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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
Registrant’s 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 Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     X
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
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).


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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


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Securities registered pursuant to Section 12(b) of the Act and listed on The NASDAQ Stock Market are as follows:
MITTS
Nikkei®225 MITTS Securities due March 8, 2011
S&P 500® MITTS Securities due June 3, 2010
S&P 500® MITTS due June 7, 2010
S&P 500® MITTS Securities due August 5, 2010
S&P 500 ®MITTS Securities due August 31, 2011
Nikkei® 225 MITTS Securities due September 30, 2010
Dow Jones Industrial Average SM MITTS Securities due December 27, 2010
97% Protected Notes
97% Protected Notes Linked to the performance of the Dow Jones Industrial Average SM due March 28, 2011
97% Protected Notes Linked to Global Equity Basket due February 14, 2012
Strategic Return Notes
Strategic Return Notes Linked to the Industrial 15 Index due April 25, 2011
 
S&P, SPDR, and S&P 500 are registered service marks of Standard & Poor’s Financial Services LLC; EAFE, MSCI, MSCI Brazil Index, and MSCI Emerging Markets Index are service marks of MSCI Inc.; Dow Jones, DJIA and DOW JONES INDUSTRIAL AVERAGE are service marks of Dow Jones & Company, Inc.; RUSSELL 2000 is a registered service mark of FRANK RUSSELL COMPANY; EURO STOXX 50 is a registered service mark of Stoxx Limited; NIKKEI is a registered service mark of KABUSHIKI KAISHA NIHON KEIZAI SHIMBUN SHA. iShares is a registered service mark of Blackrock Institutional Trust Company, National Association. CBOE is a registered service mark of Chicago Board Options Exchange, Incorporated. All other service marks are the property of Bank of America Corporation.


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ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
 
 
         
       
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 EX-2.2
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PART I
 
Item 1.   Business
 
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


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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.
 
Item 1A.  Risk Factors
 
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


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we operate. The deterioration of any of these conditions could adversely affect the value of our assets, as well as our results of operations.
 
Economic conditions in the U.S. and abroad deteriorated significantly in 2008 and to a lesser extent in 2009. While there are early indications that these conditions are stabilizing, we do not expect them to significantly improve in the near future. A protracted continuation or worsening of these difficult business or economic conditions would likely exacerbate the adverse effects on us.
 
Adverse changes in legislative and regulatory initiatives may significantly impact our earnings, operations and ability to pursue business opportunities.  We are heavily regulated by regulatory agencies at the federal, state and international levels. As a result of the recent financial crisis and economic downturn, we have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us and the financial services industry in general.
 
In December 2009, the Basel Committee on Banking Supervision released consultative documents on both capital and liquidity. These proposals currently include a leverage ratio that could prove more restrictive than the current risk-based measure. The capital proposal would increase significantly the capital charges imposed on certain assets, including trading assets, thereby potentially making those businesses more expensive to conduct. Full implementation of these proposals is currently projected by the end of 2012, although delays are possible, and it is likely that many elements of the proposals will change prior to adoption. U.S. regulatory agencies have not opined on these proposals for U.S. implementation. We continue to assess the potential impact of these proposals.
 
As a result of the financial crisis, the financial services industry is facing the possibility of legislative and regulatory changes that could impose significant, adverse changes on our ability to serve our clients. A proposal is currently being considered to levy a tax or fee on financial institutions with assets in excess of $50 billion to repay the costs of the Troubled Asset Relief Program (“TARP”), although the proposed tax would continue even after those costs are repaid. If enacted as proposed, the tax could significantly affect our earnings, either by increasing the costs of our liabilities or causing us to reduce our assets. It remains uncertain whether the tax will be enacted, to whom it would apply, or the amount of the tax we would be required to pay. It is also unclear the extent to which the costs of such a tax could be recouped through higher pricing.
 
In addition, various proposals for broad-based reform of the financial regulatory system are pending. A majority of these proposals would not disrupt our core businesses, but a proposal could ultimately be adopted that adversely affects certain of our businesses. The proposals would require divestment of certain proprietary trading activities, or limit private equity investments. Other proposals, which include limiting the scope of an institution’s derivatives activities, or forcing certain derivatives activities to be traded on exchanges, would diminish the demand for, and profitability of, certain businesses. Several other proposals would require issuers to retain unhedged interests in any asset that is securitized, potentially severely restricting the secondary market as a source of funding for consumer or commercial lending. There are also numerous proposals pending on how to resolve a failed systemically important institution. Following the passage of a bill in the U.S. House of Representatives and the possibility of similar provisions in a U.S. Senate bill, one rating agency has placed the credit ratings of Bank of America, us and other banks on negative credit watch, and therefore adoption of such provisions may adversely affect Bank of America’s access to capital markets. It remains unclear whether any of these proposals will ultimately be enacted, and what form they may take.
 
In addition, other countries, including the United Kingdom (“U.K.”) and France, have proposed and in some cases adopted, certain reforms targeted at financial institutions, including, but not limited to, increased capital and liquidity requirements for local entities, including regulated U.K. subsidiaries of foreign companies and other financial institutions as well as branches of foreign banks located in the U.K., the creation and production of recovery and resolutions plans (commonly referred


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to as living wills) by such entities, and a significant payroll tax on bank bonuses paid to employees over a certain threshold.
 
In addition, the U.S. Congress is currently considering reinstating income tax provisions that have recently expired whereby income of certain foreign subsidiaries would not be subject to current U.S. income tax as a result of long-standing deferral provisions applicable to active finance income. These provisions, which in the past have expired and been extended, expired for taxable years beginning on or after January 1, 2010. Absent an extension of these provisions, active financing income earned by our foreign subsidiaries after January 1, 2010 will generally be subject to a tax that considers the incremental U.S. income tax. The impact of the expiration of the provisions should they not be extended would be significant. The exact impact would depend upon the amount, composition and geographic mix of our future earnings.
 
Compliance with current or future legislative and regulatory initiatives could require us to change certain of our business practices, impose significant additional costs on us, limit the products that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value of assets that we hold or otherwise adversely affect our business, results of operations or financial condition. We have recently witnessed the introduction of an ever-increasing number of regulatory proposals that could substantially impact us and others in the financial services industry. The extent of changes imposed by, and frequency of adoption of, any regulatory initiatives could make it more difficult for us to comply in a timely manner, which could further limit our operations, increase compliance costs or divert management attention or other resources. The long-term impact of these initiatives on our business practices and revenues will depend upon the successful implementation of our strategies and competitors’ responses to such initiatives, both of which are difficult to predict.
 
We could suffer losses as a result of the actions of or deterioration in the commercial soundness of other financial services institutions and counterparties, including as a result of derivatives transactions.  Our ability to engage in routine trading and funding transactions could be adversely affected by the actions and commercial soundness of other market participants. Financial services institutions are interrelated as a result of trading, funding, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity disruptions and could lead to future losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of a counterparty or client, and our results of operations in 2008 and to a lesser extent in 2009 were materially affected by the credit valuation adjustments described in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — U.S. ABS CDO and Other Mortgage-Related Activities — Monoline Financial Guarantors”. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations or financial condition.
 
We are party to a large number of derivative transactions, including credit derivatives. Many of these derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling some positions difficult. Many credit derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be able to obtain, the underlying security, loan or other obligation. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to us.


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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.


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For a further discussion of litigation risks, see Note 14 to the Consolidated Financial Statements.
 
