Merrill Lynchs
preferred stock exchanged for Bank of America preferred stock
having substantially identical terms and also includes
$1.5 billion of convertible preferred stock. |
(3) |
|
See Note 22 for further
information on the impact of purchase accounting adjustments on
Merrill Lynchs quarterly results of operations. |
(4) |
|
Consists of trade name of
$1.5 billion and customer relationship and core deposit
intangibles of $3.9 billion. The amortization life is
10 years for the customer relationship and core deposit
intangibles, which are primarily amortized on a straight-line
basis. |
(5) |
|
No goodwill is expected to be
deductible for federal income tax purposes. |
(6) |
|
A portion of the goodwill and
intangible assets initially recognized were subsequently
transferred to Bank of America in connection with the sale of
Merrill Lynchs U.S. banks to Bank of America. |
Asset
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
59
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 its wholly-owned broker-dealer subsidiaries, to
ML & Co. Subsequent to the transfer, BAI was merged
into MLPF&S. The net amount contributed by Bank of America
to ML & Co. was equal to BAIs net book value of
approximately $263 million. In accordance with Business
Combinations Accounting, Merrill Lynchs 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. BAIs impact on Merrill
Lynchs 2009 pre-tax earnings and net earnings was not
material. Refer to Note 22 for further information.
60
Note 3. Segment and Geographic Information
Segment
Information
Prior to the acquisition by Bank of America, Merrill
Lynchs operations were organized and reported as two
operating segments in accordance with the criteria in ASC 280,
Segment Reporting (Segment Reporting): Global
Markets and Investment Banking (GMI) and Global
Wealth Management (GWM).
As a result of the acquisition by Bank of America, Merrill Lynch
reevaluated the provisions of Segment Reporting in the first
quarter of 2009. Pursuant to Segment Reporting, operating
segments represent components of an enterprise for which
separate financial information is available that is regularly
evaluated by the chief operating decision maker in determining
how to allocate resources and in assessing performance. Based
upon how the chief operating decision maker of Merrill Lynch
reviews results in terms of allocating resources and assessing
performance, it was determined that Merrill Lynch does not
contain any identifiable operating segments under Segment
Reporting. As a result, the financial information of Merrill
Lynch is presented as a single segment.
Geographic
Information
Merrill Lynch conducts its business activities through offices
in the following five regions:
|
|
|
|
|
United States;
|
|
|
Europe, Middle East, and Africa (EMEA);
|
|
|
Pacific Rim;
|
|
|
Latin America; and
|
|
|
Canada.
|
The principal methodologies used in preparing the geographic
information below are as follows:
|
|
|
|
|
Revenues and expenses are generally recorded based on the
location of the employee generating the revenue or incurring the
expense;
|
|
|
Pre-tax earnings or loss from continuing operations include the
allocation of certain shared expenses among regions; and
|
|
|
Intercompany transfers are based primarily on service agreements.
|
61
The information that follows, in managements judgment,
provides a reasonable representation of each regions
contribution to the consolidated net revenues and pre-tax
earnings/(loss) from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
For the Year Ended
|
|
|
December 31,
2009
|
|
|
December 26,
2008
|
|
December 28,
2007
|
|
Revenues, net of interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East, and
Africa(1)
|
|
$
|
5,841
|
|
|
|
$
|
(2,390
|
)
|
|
$
|
5,973
|
|
Pacific Rim
|
|
|
2,136
|
|
|
|
|
69
|
|
|
|
5,065
|
|
Latin America
|
|
|
823
|
|
|
|
|
1,237
|
|
|
|
1,401
|
|
Canada
|
|
|
242
|
|
|
|
|
161
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
9,042
|
|
|
|
|
(923
|
)
|
|
|
12,869
|
|
United
States(2)(3)(4)
|
|
|
14,244
|
|
|
|
|
(11,670
|
)
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net of interest expense
|
|
$
|
23,286
|
|
|
|
$
|
(12,593
|
)
|
|
$
|
11,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings/(loss) from continuing
operations(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East, and
Africa(1)
|
|
$
|
3,043
|
|
|
|
$
|
(6,735
|
)
|
|
$
|
1,211
|
|
Pacific Rim
|
|
|
181
|
|
|
|
|
(2,559
|
)
|
|
|
2,403
|
|
Latin America
|
|
|
239
|
|
|
|
|
340
|
|
|
|
632
|
|
Canada
|
|
|
107
|
|
|
|
|
5
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
3,570
|
|
|
|
|
(8,949
|
)
|
|
|
4,481
|
|
United
States(2)(3)(4)(5)
|
|
|
328
|
|
|
|
|
(32,882
|
)
|
|
|
(17,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax earnings/(loss) from continuing
operations(6)
|
|
$
|
3,898
|
|
|
|
$
|
(41,831
|
)
|
|
$
|
(12,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The EMEA 2008 results included