Our liquidity could be impaired by an inability of Bank of America to access the capital markets on favorable terms.  Liquidity is essential to our businesses. Since we were acquired by Bank of America, we established intercompany lending and borrowing arrangements with Bank of America to facilitate centralized liquidity management and as a result, our liquidity risk is derived in large part from Bank of America’s liquidity risk. Bank of America’s liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that Bank of America or we may be unable to control, such as a general market disruption, negative views about the financial services industry generally, or an operational problem that affects third parties or us. Bank of America’s ability to raise certain types of funds has been and could continue to be adversely affected by conditions in the United States and international markets and economies. In 2009, global capital and credit markets continued to experience volatility and disruptions. As a result, Bank of America utilized several of the U.S. Government liquidity programs, which are temporary in nature, to enhance its liquidity position. Bank of America’s ability and our ability to borrow from other financial institutions or to engage in securitization funding transactions on favorable terms could be adversely affected by continued disruptions in the capital markets or other events, including actions by rating agencies or deteriorating investor expectations.
 
Our credit ratings and Bank of America’s credit ratings are important to our liquidity. Rating agencies regularly evaluate Bank of America and us. Their ratings of our long-term and short-term debt and other securities are based on a number of factors, including Bank of America’s and our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. During 2009, the rating agencies took numerous actions with respect to Bank of America’s and our credit ratings and outlooks, many of which were negative. The rating agencies have indicated that our credit ratings currently reflect their expectation that, if necessary, Bank of America would receive significant support from the U.S. Government. In February 2010, a rating agency affirmed our current credit ratings but revised the outlook to negative from stable, based on their belief that it is less certain whether the U.S. Government would be willing to provide extraordinary support to Bank of America. In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that we will maintain our current ratings. Failure to maintain those ratings could adversely affect our liquidity and competitive position, by materially increasing our borrowing costs or significantly limiting our access to the capital markets. A reduction in our credit ratings also could have a significant impact on certain trading revenues, particularly in those businesses where counterparty credit-worthiness is critical. In connection with certain trading agreements, we may be required to provide additional collateral in the event of a credit ratings downgrade.
 
For a further discussion of our liquidity position and other liquidity matters and the policies and procedures we use to manage our liquidity risks, see “Liquidity Risk” in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Changes in financial or capital market conditions could cause our earnings and the value of our assets to decline.  Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. As a result, we are directly and indirectly affected by changes in market conditions. For example, changes in interest rates could adversely affect our principal transaction revenues and net interest profit (which we view together as our trading revenues), which could in turn affect our net earnings. Market risk is inherent in the financial


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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


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insurers, including financial guarantors. This has resulted in significant credit concentration with respect to this industry.
 
For a further discussion of credit risk, see “Concentrations of Credit Risk” in Note 4 to the Consolidated Financial Statements.
 
Our ability to successfully identify and manage our compliance and other risks is an important factor that can significantly impact our results.  We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Accordingly, our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results. Recent economic conditions, increased legislative and regulatory scrutiny and increased complexity of our operations, among other things, have increased and made it more difficult for us to manage our operational, compliance and other risks. For a further discussion of our risk management policies and procedures, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
 
We may be unable to compete successfully as a result of the evolving financial services industry and market conditions.  We operate in a highly competitive environment. Over time, there has been substantial consolidation among companies in the financial services industry, and this trend accelerated in 2008 and 2009 as the credit crisis has led to numerous mergers and asset acquisitions among industry participants and in certain cases reorganization, restructuring, or even bankruptcy. This trend also has hastened the globalization of the securities and financial services markets. We will continue to experience intense competition as continued consolidation in the financial services industry may produce larger and better-capitalized companies that are capable of offering a wider array of financial products and services at more competitive prices. To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to compete. Increased competition may affect our results by creating pressure to lower prices on our products and services and reducing market share.
 
Our continued ability to compete effectively in our businesses, including management of our existing businesses as well as expansion into new businesses and geographic areas, depends on our ability to retain and motivate our existing employees and attract new employees. We face significant competition for qualified employees both within and outside the financial services industry, including non-U.S. institutions and institutions not subject to compensation or hiring restrictions imposed under any U.S. government initiatives or not subject to the same regulatory scrutiny. This is particularly the case in emerging markets, where we are often competing for qualified employees with entities that may have a significantly greater presence or more extensive experience in the region. A substantial portion of our annual bonus compensation paid to our senior employees has in recent years been paid in the form of equity-based awards, which are now payable in Bank of America’s common stock. The value of these awards has been impacted by the significant decline in the market price of Bank of America’s common stock. We also reduced the number of employees across nearly all of our businesses in 2008 and 2009. In addition, the consolidation in the financial services industry has intensified the inherent challenges of cultural integration between differing types of financial services institutions. The combination of these events could have a significant adverse impact on our ability to retain and hire the most qualified employees.
 
We may be adversely impacted by business, economic and political conditions in the non-U.S. jurisdictions in which we operate.  We do business throughout the world, including in developing regions of the world commonly known as emerging markets. As a result, we are exposed to a number of risks in non-U.S. jurisdictions, including economic, market, reputational, litigation and regulatory risks. Our businesses and revenues derived from non-U.S. jurisdictions are subject to risk of


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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


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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.
 
Item 2.  Properties
 
We have offices in various locations throughout the world. Other than those described below as being owned, substantially all of our offices are located in leased premises. We believe that the facilities we own or lease are adequate for the purposes for which they are currently used and that they are well maintained. Set forth below is the location and the approximate square footage of our principal facilities. Information regarding our property lease commitments is set forth in “Operating Leases” in Note 14 to the Consolidated Financial Statements.
 
Principal Facilities in the United States
 
Following our acquisition by Bank of America, we changed our principal executive offices from 4 World Financial Center, New York, New York, to the Bank of America Corporate Center in Charlotte, North Carolina, which is owned by one of Bank of America’s subsidiaries. In addition, some of our employees are located at Bank of America Tower at One Bryant Park in New York, New York. We lease portions of 4 World Financial Center (1,800,000 square feet) and 2 World Financial Center (2,500,000 square feet); both leases expire in 2013. One of our subsidiaries is a partner in the partnership that holds the ground lessee’s interest in 4 World Financial Center. As of December 31, 2009, we occupied the entire 4 World Financial Center (other than retail areas) and approximately 27% of 2 World Financial Center.
 
We own a 760,000 square foot building at 222 Broadway, New York and occupy 92% of this building. We also own 1,251,000 square feet of office space, 273,000 square feet of ancillary buildings in Hopewell, New Jersey and the underlying land upon which the Hopewell facilities are located. We also own a 54-acre campus in Jacksonville, Florida, with four buildings.
 
Principal Facilities Outside the United States
 
In London, we lease and occupy 100% of our 576,626 square foot London headquarters facility known as Merrill Lynch Financial Centre; this lease expires in 2022. In addition, we lease approximately 305,086 square feet in other London locations with various terms, the longest of which lasts until 2020. We occupy 134,375 square feet of this space and have sublet the remainder. In Tokyo, we have leased 292,349 square feet until 2014 for our Japan headquarters. Other leased facilities in the Pacific Rim are located in Hong Kong, Singapore, Seoul, South Korea, Mumbai and Chennai, India, and Sydney and Melbourne, Australia.
 
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.
 
Item 4.  Reserved.


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PART II
 
Item 5.  Market for Registrant’s 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).


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Item 7.  Management’s 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 world’s leading capital markets, advisory and wealth management companies. We are a leading global trader and underwriter of securities and derivatives across a broad range of asset classes, and we serve as a strategic advisor to corporations, governments, institutions and individuals worldwide. In addition, as of December 31, 2009, we owned approximately 34 percent of the economic interest of BlackRock, Inc. (“BlackRock”), one of the world’s largest publicly traded investment management companies with approximately $3.3 trillion in assets under management at December 31, 2009. See “Executive Overview — Other Events” for additional information regarding our investment in BlackRock.
 