net losses of $4.3 billion primarily related to residential
and commercial mortgage-related exposures. |
|
|
|
(2) |
|
U.S. results for the year ended
December 31, 2009 included net losses of $5.2 billion,
which resulted from the narrowing of Merrill Lynchs credit
spreads on the carrying values of certain long-term borrowings,
primarily structured notes. |
(3) |
|
Corporate net revenues and
adjustments are reflected in the U.S. region. |
(4) |
|
The U.S. 2008 results included
net losses of $21.5 billion, primarily related to credit
valuation adjustments related to hedges with financial
guarantors, losses from
asset-backed
collateralized debt obligations (ABS CDOs), losses
from residential and commercial mortgage-related exposures,
other than temporary impairment charges recognized in the
investment securities portfolio, and losses on leveraged finance
loans and commitments. These losses were partially offset by
gains of $5.1 billion that resulted from the widening of
Merrill Lynchs credit spreads on the carrying value of
certain long-term borrowings, primarily structured notes, and a
$4.3 billion net gain related to the sale of Merrill
Lynchs ownership stake in Bloomberg L.P. |
(5) |
|
The U.S. 2007 results included
net losses of $23.2 billion related to ABS CDOs, U.S.
sub-prime
residential mortgages and securities, and credit valuation
adjustments related to hedges with financial guarantors on U.S.
ABS CDOs. |
(6) |
|
See Note 19 for further
information on discontinued operations. |
62
Note 4. Fair Value Disclosures
Fair
Value Accounting
Fair
Value Hierarchy
In accordance with Fair Value Accounting, Merrill Lynch has
categorized its financial instruments, based on the priority of
the inputs to the valuation technique, into a three-level fair
value hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3).
Financial assets and liabilities recorded on the Consolidated
Balance Sheets are categorized based on the inputs to the
valuation techniques as follows:
|
|
Level 1.
|
Financial assets and liabilities whose values are based on
unadjusted quoted prices for identical assets or liabilities in
an active market that Merrill Lynch has the ability to access
(examples include active exchange-traded equity securities,
exchange-traded derivatives, U.S. Government securities,
and certain other sovereign government obligations).
|
|
Level 2.
|
Financial assets and liabilities whose values are based on
quoted prices in markets that are not active or model inputs
that are observable either directly or indirectly for
substantially the full term of the asset or liability.
Level 2 inputs include the following:
|
|
|
|
|
a)
|
Quoted prices for similar assets or liabilities in active
markets (examples include restricted stock and U.S. agency
securities);
|
|
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in
non-active markets (examples include corporate and municipal
bonds, which trade infrequently);
|
|
|
|
|
c)
|
Pricing models whose inputs are observable for substantially the
full term of the asset or liability (examples include most
over-the-counter
derivatives, including interest rate and currency
swaps); and
|
|
|
|
|
d)
|
Pricing models whose inputs are derived principally from or
corroborated by observable market data through correlation or
other means for substantially the full term of the asset or
liability (examples include certain residential and commercial
mortgage-related assets, including loans, securities and
derivatives).
|
|
|
Level 3. |
Financial assets and liabilities whose values are based on
prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value
measurement. These inputs reflect managements own
assumptions about the assumptions a market participant would use
in pricing the asset or liability (examples include certain
private equity investments, certain residential and commercial
mortgage-related assets (including loans, securities and
derivatives), and long-dated or complex derivatives (including
certain equity and currency derivatives and long-dated options
on gas and power)).
|
As required by Fair Value Accounting, when the inputs used to
measure fair value fall within different levels of the
hierarchy, the level within which the fair value measurement is
categorized is based on the lowest level input that is
significant to the fair value measurement in its entirety. For
example, a Level 3 fair value measurement may include
inputs that are observable (Levels 1 and 2) and
unobservable (Level 3). Therefore gains and losses for such
assets and liabilities categorized within the Level 3 table
below may include changes in fair value that are attributable to
both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3). Further, the following
tables do not take into consideration the offsetting effect of
Level 1 and 2 financial instruments entered into by Merrill
Lynch that economically hedge certain exposures to the
Level 3 positions.