Bank of America Acquisition and Basis of Presentation
 
On January 1, 2009, Merrill Lynch was acquired by Bank of America Corporation (“Bank of America”) through the merger of a wholly owned subsidiary of Bank of America with and into ML & Co. with ML & Co. continuing as the surviving corporation and a wholly owned subsidiary of Bank of America. Upon completion of the acquisition, each outstanding share of ML & Co. common stock was converted into 0.8595 shares of Bank of America common stock. As of the completion of the acquisition, ML & Co. Series 1 through Series 8 preferred stock were converted into Bank of America preferred stock with substantially identical terms to the corresponding series of Merrill Lynch preferred stock (except for additional voting rights provided to the Bank of America securities). The Merrill Lynch 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 2, and 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 3 that was outstanding immediately prior to the completion of the acquisition remained issued and outstanding subsequent to the acquisition, but are now convertible into Bank of America common stock.


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Bank of America’s cost of acquiring Merrill Lynch has been pushed down to form a new accounting basis for Merrill Lynch. Accordingly, the Consolidated Financial Statements appearing in Part II, Item 8 of this Form 10-K are presented for Merrill Lynch for periods occurring prior to the acquisition by Bank of America (the “Predecessor Company”) and subsequent to the January 1, 2009 acquisition (the “Successor Company”). The Predecessor Company and Successor Company periods have been separated by a vertical line on the face of the Consolidated Financial Statements to highlight the fact that the financial information for such periods has been prepared under two different cost bases of accounting.
 
Effective January 1, 2009, Merrill Lynch adopted calendar quarter-end and year-end reporting periods to coincide with those of Bank of America. As a result, the following discussion of the results of operations for the 2009 year-end refers to the period from January 1, 2009 through December 31, 2009. The 2008 year-end refers to the period from December 29, 2007 through December 26, 2008. The intervening period between Merrill Lynch’s previous fiscal year end (December 26, 2008) and the beginning of its 2009 year (January 1, 2009) is presented separately on the Consolidated Statements of Earnings/(Loss).
 
In connection with Merrill Lynch’s acquisition by Bank of America, we evaluated the provisions of Accounting Standards Codification (“ASC”) 280, Segment Reporting (“Segment Reporting”), in the first quarter of 2009. Pursuant to Segment Reporting, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. Based upon how the chief operating decision maker of Merrill Lynch reviews our results, it was determined that Merrill Lynch does not contain any identifiable operating segments. As a result, the financial information of Merrill Lynch is presented as a single segment.
 
As a result of the acquisition of Merrill Lynch by Bank of America, certain information is not required in this Form 10-K as permitted by general Instruction I(2) of Form 10-K. We have also abbreviated Management’s Discussion and Analysis of Financial Condition and Results of Operations as permitted by general Instruction I(2).


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Executive Overview
 
Company Results
 
We reported net earnings from continuing operations for the year ended December 31, 2009 of $4.7 billion compared with net losses from continuing operations of $27.6 billion the year ended December 26, 2008. Revenues, net of interest expense (“net revenues”) for 2009 were $23.3 billion compared with negative net revenues of $12.6 billion in 2008. Pre-tax earnings from continuing operations were $3.9 billion in 2009. The pre-tax loss from continuing operations was $41.8 billion for 2008.
 
The results for the year ended December 31, 2009 primarily reflected improved sales and trading results as compared with the prior year. Net revenues increased due primarily to our fixed income trading activities, including mortgage and credit products, which generated positive trading revenues in the current year as compared with the significant net write-downs recorded in 2008. In 2009, net earnings also benefited from a $1.1 billion pre-tax gain associated with our investment in BlackRock (see “Executive Overview — Other Events”), a decline in compensation and non-compensation expenses, and a lower effective income tax rate. These items were partially offset by net losses of $5.2 billion due to the impact of the narrowing of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities, primarily structured notes. Our net revenues for 2009 also reflected lower investment banking and managed account and other fee-based revenues as compared with the prior year.
 
In 2008, our net revenues and net earnings were materially affected by a number of significant items, which included: net losses of $10.4 billion due to credit valuation adjustments (“CVA”) related to certain hedges with financial guarantors; net write-downs of $10.2 billion (excluding CVA) on U.S. asset-backed collateralized debt obligations (“ABS CDOs”); net write-downs of approximately $10.8 billion related to other-than-temporary impairment charges on our investment securities portfolio, losses related to leveraged finance loans and commitments, losses related to certain government-sponsored entities and the default of a major U.S. broker-dealer and other market dislocations; net losses of $6.5 billion resulting primarily from write-downs and losses on asset sales across residential mortgage-related exposures and commercial real estate exposures; net losses of $2.1 billion due to write-downs on private equity investments; net gains of $5.1 billion due to the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities; a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P., a $2.6 billion foreign currency gain related to currency hedges of U.K. deferred tax assets; a $2.5 billion non-deductible payment to affiliates and transferees of Temasek Holdings (Private) Limited (“Temasek”) related to our July 2008 offering of common stock; a $2.3 billion goodwill impairment charge related to our fixed income and investment banking businesses; a $0.5 billion expense, including a $125 million fine, arising from Merrill Lynch’s offer to repurchase auction rate securities (“ARS”) from our private clients and the associated settlement with regulators; and a $486 million restructuring charge associated with headcount reduction initiatives conducted during 2008.
 
Our net earnings applicable to common shareholders for 2009 were $4.6 billion as compared with net losses applicable to common shareholders of $30.5 billion in 2008. The net loss applicable to common shareholders in 2008 included $2.1 billion of additional preferred dividends associated with the exchange of Merrill Lynch’s mandatory convertible preferred stock, which occurred in July 2008.
 
Transactions with Bank of America
 
Asset and Liability Transfers
 
Subsequent to the Bank of America acquisition, certain assets and liabilities were transferred at fair value between Merrill Lynch and Bank of America. These transfers were made in connection with the integration of certain trading activities with Bank of America and efforts to manage risk in a more effective and efficient manner at the consolidated Bank of America level. The assets and liabilities


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transferred related to sales and trading activities and included positions associated with the rates and currency, equity, credit and mortgage products trading businesses. During the year ended December 31, 2009, these transfers included approximately $56 billion of assets and $52 billion of liabilities transferred from Merrill Lynch to Bank of America, primarily U.S. matched book repurchase positions and credit and mortgage positions. Approximately $44 billion of assets and $20 billion of liabilities were transferred from Bank of America to Merrill Lynch, primarily equity-related positions. In the future, Merrill Lynch and Bank of America may continue to transfer certain assets and liabilities to (and from) each other. In addition to these transfers, Merrill Lynch also sold two of its bank subsidiaries to Bank of America and acquired a broker-dealer subsidiary from Bank of America during 2009, which is discussed further below.
 
Sale of U.S. Banks to Bank of America
 
During the second quarter of 2009, the separate boards of directors of Merrill Lynch Bank USA (“MLBUSA”) and Merrill Lynch Bank & Trust Co., FSB (“MLBT-FSB”) approved the sale of their respective entities to a subsidiary of Bank of America.
 
In both transactions, Merrill Lynch sold the shares of the respective entity to Bank of America. The sale price of each entity was equal to its net book value as of the date of transfer. Consideration for the sale of MLBUSA was in the form of an $8.9 billion floating rate demand note payable from Bank of America to Merrill Lynch, while MLBT-FSB was sold for cash of approximately $4.4 billion. The demand note received by Merrill Lynch in connection with the MLBUSA sale had a stated interest rate that was a market rate at the time of sale.
 
The MLBUSA sale was completed on July 1, 2009. At that time, MLBUSA was merged into Bank of America, N.A., a subsidiary of Bank of America. The sale of MLBT-FSB was completed on November 2, 2009. At that time, MLBT-FSB was also merged into Bank of America, N.A.
 
Acquisition of Banc of America Investment Services, Inc. (“BAI”) from Bank of America
 
In October 2009, Bank of America contributed the shares of BAI, one of Bank of America’s wholly-owned broker-dealer subsidiaries, to ML & Co. Subsequent to the transfer, BAI was merged into Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned broker-dealer subsidiary of ML&Co. The net amount contributed by Bank of America to ML&Co. was equal to BAI’s net book value of approximately $263 million. In accordance with ASC 805-10, Business Combinations, Merrill Lynch’s results of operations for the year ended December 31, 2009 include the results of BAI as if the contribution from Bank of America had occurred on January 1, 2009. BAI’s impact on Merrill Lynch’s 2009 pre-tax earnings and net earnings was not material. Refer to Note 22 to the Consolidated Financial Statements for further information.
 
Other Events
 
On December 1, 2009, BlackRock completed its purchase of Barclays Global Investors from Barclays, Plc. This acquisition had the effect of diluting our ownership interest in BlackRock, which for accounting purposes was treated as a sale of a portion of our ownership interest. As a result, upon the closing of this transaction, we recorded an adjustment to our investment in BlackRock, which resulted in a pre-tax gain of $1.1 billion. In addition, our economic interest in BlackRock was reduced from approximately 50 percent to approximately 34 percent.
 
On September 21, 2009, Bank of America reached an agreement to terminate its term sheet with the U.S. Government under which the U.S. Government agreed in principle to provide protection against the possibility of unusually large losses on a pool of Bank of America’s financial instruments that were acquired as a result of the acquisition of Merrill Lynch. In connection with the termination of the term sheet, Bank of America paid a total of $425 million in the third quarter to the U.S. Government to be allocated among the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation.


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Results Of Operations
                             
(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.


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Consolidated Results of Operations
 
Our net earnings from continuing operations for 2009 were $4.7 billion compared with a net loss of $27.6 billion for 2008. Net revenues for the year ended December 31, 2009 were $23.3 billion compared with negative $12.6 billion for the year ended December 26, 2008. The results in 2009 primarily reflected improved performance from our fixed income trading businesses. The year’s results also included a $5.2 billion loss due to the impact of the narrowing of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities, primarily structured notes. The net losses for the year ended December 26, 2008 were primarily driven by the significant write-downs recorded during that period, and were materially impacted by the challenging market environment that existed in 2008. Losses incurred during 2008 included: CVA of $10.4 billion primarily related to certain hedges with financial guarantors; net write-downs of $10.2 billion related to U.S. ABS CDOs; net losses of $6.5 billion related to certain residential and commercial mortgage exposures; net losses of $4.1 billion in the investment securities portfolio; and $4.2 billion of write-downs on leveraged finance loans and commitments. These net losses were partially offset by a net gain of $5.1 billion from the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities and a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P.
 
2009 Compared With 2008
 
Principal transactions revenues include both realized and unrealized gains and losses on trading assets and trading liabilities and investment securities classified as trading. Principal transactions revenues were $4.0 billion for the year ended December 31, 2009 compared with negative $27.2 billion for the year ended December 26, 2008. The increase in principal trading revenues primarily reflected higher revenues from fixed income trading activities. Revenues from mortgage products increased and reflected improved trading results in the current year as compared with the significant net write-downs recorded in the prior year. Credit products revenues also increased, reflecting significant spread tightening, while 2008’s results reflected a challenging market environment as a result of the global credit crisis. These increases were partially offset by lower revenues from equity products as a decline in revenues from equity financing and services was partially offset by higher revenues from equity derivative products. Revenues from commodity products also declined as compared with the prior year. In addition, principal transactions revenues for 2009 were adversely affected by a $5.2 billion loss due to the impact of the narrowing of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities, primarily structured notes, as compared with gains of $5.1 billion recorded in 2008 due to the widening of Merrill Lynch’s credit spreads. The negative principal trading revenues in 2008 were driven primarily by net losses within our fixed income business related to credit valuation adjustments related to hedges with financial guarantors, U.S. ABS CDOs, net losses associated with real estate-related assets, and net losses from credit spreads widening across most asset classes to significantly higher levels during the year. We also recorded net losses in 2008 on various positions as a result of severe market dislocations, including significant asset price declines, high levels of volatility and reduced levels of liquidity, particularly following the default of a major U.S. broker-dealer and the U.S. Government’s conservatorship of certain government sponsored entities. These losses were partially offset by positive net revenues generated from our interest rate and currencies, commodities and cash equities businesses.
 
Net interest profit is a function of (i) the level and mix of total assets and liabilities, including trading assets owned, deposits, financing and lending transactions, and trading strategies associated with our businesses, and (ii) the prevailing level, term structure and volatility of interest rates. Net interest profit is an integral component of trading activity. In assessing the profitability of our client facilitation and trading activities, we view principal transactions and net interest profit in the aggregate as net trading revenues. Changes in the composition of trading inventories and hedge positions can cause the mix of principal transactions and net interest profit to fluctuate from period to period. Net interest profit was $632 million for the year ended December 31, 2009 as compared with $4.0 billion for the year ended December 26, 2008. Interest revenues declined as a result of lower asset levels and stated interest rates on those assets. Interest expense also decreased due to reduced funding levels and lower interest rates


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on such funding in our sales and trading businesses. The decline in net interest profit also reflected interest expenses of $2.2 billion associated with the amortization of purchase accounting adjustments related to the fair value of certain long-term borrowings that were recorded in connection with the acquisition of Merrill Lynch by Bank of America.
 
Commissions revenues primarily arise from agency transactions in listed and OTC equity securities and commodities and options. Commissions revenues also include distribution fees for promoting and distributing mutual funds. Commissions revenues were $5.9 billion for the year ended December 31, 2009, down 15% from the prior year period, driven primarily by lower revenues from our global cash equity trading business resulting from lower transaction volumes. Commission revenues from our global wealth management activities also declined as compared with the prior year. These decreases were partially offset by the addition of commission revenues from BAI.
 
Managed accounts and other fee-based revenues primarily consist of asset-priced portfolio service fees earned from the administration of separately managed and other investment accounts for retail investors, annual account fees, and certain other account-related fees. Managed accounts and other fee-based revenues were $4.3 billion for the year ended December 31, 2009, a decrease of 22% from the prior year period primarily due to lower fee-based revenues from our global wealth management activities. The decline was driven by lower levels of fee-based assets, which were adversely affected by the difficult market conditions and net outflows of client assets that occurred during the first half of 2009.
 
Investment banking revenues include (i) origination revenues representing fees earned from the underwriting of debt, equity and equity-linked securities, as well as loan syndication and commitment fees and (ii) strategic advisory services revenues including merger and acquisition and other investment banking advisory fees. Investment banking revenues were $3.6 billion for the year ended December 31, 2009, down 4% from the prior year period. Underwriting revenues increased 13% to $2.7 billion. Revenues from strategic advisory services declined 36% to $846 million, reflecting an industry-wide decline in transaction volumes. As a result of Bank of America’s acquisition of Merrill Lynch, beginning in 2009, certain debt origination activities that were formerly conducted by Merrill Lynch are now being conducted within the Bank of America platform, while certain equity origination activities that were formerly conducted by Bank of America are now being conducted within the Merrill Lynch platform.
 