A review of fair value hierarchy classifications is conducted on
a quarterly basis. Changes in the observability of valuation
inputs may result in a reclassification for certain financial
assets or liabilities. Level 3 gains and losses represent
amounts incurred during the period in which the instrument was
classified as Level 3. Reclassifications impacting
Level 3 of the fair value hierarchy
63
are reported as transfers in/out of the Level 3 category as
of the beginning of the quarter in which the reclassifications
occur. Refer to the recurring and non-recurring sections within
this Note for further information on net transfers in and out.
Valuation
Techniques
The following outlines the valuation methodologies for Merrill
Lynchs material categories of assets and liabilities:
U.S.
Government and agencies
U.S. treasury securities U.S. treasury
securities are valued using quoted market prices and are
generally classified as Level 1 in the fair value hierarchy.
U.S. agency securities U.S. agency securities
are comprised of two main categories consisting of agency issued
debt and mortgage pass-throughs. Agency issued debt securities
are generally valued using quoted market prices. Mortgage
pass-throughs include To-be-announced (TBA)
securities and mortgage pass-through certificates. TBA
securities are generally valued using quoted market prices. The
fair value of mortgage pass-through certificates are model
driven based on the comparable TBA security. Agency issued debt
securities and mortgage pass-throughs are generally classified
as Level 2 in the fair value hierarchy.
Non-U.S.
governments and agencies
Sovereign government obligations are valued using quoted prices
in active markets when available. To the extent quoted prices
are not available, fair value is determined based on reference
to recent trading activity and quoted prices of similar
securities. These bonds are generally classified in Level 1
or Level 2 of the fair value hierarchy.
Municipal
debt
Municipal bonds The fair value of municipal bonds is
calculated using recent trade activity, market price quotations
and new issuance levels. In the absence of this information,
fair value is calculated using comparable bond credit spreads.
Current interest rates, credit events, and individual bond
characteristics such as coupon, call features, maturity, and
revenue purpose are considered in the valuation process. The
majority of these bonds are classified as Level 2 in the
fair value hierarchy
Auction Rate Securities (ARS) Merrill Lynch
holds investments in certain ARS, including student loan and
municipal ARS. Student Loan ARS are comprised of various pools
of student loans. Municipal ARS are issued by states and
municipalities for a wide variety of purposes, including but not
limited to healthcare, industrial development, education and
transportation infrastructure. Historically, ARS were valued at
par based upon the successful history of the auction process.
However, during 2008, the liquidity crisis reduced the amount of
investors in the auction rate process, resulting in a number of
failed auctions. As such, these assets are subject to valuation
using alternate procedures.
The fair value of the Student Loan ARS is calculated using a
pricing model that relies upon a number of assumptions including
weighted average life, coupon, discount margin and liquidity
discounts. The fair value of the Municipal ARS is calculated
based upon projected refinancing and spread assumptions. In both
cases, recent trades and issuer tenders are considered in the
valuations. Student Loan ARS are classified as Level 3 in
the fair value hierarchy, while Municipal ARS are classified as
Level 2.
64
Corporate
and other debt
Corporate bonds Corporate bonds are valued based on
either the most recent observable trade
and/or
external quotes, depending on availability. The most recent
observable trade price is given highest priority as the
valuation benchmark based on an evaluation of transaction date,
size, frequency, and bid-offer. This price may be adjusted by
bond or credit default swap spread movement. When credit default
swap spreads are referenced,
cash-to-synthetic
basis magnitude and movement as well as maturity matching are
incorporated into the value. When neither external quotes nor a
recent trade is available, the bonds are valued using a
discounted cash flow approach based on risk parameters of
comparable securities. In such cases, the potential pricing
difference in spread
and/or price
terms with the traded comparable is considered. Corporate bonds
are generally classified as Level 2 or Level 3 in the
fair value hierarchy.
Corporate loans and commitments The fair values of
corporate loans and loan commitments are based on market prices
and most recent transactions when available. When not available,
a discounted cash flow valuation approach is applied using
market-based credit spreads of comparable debt instruments,
recent new issuance activity or relevant credit derivatives with
appropriate
cash-to-synthetic
basis adjustments. Corporate loans and commitments are generally
classified as Level 2 in the fair value hierarchy. Certain
corporate loans, particularly those related to emerging market,
leveraged and distressed companies have limited price
transparency. These loans are generally classified as
Level 3 in the fair value hierarchy.