Earnings from equity method investments include our pro rata share of income and losses associated with investments accounted for under the equity method of accounting. Earnings from equity method investments were $1.7 billion for the year ended December 31, 2009 compared with $4.5 billion for the year ended December 26, 2008. The results for 2009 primarily consisted of a $1.1 billion pre-tax gain associated with our investment in BlackRock, which resulted from BlackRock’s acquisition of Barclays Global Investors. The results for 2008 included a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P. Excluding the gains from BlackRock and Bloomberg, L.P., the year-over-year increase primarily reflected higher revenues from certain investments, including partnerships and alternative investment management companies. Refer to Note 8 to the Consolidated Financial Statements for further information on equity method investments.
 
Other revenues include gains and losses on investment securities, including certain available-for-sale securities, gains and losses on private equity investments, and gains and losses on loans and other miscellaneous items. Other revenues were $3.2 billion for the year ended December 31, 2009 compared with negative $10.1 billion in the prior year period. Other revenues in 2009 were primarily associated with a net increase in the fair value of certain private equity investments. The negative revenues for 2008 were primarily due to other-than-temporary impairment charges on available-for-sale securities within our investment securities portfolio of $4.1 billion, write-downs on our leveraged finance loans and commitments of $4.2 billion, and net losses of $1.9 billion related to our private equity investments due primarily to the decline in the value of private and public investments.
 
Compensation and benefits expenses were $12.0 billion for the year ended December 31, 2009 and $14.8 billion in the prior year period. The decrease primarily reflected lower compensation costs as a result of reduced headcount levels. Amortization expense associated with prior year stock-based


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compensation awards also decreased as a result of the revaluation of these awards due to purchase accounting adjustments that were recorded in connection with the acquisition of Merrill Lynch by Bank of America. In addition, the decline in compensation expense reflected a change in compensation that delivers a greater portion of incentive compensation over time.
 
In December 2009, the U.K. Government announced its intention to introduce a new employer payroll tax of 50% on bonuses awarded to employees of applicable banking entities, including Merrill Lynch, between December 9, 2009 and April 5, 2010. The exact nature and scope of the payroll tax is still being clarified by the U.K. tax authorities and the draft proposals are subject to potential revision before they are enacted into law. Merrill Lynch has estimated that if this U.K. payroll tax is enacted as currently proposed, the potential impact in 2010 could be approximately $500 million.
 
Non-compensation expenses were $7.3 billion for the year ended December 31, 2009 and $14.5 billion in the prior year period. Non-compensation expenses in 2008 included a $2.5 billion non-tax deductible payment to Temasek related to the July 2008 common stock offering; a $2.3 billion goodwill impairment charge related to our fixed income and investment banking businesses; a $0.5 billion expense, including a $125 million fine, arising from Merrill Lynch’s offer to repurchase ARS from our private clients and the associated settlement with regulators; and a $0.5 billion restructuring charge associated with headcount reduction initiatives conducted during that period. Excluding the aforementioned items in 2008, non-compensation expenses declined by $1.3 billion, or 15%, in 2009. Brokerage, clearing and exchange fees were $1.0 billion, down 25% primarily associated with decreased transaction volumes. Advertising and market development costs were $363 million, down 44% primarily due to lower travel and entertainment expenses as well as lower promotion and marketing expenses. Professional fees were $607 million, down 43% primarily due to lower legal and consulting fees. Other expenses were $2.1 billion, a decrease of 14% from the prior year. Other expenses for 2008 included the $0.5 billion expense related to the ARS settlement previously discussed. Excluding this item, the increase in other expenses primarily reflected an additional $350 million of amortization expense due to intangible assets that were recorded in connection with the acquisition of Merrill Lynch by Bank of America and an additional $370 million of expense associated with non-controlling interests of certain principal investments, including private equity investments, partially offset by lower litigation-related expenses of $700 million.
 
The income tax benefit from continuing operations was $838 million for the year ended December 31, 2009 compared with a benefit of $14.3 billion for 2008, resulting in effective tax rates of (21.5)% and 34.1%, respectively. The effective tax rate for 2009 was driven by net permanent tax benefits, primarily a release of a valuation allowance provided for a U.S. federal capital loss carryforward tax benefit, a loss on certain foreign subsidiary stock, foreign earnings taxed at rates below the U.S. rate and audit settlements. During 2009, Bank of America recognized capital gains against which a portion of Merrill Lynch’s U.S. capital loss carryforward was utilized, resulting in a release of $650 million of a valuation allowance attributable to Merrill Lynch’s U.S. capital loss carryforward. For 2008, the effective tax rate reflected the tax benefit of Merrill Lynch’s pre-tax losses and the tax benefit attributable to a loss on foreign subsidiary stock. These benefits were partially offset by the geographic mix of our earnings and a non-deductible expense related to the Temasek payment.
 
The income of certain foreign subsidiaries has not been subject to U.S. income tax as a result of long-standing deferral provisions applicable to active finance income. These provisions expired for taxable years beginning on or after January 1, 2010. On December 9, 2009, the U.S. House of Representatives passed a bill that would extend these provisions as well as certain other expiring tax provisions through December 31, 2010 and certain U.S. Senate members subsequently stated their intent to reinstate these expiring tax provisions in 2010. Absent an extension of these provisions, this active financing income earned by foreign subsidiaries after January 1, 2010 will generally be subject to a tax that considers the incremental U.S. income tax. The impact of the expiration of these provisions would depend upon the amount, composition and geographic mix of our future earnings and could increase Merrill Lynch’s annual income tax expense by up to $1.0 billion.
 
For further information on income taxes, see Note 17 to the Consolidated Financial Statements.


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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


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(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 & Poor’s 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.


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


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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.


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In connection with residential mortgage loan and other securitization transactions, we typically make representations and warranties about the underlying assets. If there is a material breach of such representations and warranties, we may have an obligation to repurchase the assets or indemnify the purchaser against any loss. For residential mortgage loan and other securitizations, the maximum potential amount that could be required to be repurchased is the current outstanding asset balance. Specifically related to First Franklin activities, there is currently approximately $25.1 billion (including loans serviced by others) of outstanding loans that First Franklin sold in various asset sales and securitization transactions where there may be an obligation to repurchase the asset or indemnify the purchaser against the loss if claims are made and it is ultimately determined that there has been a material breach related to such loans.
 
Derivatives
 
We record all derivative transactions at fair value on our Consolidated Balance Sheets. We do not monitor our exposure to derivatives based on the notional amount because that amount is not a relevant indicator of our exposure to these contracts, as it is generally not indicative of the amount that we would owe on the contract. Instead, a risk framework is used to define risk tolerances and establish limits to help to ensure that certain risk-related losses occur within acceptable, predefined limits. Since derivatives are recorded on the Consolidated Balance Sheets at fair value and the disclosure of the notional amounts is not a relevant indicator of risk, notional amounts are not provided for the off-balance sheet exposure on derivatives. Derivatives that meet the accounting definition of a guarantee and credit derivatives are included in Note 6 to the Consolidated Financial Statements.
 
Involvement with SPEs
 
We transact with SPEs in a variety of capacities, including those that we help establish as well as those initially established by third parties. Our involvement with SPEs can vary and, depending upon the accounting definition of the SPE (i.e., voting rights entity (“VRE”), variable interest entity (“VIE”) or qualified special purpose entity (“QSPE”)), we may be required to reassess prior consolidation and disclosure conclusions. An interest in a VRE requires reconsideration when our equity interest or management influence changes, an interest in a VIE requires reconsideration when an event occurs that was not originally contemplated (e.g., a purchase of the SPE’s assets or liabilities), and an interest in a QSPE requires reconsideration if the entity no longer meets the definition of a QSPE. Refer to Note 1 to the Consolidated Financial Statements for a discussion of our consolidation accounting policies and for information regarding new VIE accounting rules that became effective on January 1, 2010. Types of SPEs with which we have historically transacted include:
 
  •  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.


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  •  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.


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Credit Ratings
 
Our credit ratings affect the cost and availability of our unsecured funding, and it is our objective to maintain high quality credit ratings. In addition, credit ratings are important when we compete in certain markets and when we seek to engage in certain transactions, including OTC derivatives. Following the acquisition by Bank of America, the major credit rating agencies have indicated that the primary drivers of Merrill Lynch’s credit ratings are Bank of America’s credit ratings. During 2009, the rating agencies took numerous actions to adjust our credit ratings and outlooks, many of which were negative. The rating agencies have indicated that our credit ratings currently reflect their expectation that, if necessary, we would receive significant support from the U.S. government. In February 2010, Standard & Poor’s affirmed our current credit ratings but revised the outlook to negative from stable, based on their belief that it is less certain whether the U.S. government would be willing to provide extraordinary support. In addition to Bank of America’s credit ratings, other factors that influence our credit ratings include rating agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, our reputation, our liquidity position, the level and volatility of our earnings, our corporate governance and risk management policies, and our capital position. Management maintains an active dialogue with the rating agencies.
 
Bank of America has not assumed or guaranteed the long-term debt that was issued or guaranteed by ML & Co. or its subsidiaries prior to the acquisition of Merrill Lynch by Bank of America. Beginning late in the third quarter of 2009, in connection with the update or renewal of certain Merrill Lynch international securities offering programs, Bank of America agreed to guarantee debt securities, warrants and/or certificates issued by certain subsidiaries of ML & Co. on a going forward basis. All existing ML & Co. guarantees of securities issued by those same Merrill Lynch subsidiaries under various international securities offering programs will remain in full force and effect as long as those securities are outstanding, and Bank of America has not assumed any of those prior ML & Co. guarantees or otherwise guaranteed such securities. There were approximately $900 million of securities guaranteed by Bank of America at December 31, 2009. In addition, Bank of America has guaranteed the performance of Merrill Lynch on certain derivative transactions. The aggregate amount of such derivative liabilities was approximately $2.5 billion at December 31, 2009.
 
The following table sets forth ML & Co.’s unsecured credit ratings as of March 8, 2010:
 
                     
 
    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
Moody’s Investors Service, Inc. 
  A2   A3   Baa3   P-1   Stable
Rating & Investment Information, Inc. (Japan)
  A+   A   Not rated   a-1   Negative
Standard & Poor’s 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.


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Liquidity Risk
 
Following the completion of Bank of America’s acquisition of Merrill Lynch, ML & Co. became a subsidiary of Bank of America and established intercompany lending and borrowing arrangements to facilitate centralized liquidity management. Included in these intercompany agreements is a $75 billion one year, revolving unsecured line of credit that allows ML & Co. to borrow funds from Bank of America for operating requirements at a spread to LIBOR that is reset periodically and is consistent with other intercompany agreements. This credit line was renewed effective January 1, 2010 with a maturity date of January 1, 2011. The credit line will automatically be extended by one year to the succeeding January 1st unless Bank of America provides written notice not to extend at least 45 days prior to the maturity date. The agreement does not contain any financial or other covenants. During 2009, ML & Co. periodically borrowed against the line of credit. There were no outstanding borrowings against the line of credit at December 31, 2009.
 
Unencumbered Loans and Securities
 
At December 31, 2009, certain of our subsidiaries, including broker-dealer subsidiaries, maintained $70 billion of unencumbered securities, including $8 billion of customer margin securities. These unencumbered securities are an important source of liquidity for broker-dealer activities and other individual subsidiary financial commitments, and are generally restricted from transfer and therefore unavailable to support liquidity needs of ML & Co. or other subsidiaries. Proceeds from encumbering customer margin securities are further limited to supporting qualifying customer activities.
 
At December 31, 2009 and December 26, 2008, unencumbered liquid assets at our regulated bank subsidiaries were $12 billion and $58 billion, respectively. The $46 billion reduction from December 26, 2008 primarily reflected the sale of MLBUSA and MLBT-FSB to Bank of America, N.A. in 2009. The remaining unencumbered assets are maintained at our international regulated bank subsidiaries and are available to meet potential deposit obligations, business activity demands and stressed liquidity needs of the bank subsidiaries.
 
Committed Credit Facilities
 
Prior to Merrill Lynch’s acquisition by Bank of America, we maintained committed unsecured and secured credit facilities to cover regular and contingent funding needs. Following the completion of Bank of America’s acquisition of Merrill Lynch on January 1, 2009, certain sources of liquidity were centralized. During the quarter ended March 31, 2009, ML & Co. repaid all outstanding amounts and terminated all of its external committed unsecured and secured credit facilities.
 
U.S. Government Liquidity Facilities
 
The U.S. Government created several temporary programs to enhance liquidity and provide stability to the financial markets following the deterioration of the credit markets in 2008. Merrill Lynch participated in a number of these programs. As of December 31, 2009, we had no outstanding borrowings under these programs. Following the completion of Bank of America’s acquisition of Merrill Lynch and resulting integration activities, Merrill Lynch is no longer eligible to directly access certain liquidity facilities or issue new securities under the programs. In response, we established intercompany arrangements with Bank of America to ensure access to liquidity in the event of contingent funding requirements.


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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 America’s risk management and governance practices to maintain consistent risk measurement and disciplined risk taking. Bank of America’s risk management structure is described below.
 
Bank of America’s Global Risk Committee (“GRC”), chaired by Bank of America’s Global Markets Risk Executive, has been designated by its Asset and Liability Market Risk Committee (“ALMRC”) as the primary governance authority for its Global Markets Risk Management, including trading risk management. The GRC’s focus is to take a forward-looking view of the primary credit and market risks impacting Bank of America’s Global Markets business (which includes Merrill Lynch’s sales and trading businesses) and prioritize those that need a proactive risk mitigation strategy. Market risks that impact lines of business outside of the Global Markets business are monitored and governed by their respective governance authorities.
 
At the GRC meetings, the committee considers significant daily revenues and losses by business along with an explanation of the primary driver of the revenue or loss. Thresholds are established for each of Bank of America’s businesses in order to determine if the revenue or loss is considered to be significant for that business. If any of the thresholds are exceeded, an explanation of the variance is made to the GRC. The thresholds are developed in coordination with the respective risk managers to highlight those revenues or losses which exceed what is considered to be normal daily income statement volatility.
 
Value-at-Risk (“VaR”)
 
Merrill Lynch uses a variety of quantitative methods to assess the risk of its positions and portfolios. To evaluate risk in our trading activities, management focuses on the actual and potential volatility of individual positions as well as portfolios. Value-at-Risk (“VaR”) is a key statistic used to measure market risk.
 