Mortgages,
mortgage-backed and asset-backed
Residential Mortgage-Backed Securities (RMBS),
Commercial Mortgage-Backed Securities (CMBS), and
other Asset-Backed Securities (ABS) RMBS, CMBS
and other ABS are valued based on observable price or credit
spreads for the particular security, or when price or credit
spreads are not observable, the valuation is based on prices of
comparable bonds or the present value of expected future cash
flows. Valuation levels of RMBS and CMBS indices are used as an
additional data point for benchmarking purposes or to price
outright index positions.
When estimating the fair value based upon the present value of
expected future cash flows, Merrill Lynch uses its best
estimates of the key assumptions, including forecasted credit
losses, prepayment rates, forward yield curves and discount
rates commensurate with the risks involved, while also taking
into account performance of the underlying collateral.
RMBS, CMBS and other ABS are classified as Level 3 in the
fair value hierarchy if external prices or credit spreads are
unobservable or if comparable trades/assets involve significant
subjectivity related to property type differences, cash flows,
performance and other inputs; otherwise, they are classified as
Level 2 in the fair value hierarchy.
Equities
Exchange-Traded Equity Securities Exchange-traded equity
securities are generally valued based on quoted prices from the
exchange. To the extent these securities are actively traded,
they are classified as Level 1 of the fair value hierarchy,
otherwise they are classified as Level 2.
Derivative
contracts
Listed Derivative Contracts Listed derivatives that are
actively traded are generally valued based on quoted prices from
the exchange and are classified as Level 1 of the fair
value hierarchy. Listed derivatives that are not actively traded
are valued using the same approaches as those applied to OTC
derivatives; they are generally classified as Level 2 of
the fair value hierarchy.
OTC Derivative Contracts OTC derivative contracts include
forwards, swaps and options related to interest rate, foreign
currency, credit, equity or commodity underlyings.
65
The fair value of OTC derivatives are derived using market
prices and other market based pricing parameters such as basis
differentials, interest rates, currency rates and volatilities
that are observed directly in the market or gathered from
independent sources such as dealer consensus pricing services or
brokers. Where models are used, they are used consistently and
reflect the contractual terms of and specific risks inherent in
the contracts. Generally, the models do not require a high level
of subjectivity since the valuation techniques used in the
models do not require significant judgment and inputs to the
models are readily observable in active markets. When
appropriate, valuations are adjusted for various factors such as
liquidity, bid-offer spreads and credit considerations based on
available market evidence. The majority of derivative contracts
are classified as Level 2 in the fair value hierarchy.
OTC derivative contracts that do not have readily observable
market based pricing parameters are classified as Level 3
in the fair value hierarchy. Examples of derivative contracts
classified within Level 3 include contractual obligations
that have tenures that extend beyond periods in which inputs to
the model would be observable, exotic derivatives with
significant inputs into a valuation model that are less
transparent in the market and certain credit default swaps
referenced to mortgage-backed securities.
Derivative instruments, such as certain credit default swaps
referenced to RMBS, CMBS, ABS and CDOs, are valued based on the
underlying mortgage risk. As these instruments are not actively
quoted, the estimate of fair value considers the valuation of
the underlying collateral (mortgage loans). Inputs to the
valuation will include available information on similar
underlying loans or securities in the cash market. The
prepayments and loss assumptions on the underlying loans or
securities are estimated using a combination of historical data,
prices on recent market transactions, relevant observable market
indices such as the ABX or CMBX and prepayment and default
scenarios and analysis.
Collateralized Debt Obligations (CDOs) The
fair value of corporate synthetic CDOs is derived from a
referenced basket of credit default swaps (CDS), the
CDOs capital structure, and the default correlation, which
is an input to a proprietary CDO valuation model. The underlying
CDO portfolios typically contain investment grade as well as
non-investment grade obligors. After adjusting for differences
in risk profile, the correlation parameter for an actual
transaction is estimated by benchmarking against observable
standardized index tranches and other comparable transactions.
CDOs are classified as either Level 2 or Level 3 in
the fair value hierarchy.
Investment
securities non-qualifying
Investments in Private Equity, Real Estate and Hedge
Funds Merrill Lynch has investments in numerous asset
classes, including: direct private equity, private equity funds,
hedge funds and real estate. Valuing these investments requires
significant management judgment due to the nature of the assets
and the lack of quoted market prices and liquidity in these
assets. Initially, the transaction price of the investment is
generally considered to be the best indicator of fair value.