A VaR model simulates the value of a portfolio under a range of hypothetical scenarios in order to generate a distribution of potential gains and losses. The VaR represents the worst loss the portfolio is expected to experience based on historical trends with a given level of confidence and depends on the volatility of the positions in the portfolio and on how strongly their risks are correlated. Within any VaR model, there are significant and numerous assumptions that will differ from company to company. In addition, the accuracy of a VaR model depends on the availability and quality of historical data for each of the positions in the portfolio. A VaR model may require additional modeling assumptions for new products which do not have extensive historical price data, or for illiquid positions for which accurate daily prices are not consistently available. The VaR model uses a historical simulation approach based on three years of historical data and an expected shortfall methodology equivalent to a 99 percent confidence level. Statistically, this means that losses will exceed VaR, on average, one out of 100 trading days, or two to three times each year.
 
A VaR model is an effective tool in estimating ranges of potential gains and losses on trading portfolios. There are, however, many limitations inherent in a VaR model as it utilizes historical results over a defined time period to estimate future performance. Historical results may not always be indicative of future results and changes in market conditions or in the composition of the underlying portfolio could have a material impact on the accuracy of the VaR model. To ensure that the VaR model reflects current market conditions, the historical data underlying the VaR model is updated on a bi-weekly basis, and the assumptions underlying the model are reviewed regularly.
 
Due to the limitations mentioned above, we have historically used the VaR model as only one of the components in managing trading risk and also use other techniques such as stress testing and desk


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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 Lynch’s daily 99% trading VaR during the year ended December 31, 2009.
 
Non-Trading Market Risk
 
Interest rate risk associated with our funding activities represents the most significant market risk exposure to our non-trading exposures. The interest rate risk associated with the non-trading positions, together with funding activities, is expressed as sensitivity to changes in the general level of interest rates. This change in economic value is a measurement of economic risk which may differ significantly in magnitude and timing from the actual profit or loss that would be realized under generally accepted accounting principles.
 
At December 31, 2009, the net interest rate sensitivity of these positions was a pre-tax gain in economic value of $10 million for a parallel one basis point increase in interest rates across all yield


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curves, compared to a pre-tax gain in economic value of less than $1 million at December 26, 2008. The year-over-year change was driven mainly by the sale of interest-rate-sensitive assets held by MLBUSA and MLBT-FSB to a subsidiary of Bank of America during 2009. For further information on these sales, see Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
 
Counterparty Credit Risk
 
In making credit decisions, we consider risk rating, collateral, country, industry and single name concentration limits while also balancing the total borrower or counterparty relationship. Our lines of business and risk management personnel use a variety of tools to continuously monitor the ability of a borrower or counterparty to perform under its obligations.
 
Commercial credit risk is evaluated and managed with a goal that concentrations of credit exposure do not result in undesirable levels of risk. We review, measure and manage concentrations of credit exposure by industry, product, geography and customer relationship. Distribution of loans by loan size is an additional measure of portfolio risk diversification. We also review, measure and manage commercial real estate loans by geographic location and property type. In addition, within our non-U.S. portfolio, we evaluate borrowings by region and by country. Additionally, we utilize syndication of exposure to third parties, loan sales, hedging and other risk mitigation techniques to manage the size and risk profile of the loan portfolio. In some cases, we enter into single name and index credit default swaps to mitigate credit exposure related to funded and unfunded commercial loans. The notional value of these swaps totaled $3.2 billion and $13.2 billion at December 31, 2009 and December 26, 2008, respectively. See Note 10 to the consolidated financial statements for additional information on these swaps.
 
Credit risk management for the consumer portfolio begins with the initial underwriting and continues throughout a borrower’s credit cycle. Statistical techniques in conjunction with experiential judgment are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, operating processes and metrics to quantify and balance risks and returns. Statistical models are built using detailed behavioral information from external sources such as credit bureaus and/or internal historical experience. These models are a component of our consumer credit risk management process and are used in part to help determine both new and existing credit decisions, portfolio management strategies including authorizations and line management, collection practices and strategies, determination of the allowance for loan losses, and economic capital allocations for credit risk.
 
Derivatives
 
We enter into International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements or their equivalent (“master netting agreements”) with almost all of our derivative counterparties. Master netting agreements provide protection in bankruptcy in certain circumstances and, in some cases, enable receivables and payables with the same counterparty to be offset for risk management purposes. Agreements are generally negotiated bilaterally and can require complex terms. While we make reasonable efforts to execute such agreements, it is possible that a counterparty may be unwilling to sign such an agreement and, as a result, would subject us to additional credit risk. The enforceability of master netting agreements under bankruptcy laws in certain countries or in certain industries is not free from doubt, and receivables and payables with counterparties in these countries or industries are accordingly recorded on a gross basis.
 
To reduce the risk of loss, we require collateral, principally cash and U.S. Government and agency securities, on certain derivative transactions. From an economic standpoint, we evaluate risk exposures net of related collateral that meets specified standards. In addition to obtaining collateral, we attempt to mitigate counterparty default risk on derivatives whenever possible by entering into transactions with provisions that enable us to terminate or reset the terms of our derivative contracts.


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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 Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 2010


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Merrill Lynch & Co., Inc.:
 
We have audited the accompanying consolidated balance sheet of Merrill Lynch & Co., Inc. and subsidiaries (“Merrill Lynch”) as of December 26, 2008, and the related consolidated statements of earnings/(loss), changes in stockholders’ equity, comprehensive income/(loss) and cash flows for the years ended December 26, 2008 and December 28, 2007. These financial statements are the responsibility of Merrill Lynch’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such 2008 and 2007 consolidated financial statements present fairly, in all material respects, the financial position of Merrill Lynch as of December 26, 2008, and the results of their operations and their cash flows for each of the years ended December 26, 2008 and December 28, 2007, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Note 1, Merrill Lynch became a wholly-owned subsidiary of Bank of America Corporation on January 1, 2009.
 
As discussed in Note 3, the disclosures in the accompanying 2008 and 2007 financial statements have been retrospectively adjusted for a change in the composition of reportable segments.
 
/s/ Deloitte & Touche LLP
New York, New York
February 23, 2009
(March 10, 2010 as to Note 3)


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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.


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Table of Contents

 
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


Table of Contents

 
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


Table of Contents

 
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.


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Table of Contents

 
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.


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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.


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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 Lynch’s 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 Lynch’s 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 Lynch’s 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.


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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


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completion of the acquisition remained issued and outstanding subsequent to the acquisition, but are now convertible into Bank of America common stock.
 
Bank of America’s cost of acquiring Merrill Lynch has been pushed down to form a new accounting basis for Merrill Lynch. Accordingly, the accompanying 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 Company’s shareholders’ equity (with the exception of $1.5 billion of convertible preferred stock discussed above) were reclassified to paid-in-capital on January 1, 2009.
 
Effective January 1, 2009, Merrill Lynch adopted calendar quarter-end and year-end reporting periods to coincide with those of Bank of America. The intervening period between Merrill Lynch’s previous fiscal year end (December 26, 2008) and the beginning of 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 subsidiary’s 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.


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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 America’s presentation of similar transactions. These changes include:
 
  •  The reclassification of bifurcated embedded derivatives from the balance sheet classification of the host instrument (e.g., long-term borrowings for structured notes) to derivative contracts within trading assets and 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 Lynch’s interest in Bloomberg, L.P. from investment securities to loans, notes and mortgages.
 
Merrill Lynch did not make any significant changes to its Predecessor Company accounting policies in order to conform with the accounting policies utilized by Bank of America.
 
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 Lynch’s 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.


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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


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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 Lynch’s 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 Lynch’s 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;


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  •  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 counterparty’s creditworthiness, or Merrill Lynch’s own creditworthiness, as appropriate. Determining the fair value for OTC derivative contracts can require a significant level of estimation and management judgment.
 
New and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the 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.