Thereafter, valuation of direct investments is based on an
assessment of each individual investment using methodologies
that include publicly traded comparables derived by multiplying
a key performance metric (e.g., earnings before interest, taxes,
depreciation and amortization) of the portfolio company by the
relevant valuation multiple observed for comparable companies,
acquisition comparables, entry level multiples and discounted
cash flows, and are subject to appropriate discounts for lack of
liquidity or marketability. Certain factors which may influence
changes to fair value include but are not limited to,
recapitalizations, subsequent rounds of financing, and offerings
in the equity or debt capital markets. For fund investments,
Merrill Lynch generally records the fair value of its
proportionate interest in the funds capital as reported by
the funds respective managers.
Publicly traded private equity or real estate investments are
classified as either Level 1 or Level 2 of the fair
value hierarchy. Level 2 classifications generally include
those publicly traded equity investments that have a legal or
contractual transfer restriction. All other investments are
classified as Level 3 in the fair value hierarchy due to
infrequent trading
and/or
unobservable market prices.
66
Resale
and repurchase agreements
Merrill Lynch elected the fair value option for certain resale
and repurchase agreements. For such agreements, the fair value
is estimated using a discounted cash flow model which
incorporates inputs such as interest rate yield curves and
option volatility. Resale and repurchase agreements for which
the fair value option has been elected are generally classified
as Level 2 in the fair value hierarchy.
Long-term
borrowings
Merrill Lynch issues structured notes that have coupons or
repayment terms linked to the performance of debt or equity
securities, indices, currencies or commodities. The fair value
of structured notes is estimated using valuation models for the
combined derivative and debt portions of the notes when the fair
value option has been elected. These models incorporate
observable and in some instances unobservable inputs including
security prices, interest rate yield curves, option volatility,
currency, commodity or equity rates and correlations between
these inputs. The impact of Merrill Lynchs own credit
spreads is also included based on Merrill Lynchs observed
secondary bond market spreads. Structured notes are classified
as either Level 2 or Level 3 in the fair value
hierarchy.
67
Recurring
Fair Value
The following tables present Merrill Lynchs fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis as of December 31, 2009 and
December 26, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
Successor Company
|
|
|
as of December 31, 2009
|
|
|
|
|
|
|
|
|
Netting
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed and asset-backed
|
|
$
|
-
|
|
|
$
|
5,525
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,525
|
|
Corporate debt
|
|
|
-
|
|
|
|
579
|
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
Non-U.S.
governments and agencies
|
|
|
946
|
|
|
|
893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,839
|
|
U.S. Government and agencies
|
|
|
1,046
|
|
|
|
1,541
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities segregated for regulatory purposes or deposited
with clearing organizations
|
|
|
1,992
|
|
|
|
8,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
|
-
|
|
|
|
41,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,740
|
|
Receivables under securities borrowed transactions
|
|
|
-
|
|
|
|
2,888
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,888
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
23,083
|
|
|
|
6,297
|
|
|
|
259
|
|
|
|
-
|
|
|
|
29,639
|
|
Convertible debentures
|
|
|
-
|
|
|
|
4,862
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,862
|
|
Non-U.S.
governments and agencies
|
|
|
17,407
|
|
|
|
2,718
|
|
|
|
1,131
|
|
|
|
-
|
|
|
|
21,256
|
|
Corporate debt
|
|
|
-
|
|
|
|
9,241
|
|
|
|
6,540
|
|
|
|
-
|
|
|
|
15,781
|
|
Preferred
stock(2)
|
|
|
-
|
|
|
|
436
|
|
|
|
562
|
|
|
|
-
|
|
|
|
998
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
-
|
|
|
|
1,680
|
|
|
|
6,291
|
|
|
|
-
|
|
|
|
7,971
|
|
U.S. Government and agencies
|
|
|
979
|
|
|
|
479
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,458
|
|
Municipals and money markets
|
|
|
798
|
|
|
|
5,181
|
|
|
|
2,148
|
|
|
|
-
|
|
|
|
8,127
|
|
Commodities and related contracts
|
|
|
-
|
|
|
|
651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
42,267
|
|
|
|
31,545
|
|
|
|
16,931
|
|
|
|
-
|
|
|
|
90,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
2,218
|
|
|
|
658,264
|
|
|
|
17,939
|
|
|
|
(628,839
|
)
|
|
|
49,582
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|