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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 Lynch’s credit risk on an instrument is done in the same manner as for third party credit risk. The impact of Merrill Lynch’s credit risk is incorporated into the fair value, even when credit risk is not readily observable, of 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


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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 Lynch’s 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 America’s policy, any new or subsequent change in an unrecognized tax benefit related to a Bank of America state consolidated, combined or unitary return in which Merrill Lynch is a member will not be reflected in Merrill Lynch’s balance sheet. However, upon Bank of America’s resolution of the item, any material impact determined to be attributable to Merrill Lynch will be reflected in Merrill Lynch’s balance sheet. Merrill Lynch accrues income-tax-related interest and penalties, if applicable, within income tax expense.
 
Beginning with the 2009 tax year, Merrill Lynch’s results of operations are included in the U.S. federal income tax return and certain state income tax returns of Bank of America. The method of allocating income tax expense is determined under the 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 America’s tax returns or the utilization in Merrill Lynch’s 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.


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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 Lynch’s 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 America’s 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 America’s 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.


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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 Lynch’s policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. To ensure that the market value of the underlying 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 Lynch’s trading activities consist primarily of securities brokerage and trading; derivatives dealing and brokerage; commodities trading and futures brokerage; and securities financing transactions. Trading assets and trading liabilities consist of cash instruments (e.g., securities and loans) and derivative instruments. Trading assets and trading liabilities also include commodities inventory. See Note 6 for additional information on derivative instruments.


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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 security’s fair value is considered to be other-than-temporary if it is probable that all amounts contractually due will not be collected or Merrill Lynch either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. Beginning in 2009, for unrealized losses on debt securities that are deemed other-than-temporary, the credit component of an other-than-temporary impairment is recognized in earnings and the noncredit component is recognized in OCI when Merrill Lynch does not


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intend to sell the security and it is more likely than not that Merrill Lynch will not be required to sell the security prior to recovery. Prior to January 1, 2009, unrealized losses (both the credit and non-credit components) on available-for-sale debt securities that were deemed other-than-temporary were included in current period earnings.
 
Merrill Lynch’s impairment review generally includes:
 
•  Identifying securities with indicators of possible impairment;
 
•  Analyzing individual securities with fair value less than amortized cost for specific factors including:
 
  •  The estimated length of time to recover from fair value to amortized cost;
 
  •  The severity and duration of the fair value decline from amortized cost;
 
  •  Deterioration in the financial condition of the issuer;
 
•  Discussing evidential matter, including an evaluation of the factors that could cause individual securities to have an other-than-temporary impairment;
 
•  Determining whether Merrill Lynch intends to sell the security or if it is more likely than not that Merrill Lynch will be required to sell the security before recovery of its amortized cost; and
 
•  Documenting the analysis and conclusions.
 
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 management’s ability to influence the investees. See the Consolidation Accounting Policies section of this Note for more information.
 
For investments accounted for using the equity method, income is recognized based on Merrill Lynch’s share of the earnings or losses of the investee. Dividend distributions are generally recorded as reductions in the investment balance. Impairment testing is based on the guidance provided in 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.


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Loans, Notes, and Mortgages, Net
 
Merrill Lynch’s lending and related activities include loan originations, syndications and securitizations. Loan originations include corporate and institutional loans, residential and commercial mortgages, asset-based loans, and other loans to individuals and businesses. Merrill Lynch also engages in secondary market loan trading (see the Trading Assets and Liabilities section within this Note) and margin lending. Loans included in loans, notes, and mortgages are classified for accounting purposes as loans held for investment and loans held for sale. Upon completion of the acquisition of Merrill Lynch by Bank of America, certain loans carried by Merrill Lynch were subject to the requirements of 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 Lynch’s estimate of probable losses inherent in Merrill Lynch’s 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 Lynch’s 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 Lynch’s estimate of fair value for other loans, notes, and mortgages is determined based on the individual loan characteristics. For certain homogeneous categories of loans, including residential mortgages, automobile loans, and home equity loans, fair value is estimated using a whole loan valuation or an “as-if” securitized price based on market conditions. An “as-if” securitized price is based on estimated performance of the underlying asset pool collateral, rating agency credit structure assumptions and market pricing for similar securitizations previously executed. Declines in the carrying value of loans held for sale and loans accounted for at fair value under the fair value option election are included in other revenues in the Consolidated Statements of Earnings/(Loss).


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Nonrefundable loan origination fees, loan commitment fees, and “draw down” fees received in conjunction with held for investment loans are generally deferred and recognized over the contractual life of the loan as an adjustment to the yield. If, at the outset, or any time during the term of the loan, it becomes probable that the repayment period will be extended, the amortization is recalculated using the expected remaining life of the loan. When the loan contract does not provide for a specific maturity date, management’s best estimate of the repayment period is used. At repayment of the loan, any unrecognized deferred fee is immediately recognized in earnings. If the loan is accounted for as held for sale, the fees received are deferred and recognized as part of the gain or loss on sale in other revenues. If the loan is accounted for under the fair value option 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.
 
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improvement’s 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 Lynch’s 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.


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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 VIE’s 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 Lynch’s 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 Lynch’s 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 America’s 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 Lynch’s 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


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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 entity’s derivative instruments and hedging activities and their effects on the entity’s 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 entity’s 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 Lynch’s 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 subsidiary’s shares that results in the deconsolidation of the subsidiary, a gain or loss is recognized for the difference between the proceeds of that sale and the carrying amount of the interest sold and a new fair value basis is established for any remaining ownership interest. 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.


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Note 2.  Acquisition and Subsequent Transactions with Bank of America Corporation
 
As a result of the acquisition of Merrill Lynch by Bank of America, Merrill Lynch recorded the following purchase accounting adjustments. The allocation of the purchase price was finalized upon completion of Bank of America’s analysis of the fair values of Merrill Lynch’s 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 America’s common shares issued (in millions)
    1,375  
Purchase price per share of Bank of America’s common stock(1)
  $ 14.08  
         
Total value of Bank of America’s 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 America’s common stock at December 31, 2008, the last trading day prior to the date of acquisition.
(2) Represents Merrill Lynch’s preferred stock exchanged for Bank of America preferred stock having substantially identical terms and also includes $1.5 billion of convertible preferred stock.
(3) See Note 22 for further information on the impact of purchase accounting adjustments on Merrill Lynch’s 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 Lynch’s 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


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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 BAI’s net book value of approximately $263 million. In accordance with Business Combinations Accounting, Merrill Lynch’s results of operations for the year ended December 31, 2009 include the results of BAI as if the contribution from Bank of America had occurred on January 1, 2009. BAI’s impact on Merrill Lynch’s 2009 pre-tax earnings and net earnings was not material. Refer to Note 22 for further information.


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Note 3.  Segment and Geographic Information
 
Segment Information
 
Prior to the acquisition by Bank of America, Merrill Lynch’s operations were organized and reported as two operating segments in accordance with the criteria in 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.


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The information that follows, in management’s judgment, provides a reasonable representation of each region’s contribution to the consolidated net revenues and pre-tax earnings/(loss) from continuing operations:
 
                           
(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 Lynch’s 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 Lynch’s 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 Lynch’s 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.


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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 management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets (including loans, securities and derivatives), and long-dated or complex derivatives (including certain equity and currency derivatives and long-dated options on gas and power)).
 
As required by 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


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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 Lynch’s 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.


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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.


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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 fund’s capital as reported by the fund’s 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.


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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 Lynch’s own credit spreads is also included based on Merrill Lynch’s observed secondary bond market spreads. Structured notes are classified as either Level 2 or Level 3 in the fair value hierarchy.


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Recurring Fair Value
 
The following tables present Merrill Lynch’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of 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: