UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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X
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file
number: 1-7182
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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13-2740599
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina
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28255
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(Address of principal executive offices)
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(Zip Code)
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(704) 386-5681
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Registrants telephone number, including area code:
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Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X YES NO
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
YES NO
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated filer
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Accelerated filer
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Non-accelerated
filer X
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Smaller reporting company
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES X NO
APPLICABLE ONLY TO CORPORATE
ISSUERS:
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
As of the close of business on May 7, 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 H(1)(a) and (b) of
Form 10-Q
and is therefore filing this Form with a reduced disclosure
format as permitted by Instruction H (2).
QUARTERLY
REPORT ON
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
TABLE OF CONTENTS
1
PART I
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Item 1.
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Financial
Statements
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Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed
Consolidated Statements of Earnings (Unaudited)
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Three Months Ended
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Three Months Ended
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(dollars in millions)
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March 31, 2010
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March 31, 2009
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Revenues
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Principal transactions
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$
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3,218
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$
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5,914
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Commissions
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1,467
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1,380
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Managed account and other fee-based revenues
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1,051
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1,156
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Investment banking
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667
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606
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Earnings from equity method investments
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281
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40
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Other income
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1,154
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271
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Other-than-temporary
impairment losses on AFS debt securities:
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Total
other-than-temporary
impairment losses on AFS debt securities
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(105
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)
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-
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Portion of
other-than-temporary
impairment losses recognized in OCI on AFS debt securities
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19
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-
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Subtotal
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7,752
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9,367
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Interest and dividend revenues
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1,815
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4,383
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Less interest expense
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2,040
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3,455
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Net interest (expense)/profit
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(225
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)
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928
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Revenues, net of interest expense
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7,527
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10,295
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Non-interest expenses
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Compensation and benefits
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3,844
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3,278
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Communications and technology
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462
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399
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Occupancy and related depreciation
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305
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271
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Brokerage, clearing, and exchange fees
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280
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272
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Advertising and market development
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85
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106
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Professional fees
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144
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102
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Office supplies and postage
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43
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42
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Other
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431
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451
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Total non-interest expenses
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5,594
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4,921
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Pre-tax earnings
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1,933
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5,374
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Income tax expense
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664
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1,624
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Net earnings
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$
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1,269
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$
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3,750
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Preferred stock dividends
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38
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15
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Net earnings applicable to common stockholder
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$
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1,231
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$
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3,735
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See Notes to Condensed
Consolidated Financial Statements.
2
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(dollars in millions, except per share amounts)
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March 31, 2010
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December 31, 2009
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ASSETS
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Cash and cash equivalents
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$
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19,784
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$
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15,005
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Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
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11,239
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20,430
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Securities financing transactions
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Receivables under resale agreements (includes $48,627 in 2010
and $41,740 in 2009 measured at fair value in accordance with
the fair value option election)
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76,710
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69,738
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Receivables under securities borrowed transactions (includes
$3,233 in 2010 and $2,888 in 2009 measured at fair value in
accordance with the fair value option election)
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56,141
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45,422
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132,851
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115,160
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Trading assets, at fair value (includes securities pledged as
collateral that can be sold or repledged of $24,769 in 2010 and
$25,901 in 2009):
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Derivative contracts
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45,355
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49,582
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Equities and convertible debentures
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33,475
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34,501
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Non-U.S.
governments and agencies
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27,350
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21,256
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Corporate debt and preferred stock
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19,966
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16,779
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Mortgages, mortgage-backed, and asset-backed
|
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|
8,414
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7,971
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U.S. Government and agencies
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|
|
2,137
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|
|
1,458
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Municipals, money markets, physical commodities and other
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13,548
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8,778
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|
|
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150,245
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|
|
140,325
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|
|
|
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|
|
|
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|
|
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Investment securities (includes $268 in 2010 and $253 in 2009
measured at fair value in accordance with the fair value option
election)
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25,040
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|
32,840
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|
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Securities received as collateral, at fair value
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|
22,963
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16,346
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|
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Receivables from Bank of America
|
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|
29,492
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|
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|
20,619
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|
|
|
|
|
|
|
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Other receivables
|
|
|
|
|
|
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Customers (net of allowance for doubtful accounts of $9 in 2010
and $10 in 2009)
|
|
|
20,073
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|
|
|
31,818
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|
Brokers and dealers
|
|
|
4,525
|
|
|
|
5,998
|
|
Interest and other
|
|
|
13,266
|
|
|
|
14,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,864
|
|
|
|
52,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes, and mortgages (net of allowances for loan losses
of $34 in 2010 and $33 in 2009) (includes $4,113 in 2010 and
$4,649 in 2009 measured at fair value in accordance with the
fair value option election)
|
|
|
35,194
|
|
|
|
37,663
|
|
|
|
|
|
|
|
|
|
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Equipment and facilities (net of accumulated depreciation and
amortization of $892 in 2010 and $726 in 2009)
|
|
|
2,110
|
|
|
|
2,324
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
8,889
|
|
|
|
8,883
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
17,939
|
|
|
|
17,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
493,610
|
|
|
$
|
479,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Consolidated VIEs Included in Total Assets Above
(pledged as collateral)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts
|
|
$
|
10,122
|
|
|
|
|
|
Derivative contracts
|
|
|
442
|
|
|
|
|
|
Investment securities
|
|
|
1,775
|
|
|
|
|
|
Loans, notes, and mortgages (net)
|
|
|
3,372
|
|
|
|
|
|
Other assets
|
|
|
2,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets of Consolidated VIEs
|
|
$
|
18,671
|
|
|
|
|
|
|
|
|
|
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|
|
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|
3
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
March 31, 2010
|
|
December 31, 2009
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Securities financing transactions
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements (includes $44,376 in 2010
and $37,325 in 2009 measured at fair value in accordance with
the fair value option election)
|
|
$
|
74,174
|
|
|
$
|
66,260
|
|
Payables under securities loaned transactions
|
|
|
15,232
|
|
|
|
24,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,406
|
|
|
|
91,175
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (includes $7,021 in 2010 and $813 in 2009
measured at fair value in accordance with the fair value option
election)
|
|
|
7,101
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
13,473
|
|
|
|
15,187
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, at fair value
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
36,114
|
|
|
|
35,120
|
|
Equities and convertible debentures
|
|
|
16,533
|
|
|
|
13,654
|
|
Non-U.S.
governments and agencies
|
|
|
21,619
|
|
|
|
12,844
|
|
Corporate debt and preferred stock
|
|
|
4,328
|
|
|
|
1,903
|
|
U.S. Government and agencies
|
|
|
1,436
|
|
|
|
1,296
|
|
Municipals, money markets and other
|
|
|
411
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,441
|
|
|
|
65,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation to return securities received as collateral, at fair
value
|
|
|
22,963
|
|
|
|
16,346
|
|
Payables to Bank of America
|
|
|
24,246
|
|
|
|
23,550
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
|
|
|
|
|
|
|
Customers
|
|
|
36,487
|
|
|
|
39,307
|
|
Brokers and dealers
|
|
|
12,000
|
|
|
|
14,148
|
|
Interest and other (includes $201 in 2010 and $240 in 2009
measured at fair value in accordance with the fair value option
election)
|
|
|
18,486
|
|
|
|
17,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,973
|
|
|
|
70,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings (includes $46,099 in 2010 and $47,040 in
2009 measured at fair value in accordance with the fair value
option election)
|
|
|
142,248
|
|
|
|
151,399
|
|
Junior subordinated notes (related to trust preferred securities)
|
|
|
3,557
|
|
|
|
3,552
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
450,408
|
|
|
|
438,057
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stockholders Equity; authorized
25,000,000 shares; (liquidation preference of $100,000 per
share; issued: 17,000 shares)
|
|
|
1,541
|
|
|
|
1,541
|
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock (par value
$1.331/3
per share; authorized: 3,000,000,000 shares; issued:
1,000 shares)
|
|
|
-
|
|
|
|
-
|
|
Paid-in capital
|
|
|
36,303
|
|
|
|
35,126
|
|
Accumulated other comprehensive (loss) (net of tax)
|
|
|
(311
|
)
|
|
|
(112
|
)
|
Retained earnings
|
|
|
5,669
|
|
|
|
4,583
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
|
41,661
|
|
|
|
39,597
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
43,202
|
|
|
|
41,138
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
493,610
|
|
|
$
|
479,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Consolidated VIEs Included in Total
Liabilities Above
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
4,956
|
|
|
|
|
|
Derivative contracts
|
|
|
42
|
|
|
|
|
|
Other liabilities
|
|
|
1,151
|
|
|
|
|
|
Long-term borrowings
|
|
|
7,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities of Consolidated VIEs
|
|
$
|
13,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements.
4
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
(dollars in millions)
|
|
March 31, 2010
|
|
March 31, 2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,269
|
|
|
$
|
3,750
|
|
Adjustments to reconcile net earnings to cash (used
for)/provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
242
|
|
|
|
303
|
|
Share-based compensation expense
|
|
|
594
|
|
|
|
248
|
|
Deferred taxes
|
|
|
917
|
|
|
|
1,268
|
|
Earnings from equity method investments
|
|
|
(203
|
)
|
|
|
(40
|
)
|
Other
|
|
|
311
|
|
|
|
2,815
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
(6,116
|
)
|
|
|
11,228
|
|
Cash and securities segregated for regulatory purposes
|
|
|
|
|
|
|
|
|
or deposited with clearing organizations
|
|
|
3,666
|
|
|
|
3,499
|
|
Receivables from Bank of America
|
|
|
(8,873
|
)
|
|
|
(17,507
|
)
|
Receivables under resale agreements
|
|
|
(6,972
|
)
|
|
|
48,119
|
|
Receivables under securities borrowed transactions
|
|
|
(10,719
|
)
|
|
|
(5,260
|
)
|
Customer receivables
|
|
|
11,746
|
|
|
|
11,366
|
|
Brokers and dealers receivables
|
|
|
1,475
|
|
|
|
7,329
|
|
Proceeds from loans, notes, and mortgages held for sale
|
|
|
1,823
|
|
|
|
3,015
|
|
Other changes in loans, notes, and mortgages held for sale
|
|
|
(927
|
)
|
|
|
(1,573
|
)
|
Trading liabilities
|
|
|
15,295
|
|
|
|
(15,934
|
)
|
Payables under repurchase agreements
|
|
|
7,914
|
|
|
|
(32,623
|
)
|
Payables under securities loaned transactions
|
|
|
(9,683
|
)
|
|
|
(8,139
|
)
|
Payables to Bank of America
|
|
|
696
|
|
|
|
25,213
|
|
Customer payables
|
|
|
(2,820
|
)
|
|
|
(7,821
|
)
|
Brokers and dealers payables
|
|
|
(2,148
|
)
|
|
|
(2,270
|
)
|
Other, net
|
|
|
1,319
|
|
|
|
(1,957
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used for)/provided by operating activities
|
|
|
(1,194
|
)
|
|
|
25,029
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
Maturities of
available-for-sale
securities
|
|
|
770
|
|
|
|
2,095
|
|
Sales of
available-for-sale
securities
|
|
|
13,427
|
|
|
|
2,329
|
|
Purchases of
available-for-sale
securities
|
|
|
(298
|
)
|
|
|
(279
|
)
|
Equipment and facilities, net
|
|
|
49
|
|
|
|
(22
|
)
|
Loans, notes, and mortgages held for investment
|
|
|
568
|
|
|
|
(2,418
|
)
|
Other investments
|
|
|
1,148
|
|
|
|
2,218
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
15,664
|
|
|
|
3,923
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
Commercial paper and short-term borrowings
|
|
|
1,235
|
|
|
|
(33,215
|
)
|
Issuance and resale of long-term borrowings
|
|
|
2,814
|
|
|
|
1,602
|
|
Settlement and repurchases of long-term borrowings
|
|
|
(11,988
|
)
|
|
|
(19,871
|
)
|
Capital contributions from Bank of America
|
|
|
-
|
|
|
|
6,850
|
|
Deposits
|
|
|
(1,714
|
)
|
|
|
(819
|
)
|
Dividends
|
|
|
(38
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Cash used for financing activities
|
|
|
(9,691
|
)
|
|
|
(45,468
|
)
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
4,779
|
|
|
|
(16,516
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
15,005
|
|
|
|
52,603
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
19,784
|
|
|
$
|
36,087
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Income taxes paid (net of refunds)
|
|
$
|
-
|
|
|
$
|
193
|
|
Interest paid
|
|
|
1,429
|
|
|
|
4,273
|
|
Non-cash investing and financing activities:
During the quarter ended March 31, 2010, Merrill Lynch
received a non-cash capital contribution of approximately
$1 billion from Bank of America associated with certain
employee stock awards. In addition, as of January 1, 2010,
Merrill Lynch assumed assets and liabilities in connection with
the consolidation of certain VIEs. See Note 9.
In connection with the acquisition of Merrill Lynch by Bank
of America, Merrill Lynch recorded purchase accounting
adjustments in the quarter ended March 31, 2009, which were
recorded as non-cash capital contributions.
See Notes to Condensed
Consolidated Financial Statements.
5
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
(dollars in millions)
|
|
March 31, 2010
|
|
March 31, 2009
|
|
Net earnings
|
|
$
|
1,269
|
|
|
$
|
3,750
|
|
Other comprehensive (loss)/income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(59
|
)
|
|
|
229
|
|
Net unrealized (loss)/gain on investment securities
available-for-sale
|
|
|
(158
|
)
|
|
|
106
|
|
Net deferred gain on cash flow hedges
|
|
|
17
|
|
|
|
39
|
|
Defined benefit pension and postretirement plans
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss)/income, net of tax
|
|
|
(199
|
)
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,070
|
|
|
$
|
4,126
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements.
6
March 31, 2010
Description
of Business
Merrill Lynch & Co. Inc. (ML &
Co.) and together with its subsidiaries (Merrill
Lynch), provide trading, investment, financing and related
services to individuals and institutions on a global basis
through its broker, dealer, banking and other financial services
subsidiaries.
Bank of
America Acquisition
On January 1, 2009, Merrill Lynch 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. continuing as the surviving corporation and a
wholly-owned subsidiary of Bank of America. Upon completion of
the acquisition, each outstanding share of ML & Co.
common stock was converted into 0.8595 shares of Bank of
America common stock. As of the completion of the acquisition,
ML & Co. Series 1 through Series 8 preferred
stock were converted into Bank of America preferred stock with
substantially identical terms to the corresponding series of
Merrill Lynch preferred stock (except for additional voting
rights provided to the Bank of America securities). The Merrill
Lynch 9.00% Non-Voting Mandatory Convertible Non-Cumulative
Preferred Stock, Series 2, and 9.00% Non-Voting Mandatory
Convertible Non-Cumulative Preferred Stock, Series 3 that
were outstanding immediately prior to the completion of the
acquisition remained issued and outstanding subsequent to the
acquisition, but are now convertible into Bank of America common
stock.
Basis of
Presentation
The Condensed Consolidated Financial Statements include the
accounts of Merrill Lynch. The Condensed Consolidated Financial
Statements are presented in accordance with U.S. Generally
Accepted Accounting Principles (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 interim Condensed Consolidated
Financial Statements are unaudited; however, all adjustments for
a fair presentation of the Condensed Consolidated Financial
Statements have been included.
These unaudited Condensed Consolidated Financial Statements
should be read in conjunction with the audited Consolidated
Financial Statements included in Merrill Lynchs Annual
Report on
Form 10-K
for the year ended December 31, 2009 (the 2009 Annual
Report). The nature of Merrill Lynchs business is
such that the results of any interim period are not necessarily
indicative of results for a full year. Certain prior-period
amounts have been reclassified to conform to the current period
presentation.
As disclosed in Note 22 to the Consolidated Financial
Statements contained in the 2009 Annual Report, Merrill Lynch
adjusted previously reported 2009 quarterly amounts related to
the valuation of certain long-term borrowings, primarily
structured notes. Merrill Lynch also recorded revisions to
certain purchase accounting adjustments made in connection with
the acquisition of Merrill Lynch by Bank of America. In
addition, Merrill Lynchs previously reported results for
the first quarter of 2009 were adjusted to include the results
of Banc of America Investment Services, Inc. (BAI),
which was contributed by Bank of America to Merrill Lynch in
October 2009, as if the contribution had occurred on
January 1, 2009. The aggregate impact of the adjustments
related to certain long-term borrowings,
7
purchase accounting adjustments and BAI on net earnings for the
first quarter of 2009 was an increase of $90 million.
Consolidation
Accounting
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 (prior to January 1,
2010) a qualified special purpose entity (QSPE).
The Condensed Consolidated Financial Statements include the
accounts of Merrill Lynch, whose subsidiaries are generally
controlled through a majority voting interest or a controlling
financial interest. In periods prior to January 1, 2010, in
certain cases, Merrill Lynch VIEs may have been consolidated
based on a risks and rewards approach. Additionally, prior to
January 1, 2010, Merrill Lynch did not consolidate those
special purpose entities that met the criteria of a QSPE. See
the New Accounting Pronouncements section of this
note for information regarding new VIE accounting guidance that
became effective on January 1, 2010.
VREs VREs are defined to include entities that have
both equity at risk that is sufficient to fund future operations
and have equity investors that have a controlling financial
interest in the entity through their equity investments. In
accordance with Accounting Standards Codification
(ASC) 810, Consolidation,
(Consolidation Accounting), Merrill Lynch
generally consolidates those VREs where it has the majority of
the voting rights. 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% to 5% 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 (prior to January 1, 2010) QSPEs. A VIE is an
entity that lacks equity investors or whose equity investors do
not have a controlling financial interest in the entity through
their equity investments. Merrill Lynch consolidates those VIEs
for which it is the primary beneficiary. In accordance with new
accounting guidance effective January 1, 2010, Merrill
Lynch is considered the primary beneficiary when it has a
controlling financial interest in a VIE. Merrill Lynch has a
controlling financial interest when it has both the power to
direct the activities of the VIE that most significantly impact
the VIEs economic performance and an obligation to absorb
losses or the right to receive benefits that could potentially
be significant to the VIE. Prior to January 1, 2010, the
primary beneficiary was the entity that would absorb a majority
of the economic risks and rewards of the VIE, based on an
analysis of probability-weighted cash flows. Merrill Lynch
reassesses whether it is the primary beneficiary of a VIE on a
quarterly basis. The quarterly reassessment process considers
whether Merrill Lynch has acquired or divested the power to
direct the activities of the VIE through changes in governing
documents or other circumstances. The reassessment also
considers whether Merrill Lynch has acquired or disposed of a
financial interest that could be significant to the VIE, or
whether an interest in the VIE has become significant or is no
longer significant. The consolidation status of the VIEs with
which Merrill Lynch is involved may change as a result of such
reassessments.
QSPEs Before January 1, 2010, QSPEs were
passive entities with significantly limited permitted
activities. QSPEs were generally used as securitization vehicles
and were 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
8
exercise through servicing activities. As noted above, prior to
January 1, 2010, Merrill Lynch did not consolidate QSPEs.
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 ASC 860, Transfers and Servicing
(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
|
|
|
|
|
|
Prior to January 1, 2010, if the entity was a QSPE the
beneficial interest holders have the right to pledge or exchange
their beneficial interests
|
|
|
|
After January 1, 2010, if the transferees sole
purpose is to engage in securitization or asset-backed
financing, the beneficial interest holders have the right to
pledge or exchange their beneficial interests; and
|
|
|
|
The transferor does not maintain effective control over the
transferred assets (e.g., the ability to unilaterally cause the
holder to return specific transferred assets).
|
Revenue
Recognition
Principal transactions revenues include both realized and
unrealized gains and losses on trading assets and trading
liabilities, investment securities classified as trading
investments and fair value changes associated with 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 account 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 and other 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.
9
Earnings from equity method investments include Merrill
Lynchs pro rata share of income and losses associated with
investments accounted for under the equity method.
Other revenues include gains/(losses) on investment securities,
including sales and
other-than-temporary-impairment
losses associated with certain
available-for-sale
securities, gains/(losses) on private equity investments and
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 Condensed 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;
|
|
|
The determination of which VIEs should be consolidated and,
prior to January 1, 2010, the determination of the
qualifying status of QSPEs;
|
|
|
The realization of deferred taxes and the recognition and
measurement of uncertain tax positions;
|
|
|
The carrying amount of goodwill and intangible assets;
|
|
|
The amortization period of intangible assets with definite lives;
|
|
|
Incentive-based compensation accruals and valuation of
share-based payment compensation arrangements; and
|
|
|
Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements.
|
Estimates, by their nature, are based on judgment and available
information. Therefore, actual results could differ from those
estimates and could have a material impact on the Condensed
Consolidated Financial Statements, and it is possible that such
changes could occur in the near term.
Fair
Value Measurement
Merrill Lynch accounts for a significant portion of its
financial instruments at fair value or considers fair value in
their measurement. Merrill Lynch accounts for certain financial
assets and liabilities at
10
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, (the
fair value option election). Merrill Lynch also
accounts for certain assets at fair value under applicable
industry guidance, namely ASC 940 Financial
Services Brokers and Dealers
(Broker-Dealer Guide) and ASC 946,
Financial Services Investment Companies
(Investment Company Guide).
ASC 820, Fair Value Measurements and Disclosures,
(Fair Value Accounting) defines fair value,
establishes a framework for measuring fair value, establishes a
fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair
value measurements.
Fair values for
over-the-counter
(OTC) derivative financial instruments, principally
forwards, options, and swaps, represent the present value of
amounts estimated to be received from or paid to a marketplace
participant in settlement of these instruments (i.e., the amount
Merrill Lynch would expect to receive in a derivative asset
assignment or would expect to pay to have a derivative liability
assumed). These derivatives are valued using pricing models
based on the net present value of estimated future cash flows
and directly observed prices from exchange-traded derivatives,
other OTC trades, or external pricing services, while taking
into account the counterpartys creditworthiness, or
Merrill Lynchs own creditworthiness, as appropriate.
Determining the fair value for OTC derivative contracts can
require a significant level of estimation and management
judgment.
New and/or
complex instruments may have immature or limited markets. As a
result, the pricing models used for valuation often incorporate
significant estimates and assumptions that market participants
would use in pricing the instrument, which may impact the
results of operations reported in the Condensed Consolidated
Financial Statements. For instance, on long-dated and illiquid
contracts extrapolation methods are applied to observed market
data in order to estimate inputs and assumptions that are not
directly observable. This enables Merrill Lynch to mark to fair
value all positions consistently when only a subset of prices
are directly observable. Values for OTC derivatives are verified
using observed information about the costs of hedging the risk
and other trades in the market. As the markets for these
products develop, Merrill Lynch continually refines its pricing
models to correlate more closely to the market price of these
instruments. The recognition of significant inception gains and
losses that incorporate unobservable inputs is reviewed by
management to ensure such gains and losses are derived from
observable inputs
and/or
incorporate reasonable assumptions about the unobservable
component, such as implied bid-offer adjustments.
Certain financial instruments recorded at fair value are
initially measured using mid-market prices which results in
gross long and short positions 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.
11
Counterparty
Credit Risk
In determining fair value, Merrill Lynch considers both the
credit risk of its counterparties, as well as its own
creditworthiness. Merrill Lynch attempts to mitigate credit risk
to third parties by entering into netting and collateral
arrangements. Net counterparty exposure (counterparty positions
netted by offsetting transactions and both cash and securities
collateral) is then valued for counterparty creditworthiness and
this resultant value is incorporated into the fair value of the
respective instruments. Merrill Lynch generally calculates the
credit risk adjustment for derivatives based on observable
market credit spreads.
Fair Value Accounting also requires that Merrill Lynch consider
its own creditworthiness when determining the fair value of
certain instruments, including OTC derivative instruments and
certain structured notes carried at fair value under the fair
value option election. The approach to measuring the impact of
Merrill Lynchs credit risk on an instrument is done in the
same manner as for third party credit risk. The impact of
Merrill Lynchs credit risk is incorporated into the fair
value, even when credit risk is not readily observable, of
instruments such as OTC derivative contracts. OTC derivative
liabilities are valued based on the net counterparty exposure as
described above.
Legal
Reserves
Merrill Lynch is a party in various actions, some of which
involve claims for substantial amounts. Amounts are accrued for
the financial resolution of claims that have either been
asserted or are deemed probable of assertion if, in the opinion
of management, it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
In many cases, it is not possible to determine whether a
liability has been incurred or to estimate the ultimate or
minimum amount of that liability until the case is close to
resolution, in which case no accrual is made until that time.
Accruals are subject to significant estimation by management
with input from outside counsel.
Income
Taxes
Merrill Lynch provides for income taxes on all transactions that
have been recognized in the Condensed Consolidated Financial
Statements in accordance with ASC 740, Income Taxes
(Income Tax Accounting). Accordingly, deferred
taxes are adjusted to reflect the tax rates at which future
taxable amounts will likely be settled or realized. The effects
of tax rate changes on deferred tax liabilities and deferred tax
assets, as well as other changes in income tax laws, are
recognized in net earnings in the period during which such
changes are enacted. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts that are
more-likely-than-not to be realized. Pursuant to Income Tax
Accounting, Merrill Lynch may consider various sources of
evidence in assessing the necessity of valuation allowances to
reduce deferred tax assets to amounts more-likely-than-not to be
realized, including the following: 1) past and projected
earnings, including losses, of Merrill Lynch and Bank of
America, as certain tax attributes such as U.S. net
operating losses (NOLs), U.S. capital loss
carryforwards and foreign tax credit carryforwards can be
utilized by Bank of America in certain income tax returns,
2) tax carryforward periods, and 3) tax planning
strategies and other factors of the legal entities, such as the
intercompany tax-allocation policy. Included within Merrill
Lynchs net deferred tax assets are carryforward amounts
generated in the U.S. and 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
12
earnings after adjusting for the past market disruptions and the
anticipated impact of the differences between pre-tax earnings
and taxable income.
Merrill Lynch recognizes and measures its unrecognized tax
benefits in accordance with Income Tax Accounting. Merrill Lynch
estimates the likelihood, based on their technical merits, that
tax positions will be sustained upon examination considering the
facts and circumstances and information available at the end of
each period. Merrill Lynch adjusts the level of unrecognized tax
benefits when there is more information available, or when an
event occurs requiring a change. In accordance with Bank of
Americas policy, any new or subsequent change in an
unrecognized tax benefit related to a Bank of America state
consolidated, combined or unitary return in which Merrill Lynch
is a member will not be reflected in Merrill Lynchs
balance sheet. However, upon Bank of Americas resolution
of the item, any material impact determined to be attributable
to Merrill Lynch will be reflected in Merrill Lynchs
balance sheet. Merrill Lynch accrues income-tax-related interest
and penalties, if applicable, within income tax expense.
Beginning with the 2009 tax year, Merrill Lynchs results
of operations are included in the U.S. federal income tax
return and certain state income tax returns of Bank of America.
The method of allocating income tax expense is determined under
the intercompany tax allocation policy of Bank of America. This
policy specifies that income tax expense will be computed for
all Bank of America subsidiaries generally on a separate pro
forma return basis, taking into account the tax position of the
consolidated group and the pro forma Merrill Lynch group. Under
this policy, tax benefits associated with net operating losses
(or other tax attributes) of Merrill Lynch are payable to
Merrill Lynch upon the earlier of the utilization in Bank of
Americas tax returns or the utilization in Merrill
Lynchs pro forma tax returns.
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 generally accounted for as
collateralized financing transactions and may be recorded at
their contractual amounts plus accrued interest or at fair value
under the fair value option election. In resale and repurchase
agreements, typically the termination date of the agreements is
before the maturity date of the underlying security. However, in
certain situations, Merrill Lynch may enter into agreements
where the termination date of the transaction is the same as the
maturity date of the underlying security. These transactions are
referred to as
repo-to-maturity
transactions. Merrill Lynch accounts for
repo-to-maturity
transactions as sales in accordance with U.S. GAAP.
Repo-to-maturity
transactions were not material for the periods presented.
Resale and repurchase agreements recorded at fair value are
generally valued based on pricing models that use inputs with
observable levels of price transparency. Where the fair value
option election has been made, changes in the fair value of
resale and repurchase agreements are reflected in principal
transactions revenues and the contractual interest coupon is
recorded as interest revenue or interest expense, respectively.
For further information refer to Note 4.
Resale and repurchase agreements recorded at their contractual
amounts plus accrued interest approximate fair value, as the
fair value of these items is not materially sensitive to shifts
in market interest rates because of the short-term nature of
these instruments
and/or
variable interest rates or to credit risk because the resale and
repurchase agreements are fully collateralized.
13
Merrill Lynchs policy is to obtain possession of
collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. To ensure that
the market value of the underlying collateral remains
sufficient, collateral is generally valued daily and Merrill
Lynch may require counterparties to deposit additional
collateral or may return collateral pledged when appropriate.
Substantially all repurchase and resale activities are
transacted under master repurchase agreements that give Merrill
Lynch the right, in the event of default, to liquidate
collateral held and to offset receivables and payables with the
same counterparty. Merrill Lynch offsets certain repurchase and
resale agreement balances with the same counterparty on the
Condensed Consolidated Balance Sheets.
Merrill Lynch may use securities received as collateral for
resale agreements to satisfy regulatory requirements such as
Rule 15c3-3
of the Securities Exchange Act of 1934.
Securities borrowed and loaned transactions may be recorded at
the amount of cash collateral advanced or received plus accrued
interest or at fair value under the fair value option election.
Securities borrowed transactions require Merrill Lynch to
provide the counterparty with collateral in the form of cash,
letters of credit, or other securities. Merrill Lynch receives
collateral in the form of cash or other securities for
securities loaned transactions. For these transactions, the fees
received or paid by Merrill Lynch are recorded as interest
revenue or expense. On a daily basis, Merrill Lynch monitors the
market value of securities borrowed or loaned against the
collateral value, and Merrill Lynch may require counterparties
to deposit additional collateral or may return collateral
pledged, when appropriate. The carrying value of these
instruments approximates fair value as these items are not
materially sensitive to shifts in market interest rates because
of their short-term nature
and/or their
variable interest rates.
All 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 Condensed Consolidated Balance Sheets.
In transactions where Merrill Lynch acts as the lender in a
securities lending agreement and receives securities that can be
pledged or sold as collateral, it recognizes an asset on the
Condensed Consolidated Balance Sheets carried at fair value,
representing the securities received (securities received as
collateral), and a liability for the same amount, representing
the obligation to return those securities (obligation to return
securities received as collateral). The amounts on the Condensed
Consolidated Balance Sheets result from such non-cash
transactions.
Trading
Assets and Liabilities
Merrill Lynchs trading activities consist primarily of
securities brokerage and trading; derivatives dealing and
brokerage; commodities trading and futures brokerage; and
securities financing transactions. Trading assets and trading
liabilities consist of cash instruments (e.g., securities and
loans) and derivative instruments. Trading assets also include
commodities inventory. See Note 6 for additional
information on derivative instruments.
Trading assets and liabilities are generally recorded on a trade
date basis at fair value. Included in trading liabilities are
securities that Merrill Lynch has sold but did not own and will
therefore be obligated to purchase at a future date (short
sales). Commodities inventory is recorded at the lower of
cost or market value. Changes in fair value of trading assets
and liabilities (i.e., unrealized gains and losses) are
recognized as principal transactions revenues in the current
period. Realized gains and losses and any related interest
amounts are included in principal transactions revenues and
interest revenues and expenses, depending on the nature of the
instrument.
14
Investment
Securities
Investment securities consist of marketable investment
securities and non-qualifying investments. Refer to Note 8.
Marketable
Investments
ML & Co. and certain of its non-broker-dealer
subsidiaries, including Merrill Lynch banks, certain of which
were sold to Bank of America during 2009, follow the guidance
within Investment Accounting for investments in debt and
publicly traded equity securities. Merrill Lynch classifies
those debt securities that it does not intend to sell as
held-to-maturity
securities.
Held-to-maturity
securities are carried at cost unless a decline in value is
deemed
other-than-temporary,
in which case the carrying value is reduced. For Merrill Lynch,
the trading classification under Investment Accounting generally
includes those securities that are bought and held principally
for the purpose of selling them in the near term, securities
that are economically hedged, or securities that may contain a
bifurcatable embedded derivative as defined in Derivatives
Accounting. Securities classified as trading are marked to fair
value through earnings. All other qualifying securities are
classified as
available-for-sale
and held at fair value with unrealized gains and losses reported
in accumulated other comprehensive income/(loss)
(OCI).
Realized gains and losses on investment securities are included
in current period earnings. For purposes of computing realized
gains and losses, the cost basis of each investment sold is
based on the specific identification method.
Merrill Lynch regularly (at least quarterly) evaluates each
held-to-maturity
and
available-for-sale
security whose value has declined below amortized cost to assess
whether the decline in fair value is
other-than-temporary.
A decline in a debt securitys fair value is considered to
be
other-than-temporary
if it is probable that all amounts contractually due will not be
collected or Merrill Lynch either plans to sell the security or
it is more likely than not that it will be required to sell the
security before recovery of its amortized cost. For unrealized
losses on debt securities that are deemed
other-than-temporary,
the credit component of an
other-than-temporary
impairment is recognized in earnings and the noncredit component
is recognized in OCI when Merrill Lynch does not intend to sell
the security and it is more likely than not that Merrill Lynch
will not be required to sell the security prior to recovery.
Merrill Lynchs impairment review generally includes:
|
|
|
Identifying securities with indicators of possible impairment;
|
|
|
Analyzing individual securities with fair value less than
amortized cost for specific factors including:
|
|
|
|
|
|
The estimated length of time to recover from fair value to
amortized cost;
|
|
|
|
The severity and duration of the fair value decline from
amortized cost;
|
|
|
|
Deterioration in the financial condition of the issuer;
|
|
|
|
Discussing evidential matter, including an evaluation of the
factors that could cause individual securities to have an
other-than-temporary
impairment;
|
15
|
|
|
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. Investments in real estate VIEs
that are held by the consolidated real estate fund are also
accounted for under the Investment Company Guide and carried at
fair value. Additionally, certain private equity investments
that are not accounted for under the Investment Company Guide
may be carried at fair value under the fair value option
election. The carrying value of private equity investments
reflects expected exit values based upon market prices or other
valuation methodologies including market comparables of similar
companies and expected cash flows.
Merrill Lynch has non-controlling investments in the common
shares of corporations and in partnerships that do not fall
within the scope of Investment Accounting or the Investment
Company Guide. Merrill Lynch accounts for these investments
using either the cost or the equity method of accounting based
on managements ability to influence the investees. See the
Consolidation Accounting Policies section of this Note for more
information.
For investments accounted for using the equity method, income is
recognized based on Merrill Lynchs share of the earnings
or losses of the investee. Dividend distributions are generally
recorded as reductions in the investment balance. Impairment
testing is based on the guidance provided in Equity Method
Accounting, and the investment is reduced when an impairment is
deemed
other-than-temporary.
For investments accounted for at cost, income is recognized as
dividends are received. Impairment testing is based on the
guidance provided in Investment Accounting, and the cost basis
is reduced when an impairment is deemed
other-than-temporary.
Loans,
Notes and Mortgages, Net
Merrill Lynchs lending and related activities include loan
originations, syndications and securitizations. Loan
originations include corporate and institutional loans,
residential and commercial mortgages, asset-based loans, and
other loans to individuals and businesses. Merrill Lynch also
engages in secondary market loan trading (see the Trading Assets
and Liabilities section within this Note) and margin lending.
Loans included in loans, notes, and mortgages are classified for
accounting purposes as loans held for investment and loans held
for sale. Upon completion of the acquisition of Merrill Lynch by
Bank of America, certain loans carried by Merrill Lynch were
subject to the requirements of
ASC 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality (Acquired Impaired Loan Accounting).
Loans held for investment are carried at amortized cost, less an
allowance for loan losses, which represents Merrill Lynchs
estimate of probable losses inherent in its 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
16
included in interest and dividend revenue in the Condensed
Consolidated Statements of Earnings/(Loss).
Merrill Lynchs estimate of loan losses includes judgment
about collectability based on available information at the
balance sheet date, and the uncertainties inherent in those
underlying assumptions. While management has based its estimates
on the best information available, future adjustments to the
allowance for loan losses may be necessary as a result of
changes in the economic environment or variances between actual
results and the original assumptions.
In general, loans that are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to
timely collection, including loans that are individually
identified as being impaired, are 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 when available or discounted
cash flows. Merrill Lynchs estimate of fair value for
other loans, notes, and mortgages is determined based on the
individual loan characteristics. For certain homogeneous
categories of loans, including residential mortgages and home
equity loans, fair value is estimated using a whole loan
valuation or an as-if securitized price based on
market conditions. An as-if securitized price is
based on estimated performance of the underlying asset pool
collateral, rating agency credit structure assumptions and
market pricing for similar securitizations previously executed.
Declines in the carrying value of loans held for sale and loans
accounted for at fair value under the fair value option election
are included in other revenues in the Condensed Consolidated
Statements of Earnings/(Loss).
Nonrefundable loan origination fees, loan commitment fees, and
draw down fees received in conjunction with held for
investment loans are generally deferred and recognized over the
contractual life of the loan as an adjustment to the yield. If,
at the outset, or any time during the term of the loan, it
becomes probable that the repayment period will be extended, the
amortization is recalculated using the expected remaining life
of the loan. When the loan contract does not provide for a
specific maturity date, managements best estimate of the
repayment period is used. At repayment of the loan, any
unrecognized deferred fee is immediately recognized in earnings.
If the loan is accounted for as held for sale, the fees received
are deferred and recognized as part of the gain or loss on sale
in other revenues. If the loan is accounted for under the fair
value option election, the fees are included in the
determination of the fair value and included in other revenues.
New
Accounting Pronouncements
In March 2010, the FASB amended Derivatives Accounting to
clarify the scope exception for embedded credit derivatives. The
amendments define which embedded credit derivatives should be
evaluated for bifurcation and separate accounting. The
amendments will be adopted by Merrill Lynch
17
in the third quarter of 2010. Merrill Lynch is currently
evaluating the impact of these amendments on the Condensed
Consolidated Financial Statements.
On January 1, 2010, Merrill Lynch adopted new amendments to
Fair Value Accounting. The amendments require disclosure of
significant transfers between Level 1 and Level 2 as
well as significant transfers in and out of Level 3 on a
gross basis. The amendments also clarify existing disclosure
requirements regarding the level of disaggregation of fair value
measurements and inputs and valuation techniques. The enhanced
disclosures required under these amendments are included in
Note 4.
On January 1, 2010, Merrill Lynch adopted new accounting
guidance on transfers of financial assets and consolidation of
VIEs. This new accounting guidance revises sale accounting
criteria for transfers of financial assets, including
elimination of the concept of and accounting for QSPEs, and
significantly changes the criteria by which an enterprise
determines whether it must consolidate a VIE. The adoption of
this new accounting guidance resulted in the consolidation of
certain VIEs that previously were QSPEs and VIEs that were not
recorded on Merrill Lynchs Consolidated Balance Sheet
prior to January 1, 2010. See Note 9 for the initial
impact of the new Consolidation Accounting guidance on Merrill
Lynchs Condensed Consolidated Balance Sheet.
Merrill Lynch has entered into various transactions with Bank of
America, primarily to integrate certain activities within either
Bank of America or Merrill Lynch. Transactions with Bank of
America also include various asset and liability transfers and
transactions associated with intercompany sales and trading and
financing activities.
Sale of
U.S. Banks to Bank of America
During 2009, Merrill Lynch sold Merrill Lynch Bank USA
(MLBUSA) and Merrill Lynch Bank &
Trust Co., FSB (MLBT-FSB) 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, and the sale
of MLBT-FSB was completed on November 2, 2009. After each
sale was completed, MLBUSA and MLBT-FSB were merged into Bank of
America, N.A., a subsidiary of Bank of America.
Acquisition
of 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated (MLPF&S), a wholly-owned
broker-dealer subsidiary of ML & Co. The net
amount contributed by Bank of America to ML & Co. was
equal to BAIs net book value of approximately
$263 million. In accordance with Business Combinations
Accounting, Merrill Lynchs results of operations for the
year ended December 31, 2009 include the results of BAI as
if the contribution from Bank of America had occurred on
January 1, 2009. BAIs impact on Merrill Lynchs
2009 pre-tax earnings and net earnings was not material.
18
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. During the quarter ended March 31, 2010,
such asset or liability transfers were not significant. During
the quarter ended March 31, 2009, Merrill Lynch transferred
approximately $47 billion each of assets and liabilities to
Bank of America and Bank of America transferred approximately
$16 billion of assets to Merrill Lynch. 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, during the quarter ended
March 31, 2010, Merrill Lynch sold approximately
$11 billion of available-for-sale securities to Bank of
America.
Other
Related Party Transactions
Merrill Lynch has entered into various other transactions with
Bank of America, primarily in connection with certain sales and
trading and financing activities. Details on amounts receivable
from and payable to Bank of America as of March 31, 2010
and December 31, 2009 are presented below:
Receivables from Bank of America are comprised of:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Cash and cash equivalents
|
|
$
|
12,932
|
|
|
$
|
8,265
|
|
Cash and securities segregated for regulatory purposes
|
|
|
6,776
|
|
|
|
3,000
|
|
Receivables under resale agreements and securities borrowed
transactions
|
|
|
2,120
|
|
|
|
77
|
|
Trading assets
|
|
|
619
|
|
|
|
700
|
|
Intercompany funding receivable
|
|
|
5,260
|
|
|
|
5,778
|
|
Other receivables
|
|
|
1,728
|
|
|
|
2,682
|
|
Other assets
|
|
|
57
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,492
|
|
|
$
|
20,619
|
|
|
|
|
|
|
|
|
|
|
Payables to Bank of America are comprised of:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
Payables under repurchase agreements
|
|
$
|
10,242
|
|
|
|
$
|
8,307
|
|
Payables under securities loaned transactions
|
|
|
8,938
|
|
|
|
|
10,326
|
|
Deposits
|
|
|
33
|
|
|
|
|
35
|
|
Trading liabilities
|
|
|
576
|
|
|
|
|
718
|
|
Other payables
|
|
|
4,457
|
|
|
|
|
4,164
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,246
|
|
|
|
$
|
23,550
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues and non-interest expenses related to
transactions with Bank of America for the three months ended
March 31, 2010 were $360 million and
$172 million, respectively. Net revenues for the three
months ended March 31, 2010 included a gain of
approximately $280 million from the sale of approximately
$11 billion of
available-for-sale
securities to Bank of America. Revenues and expenses related to
transactions with Bank of America were not material for the
three months ended March 31, 2009.
19
Segment
Information
Prior to the acquisition by Bank of America, Merrill
Lynchs operations were organized and reported as two
operating segments in accordance with the criteria in
ASC 280, Segment Reporting (Segment
Reporting): Global Markets and Investment Banking
(GMI) and Global Wealth Management (GWM).
As a result of the acquisition by Bank of America, Merrill Lynch
reevaluated the provisions of Segment Reporting in the first
quarter of 2009. Pursuant to Segment Reporting, operating
segments represent components of an enterprise for which
separate financial information is available that is regularly
evaluated by the chief operating decision maker in determining
how to allocate resources and in assessing performance. Based
upon how the chief operating decision maker of Merrill Lynch
reviews results in terms of allocating resources and assessing
performance, it was determined that Merrill Lynch does not
contain any identifiable operating segments under Segment
Reporting. As a result, the financial information of Merrill
Lynch is presented as a single segment.
Geographic
Information
Merrill Lynch conducts its business activities through offices
in the following five regions:
|
|
|
United States;
|
|
|
Europe, Middle East, and Africa (EMEA);
|
|
|
Pacific Rim;
|
|
|
Latin America; and
|
|
|
Canada.
|
The principal methodologies used in preparing the geographic
information below are as follows:
|
|
|
Revenues are generally recorded based on the location of the
employee generating the revenue; and
|
|
|
Intercompany transfers are based primarily on service agreements.
|
The information that follows, in managements judgment,
provides a reasonable representation of each regions
contribution to the consolidated net revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
(dollars in millions)
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
Revenues, net of interest expense
|
|
|
|
|
|
|
|
|
Europe, Middle East, and Africa
|
|
$
|
2,121
|
|
|
$
|
1,935
|
|
Pacific Rim
|
|
|
778
|
|
|
|
806
|
|
Latin America
|
|
|
340
|
|
|
|
235
|
|
Canada
|
|
|
73
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
3,312
|
|
|
|
3,028
|
|
United States
(1)(2)
|
|
|
4,215
|
|
|
|
7,267
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net of interest expense
|
|
$
|
7,527
|
|
|
$
|
10,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
U.S. results for the three
months ended March 31, 2010 and March 31, 2009
included gains of $0.2 billion and $2.2 billion,
respectively, which resulted from the widening of Merrill
Lynchs credit spreads on the carrying values of certain
long-term borrowings, primarily structured notes. |
(2) |
|
Corporate net revenues and
adjustments are reflected in the U.S. region. |
20
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 Condensed
Consolidated Balance Sheets are categorized based on the inputs
to the valuation techniques as follows:
|
|
Level 1.
|
Financial assets and liabilities whose values are based on
unadjusted quoted prices for identical assets or liabilities in
an active market that Merrill Lynch has the ability to access
(examples include active exchange-traded equity securities,
exchange-traded derivatives, U.S. Government securities,
and certain other sovereign government obligations).
|
|
Level 2.
|
Financial assets and liabilities whose values are based on
quoted prices in markets that are not active or model inputs
that are observable either directly or indirectly for
substantially the full term of the asset or liability.
Level 2 inputs include the following:
|
|
|
|
|
a)
|
Quoted prices for similar assets or liabilities in active
markets (examples include restricted stock and U.S. agency
securities);
|
|
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in
non-active markets (examples include corporate and municipal
bonds, which can trade infrequently);
|
|
|
|
|
c)
|
Pricing models whose inputs are observable for substantially the
full term of the asset or liability (examples include most
over-the-counter
derivatives, including interest rate and currency
swaps); and
|
|
|
|
|
d)
|
Pricing models whose inputs are derived principally from or
corroborated by observable market data through correlation or
other means for substantially the full term of the asset or
liability (examples include certain residential and commercial
mortgage-related assets, including loans, securities and
derivatives).
|
|
|
Level 3. |
Financial assets and liabilities whose values are based on
prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value
measurement. These inputs reflect managements view 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 and long-dated or complex derivatives).
|
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
21
consideration the offsetting effect of Level 1 and 2
financial instruments entered into by Merrill Lynch that
economically hedge certain exposures to the Level 3
positions.
A review of fair value hierarchy classifications is conducted on
a quarterly basis. Changes in the observability of valuation
inputs may result in a reclassification for certain financial
assets or liabilities. Level 3 gains and losses represent
amounts incurred during the period in which the instrument was
classified as Level 3. Reclassifications impacting
Level 3 of the fair value hierarchy are reported as
transfers in or transfers 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 transfers in and out of
Level 3.
Transfers between Level 1 and Level 2 assets and
liabilities were not significant for the quarter ended
March 31, 2010.
Valuation
Techniques
The following outlines the valuation methodologies for Merrill
Lynchs material categories of assets and liabilities:
U.S.
Government and agencies
U.S. treasury securities U.S. treasury
securities are valued using quoted market prices and are
generally classified as Level 1 in the fair value hierarchy.
U.S. agency securities U.S. agency securities
are comprised of two main categories consisting of agency issued
debt and mortgage pass-throughs. Agency issued debt securities
are generally valued using quoted market prices. Mortgage
pass-throughs include To-be-announced (TBA)
securities and mortgage pass-through certificates. TBA
securities are generally valued using quoted market prices. The
fair value of mortgage pass-through certificates are model
driven based on the comparable TBA security. Agency issued debt
securities and mortgage pass-throughs are generally classified
as Level 2 in the fair value hierarchy.
Non-U.S.
governments and agencies
Sovereign government obligations are valued using quoted prices
in active markets when available. To the extent quoted prices
are not available, fair value is determined based on reference
to recent trading activity and quoted prices of similar
securities. These securities are generally classified in
Level 1 or Level 2 in the fair value hierarchy,
primarily based on the issuing country.
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. 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 and
municipal ARS are classified as Level 3 in the fair value
hierarchy.
22
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 estimate
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 in 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 in
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.
23
The fair value of OTC derivatives is derived using market prices
and other market based pricing parameters such as 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
and credit considerations based on available market evidence.
The majority of OTC 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
(CDS) referenced to mortgage-backed securities.
For example, derivative instruments, such as certain CDS
referenced to RMBS, CMBS, ABS and collateralized debt
obligations (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.
CDOs The fair value of CDOs is derived from a referenced
basket of 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 funds. 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 various
methodologies, which 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. These valuations are
subject to appropriate discounts for lack of liquidity or
marketability. Certain factors which may influence changes to
fair value include but are not limited to, recapitalizations,
subsequent rounds of financing, and offerings in the equity or
debt capital markets. For fund investments, Merrill Lynch
generally records the fair value of its proportionate interest
in the funds capital as reported by the funds
respective managers.
Publicly traded private equity investments are primarily
classified as either Level 1 or Level 2 in 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.
24
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
and short term borrowings
Merrill Lynch and its consolidated VIEs issue structured notes
that have coupons or repayment terms linked to the performance
of debt or equity securities, indices, currencies or
commodities. The fair value of structured notes is estimated
using valuation models for the combined derivative and debt
portions of the notes when the fair value option has been
elected. These models incorporate observable and in some
instances unobservable inputs including security prices,
interest rate yield curves, option volatility, currency,
commodity or equity rates and correlations between these inputs.
The impact of Merrill Lynchs own credit spreads is also
included based on Merrill Lynchs observed secondary bond
market spreads. Structured notes are classified as either
Level 2 or Level 3 in the fair value hierarchy.
25
Recurring
Fair Value
The following tables present Merrill Lynchs fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis as of March 31, 2010 and
December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of March 31, 2010
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(dollars in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
-
|
|
|
$
|
129
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
129
|
|
Corporate debt
|
|
|
-
|
|
|
|
623
|
|
|
|
-
|
|
|
|
-
|
|
|
|
623
|
|
Non-U.S.
governments and agencies
|
|
|
892
|
|
|
|
957
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,849
|
|
U.S. government and agencies
|
|
|
665
|
|
|
|
974
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities segregated for regulatory purposes or deposited
with clearing organizations
|
|
|
1,557
|
|
|
|
2,683
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
|
-
|
|
|
|
48,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,627
|
|
Receivables under securities borrowed transactions
|
|
|
-
|
|
|
|
3,233
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,233
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
20,037
|
|
|
|
7,868
|
|
|
|
245
|
|
|
|
-
|
|
|
|
28,150
|
|
Convertible debentures
|
|
|
-
|
|
|
|
5,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,325
|
|
Non-U.S.
governments and agencies
|
|
|
23,568
|
|
|
|
2,726
|
|
|
|
1,056
|
|
|
|
-
|
|
|
|
27,350
|
|
Corporate debt
|
|
|
-
|
|
|
|
13,178
|
|
|
|
6,026
|
|
|
|
-
|
|
|
|
19,204
|
|
Preferred stock
|
|
|
-
|
|
|
|
552
|
|
|
|
210
|
|
|
|
-
|
|
|
|
762
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
-
|
|
|
|
2,015
|
|
|
|
6,399
|
|
|
|
-
|
|
|
|
8,414
|
|
U.S. government and agencies
|
|
|
1,709
|
|
|
|
428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,137
|
|
Municipals and money markets
|
|
|
780
|
|
|
|
9,361
|
|
|
|
2,819
|
|
|
|
-
|
|
|
|
12,960
|
|
Commodities and related contracts
|
|
|
-
|
|
|
|
588
|
|
|
|
-
|
|
|
|
-
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
46,094
|
|
|
|
42,041
|
|
|
|
16,755
|
|
|
|
-
|
|
|
|
104,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contracts(2)
|
|
|
4,591
|
|
|
|
618,512
|
|
|
|
17,249
|
|
|
|
(594,997
|
)
|
|
|
45,355
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities agency collateralized
mortgage obligations
|
|
|
-
|
|
|
|
1,595
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,595
|
|
Mortgage-backed securities non-agency MBSs
|
|
|
-
|
|
|
|
931
|
|
|
|
585
|
|
|
|
-
|
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
-
|
|
|
|
2,526
|
|
|
|
585
|
|
|
|
-
|
|
|
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,121
|
|
|
|
370
|
|
|
|
3,490
|
|
|
|
-
|
|
|
|
5,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
2,121
|
|
|
|
2,896
|
|
|
|
4,075
|
|
|
|
-
|
|
|
|
9,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral
|
|
|
22,158
|
|
|
|
805
|
|
|
|
-
|
|
|
|
|
|
|
|
22,963
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
690
|
|
|
|
3,532
|
|
|
|
-
|
|
|
|
4,222
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of March 31, 2010
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(dollars in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
-
|
|
|
|
44,376
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,376
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
7,021
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,021
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
12,390
|
|
|
|
3,192
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,582
|
|
Convertible debentures
|
|
|
-
|
|
|
|
951
|
|
|
|
-
|
|
|
|
-
|
|
|
|
951
|
|
Non-U.S.
governments and agencies
|
|
|
20,565
|
|
|
|
685
|
|
|
|
369
|
|
|
|
-
|
|
|
|
21,619
|
|
Corporate debt
|
|
|
-
|
|
|
|
4,328
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,328
|
|
U.S. government and agencies
|
|
|
1,436
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,436
|
|
Municipals, money markets and other
|
|
|
411
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
34,802
|
|
|
|
9,156
|
|
|
|
369
|
|
|
|
-
|
|
|
|
44,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contracts(2)
|
|
|
4,169
|
|
|
|
621,136
|
|
|
|
9,969
|
|
|
|
(599,160
|
)
|
|
|
36,114
|
|
Obligation to return securities received as collateral
|
|
|
22,158
|
|
|
|
805
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,963
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
53
|
|
|
|
148
|
|
|
|
-
|
|
|
|
201
|
|
Long-term borrowings
|
|
|
-
|
|
|
|
41,580
|
|
|
|
4,519
|
|
|
|
-
|
|
|
|
46,099
|
|
|
|
|
|
|
(1) |
|
Represents counterparty and
cash collateral netting. |
(2) |
|
Refer to Note 6 for
product level detail. |
Level 3 derivative contracts (assets) primarily relate to
derivative positions on U.S. ABS CDOs and other mortgage
products of $6.7 billion, $5.4 billion of other credit
derivatives that incorporate unobservable correlation, and
$5.1 billion of equity, currency, interest rate and
commodity derivatives that are long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
Level 3 non-qualifying investment securities primarily
relate to certain private equity positions.
Level 3 loans, notes and mortgages primarily relate to
residential mortgage and corporate loans.
Level 3 derivative contracts (liabilities) primarily relate
to derivative positions on U.S. ABS CDOs and other mortgage
products of $3.4 billion, $2.2 billion of other credit
derivatives that incorporate unobservable correlation, and
$4.4 billion of equity, currency, interest rate and
commodity derivatives that are long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
Level 3 long-term borrowings primarily relate to
equity-linked structured notes of $2.9 billion that are
long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation) and non-recourse borrowings issued by consolidated
VIEs of $1.0 billion that hold Level 3 residential
mortgages.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of December 31, 2009
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(dollars in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed and asset-backed
|
|
$
|
-
|
|
|
$
|
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
|
|
|
-
|
|
|
|
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)
|
|
|
2,218
|
|
|
|
658,264
|
|
|
|
17,939
|
|
|
|
(628,839
|
)
|
|
|
49,582
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities agency collateralized
mortgage obligations
|
|
|
-
|
|
|
|
9,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,688
|
|
Mortgage-backed securities non-agency MBSs
|
|
|
-
|
|
|
|
1,132
|
|
|
|
473
|
|
|
|
-
|
|
|
|
1,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
-
|
|
|
|
10,820
|
|
|
|
473
|
|
|
|
-
|
|
|
|
11,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,027
|
|
|
|
451
|
|
|
|
3,696
|
|
|
|
-
|
|
|
|
6,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
2,027
|
|
|
|
11,271
|
|
|
|
4,169
|
|
|
|
-
|
|
|
|
17,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral
|
|
|
15,780
|
|
|
|
566
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,346
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
654
|
|
|
|
4,115
|
|
|
|
-
|
|
|
|
4,769
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
-
|
|
|
|
37,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,325
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
813
|
|
|
|
-
|
|
|
|
-
|
|
|
|
813
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
12,051
|
|
|
|
1,069
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,120
|
|
Convertible debentures
|
|
|
-
|
|
|
|
534
|
|
|
|
-
|
|
|
|
-
|
|
|
|
534
|
|
Non-U.S.
governments and agencies
|
|
|
12,028
|
|
|
|
430
|
|
|
|
386
|
|
|
|
-
|
|
|
|
12,844
|
|
Corporate debt
|
|
|
-
|
|
|
|
1,903
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,903
|
|
U.S. government and agencies
|
|
|
1,296
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,296
|
|
Municipals, money markets and other
|
|
|
273
|
|
|
|
370
|
|
|
|
-
|
|
|
|
-
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
25,648
|
|
|
|
4,306
|
|
|
|
386
|
|
|
|
-
|
|
|
|
30,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contracts(2)
|
|
|
1,727
|
|
|
|
662,629
|
|
|
|
11,073
|
|
|
|
(640,309
|
)
|
|
|
35,120
|
|
Obligation to return securities received as collateral
|
|
|
15,780
|
|
|
|
566
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,346
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
54
|
|
|
|
186
|
|
|
|
-
|
|
|
|
240
|
|
Long-term borrowings
|
|
|
-
|
|
|
|
42,357
|
|
|
|
4,683
|
|
|
|
-
|
|
|
|
47,040
|
|
|
|
|
|
|
(1) |
|
Represents counterparty and
cash collateral netting. |
(2) |
|
Refer to Note 6 for
product level detail. |
28
Level 3 derivative contracts (assets) primarily relate to
derivative positions on U.S. ABS CDOs and other mortgage
products of $7.5 billion, $5.0 billion of other credit
derivatives that incorporate unobservable correlation, and
$5.4 billion of equity, currency, interest rate and
commodity derivatives that are long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
Level 3 non-qualifying investment securities primarily
relate to certain private equity positions.
Level 3 loans, notes and mortgages primarily relate to
residential mortgage and corporate loans.
Level 3 derivative contracts (liabilities) primarily relate
to derivative positions on U.S. ABS CDOs and other mortgage
products of $4.1 billion, $2.2 billion of other credit
derivatives that incorporate unobservable correlation, and
$4.8 billion of equity, currency, interest rate and
commodity derivatives that are long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
Level 3 long-term borrowings primarily relate to
equity-linked structured notes of $3.6 billion that are
long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
The following tables provide a summary of changes in fair value
of Merrill Lynchs Level 3 financial assets and
liabilities for the three months ended March 31, 2010 and
March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
Total Realized and Unrealized Gains or (Losses)
|
|
Total Realized and
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
included in Income
|
|
Unrealized Gains
|
|
Unrealized
|
|
Issuances
|
|
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
Gains to
|
|
and
|
|
Transfers
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
OCI
|
|
Settlements
|
|
in
|
|
out
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
259
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
(7
|
)
|
|
$
|
31
|
|
|
$
|
(40
|
)
|
|
$
|
245
|
|
Non-U.S.
governments and agencies
|
|
|
1,131
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
87
|
|
|
|
(51
|
)
|
|
|
1,056
|
|
Corporate debt
|
|
|
6,540
|
|
|
|
212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
212
|
|
|
|
-
|
|
|
|
(607
|
)
|
|
|
300
|
|
|
|
(419
|
)
|
|
|
6,026
|
|
Preferred stock
|
|
|
562
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(350
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
210
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
6,291
|
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
-
|
|
|
|
310
|
|
|
|
22
|
|
|
|
(164
|
)
|
|
|
6,399
|
|
Municipals and money markets
|
|
|
2,148
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
(420
|
)
|
|
|
1,074
|
|
|
|
-
|
|
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
16,931
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
|
|
-
|
|
|
|
(1,102
|
)
|
|
|
1,514
|
|
|
|
(674
|
)
|
|
|
16,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
6,866
|
|
|
|
(419
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(419
|
)
|
|
|
-
|
|
|
|
(135
|
)
|
|
|
1,029
|
|
|
|
(61
|
)
|
|
|
7,280
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential non-agency MBSs
|
|
|
473
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
24
|
|
|
|
4
|
|
|
|
(27
|
)
|
|
|
83
|
|
|
|
52
|
|
|
|
-
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
473
|
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
24
|
|
|
|
4
|
|
|
|
(27
|
)
|
|
|
83
|
|
|
|
52
|
|
|
|
-
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
3,696
|
|
|
|
-
|
|
|
|
363
|
|
|
|
-
|
|
|
|
363
|
|
|
|
-
|
|
|
|
(434
|
)
|
|
|
-
|
|
|
|
(135
|
)
|
|
|
3,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
4,169
|
|
|
|
-
|
|
|
|
343
|
|
|
|
24
|
|
|
|
367
|
|
|
|
(27
|
)
|
|
|
(351
|
)
|
|
|
52
|
|
|
|
(135
|
)
|
|
|
4,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
4,115
|
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
46
|
|
|
|
(105
|
)
|
|
|
-
|
|
|
|
(478
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,532
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
386
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
386
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
186
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
148
|
|
Long-term borrowings
|
|
|
4,683
|
|
|
|
123
|
|
|
|
79
|
|
|
|
-
|
|
|
|
202
|
|
|
|
-
|
|
|
|
452
|
|
|
|
271
|
|
|
|
(685
|
)
|
|
|
4,519
|
|
|
|
29
Transfers in for municipals and money markets relates to reduced
price transparency (e.g., trading activity) for municipal
auction rate securities. Transfers in for net derivative
contracts primarily relates to a lack of price observability for
certain credit default swaps.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Three Months Ended March 31, 2009
|
|
|
|
|
Total Realized and Unrealized Gains or (Losses)
|
|
Total Realized and
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
included in Income
|
|
Unrealized Gains
|
|
Unrealized
|
|
Issuances
|
|
|
|
|
|
|
Beginning
|
|
Principal
|
|
Other
|
|
|
|
or (Losses)
|
|
Gains to
|
|
and
|
|
Transfers
|
|
Ending
|
|
|
Balance
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
included in Income
|
|
OCI
|
|
Settlements
|
|
in (out)
|
|
Balance
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
231
|
|
|
$
|
(18
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(18
|
)
|
|
$
|
-
|
|
|
$
|
184
|
|
|
$
|
(18
|
)
|
|
$
|
379
|
|
Non-U.S.
governments and agencies
|
|
|
30
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
587
|
|
|
|
601
|
|
Corporate debt
|
|
|
10,295
|
|
|
|
(484
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(484
|
)
|
|
|
-
|
|
|
|
(394
|
)
|
|
|
(3,772
|
)
|
|
|
5,645
|
|
Preferred stock
|
|
|
3,344
|
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
3,419
|
|
|
|
105
|
|
|
|
6,759
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
7,590
|
|
|
|
(261
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(261
|
)
|
|
|
-
|
|
|
|
(591
|
)
|
|
|
699
|
|
|
|
7,437
|
|
Municipals and money markets
|
|
|
798
|
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
197
|
|
|
|
(13
|
)
|
|
|
1,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
22,288
|
|
|
|
(823
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(823
|
)
|
|
|
-
|
|
|
|
2,814
|
|
|
|
(2,412
|
)
|
|
|
21,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
2,307
|
|
|
|
913
|
|
|
|
-
|
|
|
|
-
|
|
|
|
913
|
|
|
|
-
|
|
|
|
441
|
|
|
|
207
|
|
|
|
3,868
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential non-agency MBSs
|
|
|
350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178
|
|
|
|
178
|
|
|
|
649
|
|
|
|
(92
|
)
|
|
|
2,108
|
|
|
|
3,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178
|
|
|
|
178
|
|
|
|
649
|
|
|
|
(92
|
)
|
|
|
2,108
|
|
|
|
3,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,761
|
|
|
|
-
|
|
|
|
(179
|
)
|
|
|
-
|
|
|
|
(179
|
)
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
(65
|
)
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
3,111
|
|
|
|
-
|
|
|
|
(179
|
)
|
|
|
178
|
|
|
|
(1
|
)
|
|
|
649
|
|
|
|
(115
|
)
|
|
|
2,043
|
|
|
|
5,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
359
|
|
|
|
-
|
|
|
|
(466
|
)
|
|
|
-
|
|
|
|
(466
|
)
|
|
|
-
|
|
|
|
266
|
|
|
|
5,985
|
|
|
|
6,144
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
348
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
348
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
-
|
|
|
|
-
|
|
|
|
392
|
|
|
|
-
|
|
|
|
392
|
|
|
|
-
|
|
|
|
54
|
|
|
|
1,337
|
|
|
|
999
|
|
Long-term borrowings
|
|
|
7,480
|
|
|
|
(499
|
)
|
|
|
7
|
|
|
|
-
|
|
|
|
(492
|
)
|
|
|
-
|
|
|
|
403
|
|
|
|
(326
|
)
|
|
|
8,049
|
|
|
|
Net gains in principal transactions related to net derivative
contracts were primarily due to $1.2 billion of gains on
credit derivatives that incorporate unobservable correlation.
Increases in purchases, issuances and settlements of preferred
stock were primarily attributable to the purchase of auction
rate securities.
Net transfers out for corporate debt primarily relate to the
reclassification of certain loans from trading assets to loans,
notes and mortgages held for investment, which are not measured
at fair value as a result of the acquisition by Bank of America.
Net transfers in for
available-for-sale
mortgage-backed securities residential non-agency
MBS are the result of reduced price observability. Net transfers
in for loans, notes, and mortgages relate to the fair value
option election for certain mortgage loans, corporate loans and
leveraged loans by Merrill Lynch as a result of the acquisition
of Merrill Lynch by Bank of America. Net transfers in for other
liabilities interest and other relate to the fair
value option election for certain loan commitments by Merrill
Lynch as a result of the acquisition by Bank of America.
30
The following tables provide the portion of gains or losses
included in income for the three months ended March 31,
2010 and March 31, 2009 attributable to unrealized gains or
losses relating to those Level 3 assets and liabilities
held at March 31, 2010 and March 31, 2009,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Unrealized Gains or (Losses) for Level 3 Assets and
Liabilities Still Held
|
|
|
Three Months Ended March 31, 2010
|
|
Three Months Ended March 31, 2009
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
|
$
|
(18
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(18
|
)
|
Non-U.S.
governments and agencies
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
Corporate debt
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124
|
|
|
|
(487
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(487
|
)
|
Preferred stock
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(109
|
)
|
Mortgages, mortgage-backed and asset-backed
|
|
|
(64
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(64
|
)
|
|
|
(278
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(278
|
)
|
Municipals and money markets
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
(843
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
(366
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(366
|
)
|
|
|
991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
991
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - non-agency MBSs
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
24
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
24
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
-
|
|
|
|
(206
|
)
|
|
|
-
|
|
|
|
(206
|
)
|
|
|
-
|
|
|
|
(179
|
)
|
|
|
-
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
-
|
|
|
|
(226
|
)
|
|
|
24
|
|
|
|
(202
|
)
|
|
|
-
|
|
|
|
(179
|
)
|
|
|
178
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
(466
|
)
|
|
|
-
|
|
|
|
(466
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
392
|
|
|
|
-
|
|
|
|
392
|
|
Long-term borrowings
|
|
|
110
|
|
|
|
78
|
|
|
|
-
|
|
|
|
188
|
|
|
|
(533
|
)
|
|
|
7
|
|
|
|
-
|
|
|
|
(526
|
)
|
|
|
For the three months ended March 31, 2009, net unrealized
gains in principal transactions related to net derivative
contracts were primarily due to $1.2 billion of gains on
credit derivatives that incorporate unobservable correlation.
Non-recurring
Fair Value
Certain assets and liabilities are measured at fair value on a
non-recurring basis and are not included in the tables above.
These assets and liabilities primarily include loans and loan
commitments held for sale that are reported at lower of cost or
fair value and loans held for investment that were initially
measured at cost and have been written down to fair value as a
result of an impairment. The following
31
table shows the fair value hierarchy for those assets and
liabilities measured at fair value on a non-recurring basis as
of March 31, 2010 and December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
(Losses)
|
|
(Losses)
|
|
|
Non-Recurring Basis
|
|
Three Months
|
|
Three Months
|
|
|
as of March 31, 2010
|
|
Ended
|
|
Ended
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
81
|
|
|
$
|
81
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
417
|
|
|
|
1,946
|
|
|
|
2,363
|
|
|
|
(77
|
)
|
|
|
(226
|
)
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
|
|
(5
|
)
|
|
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
31
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Non-Recurring Basis
|
|
|
as of December 31, 2009
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
182
|
|
|
$
|
182
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
524
|
|
|
|
2,671
|
|
|
|
3,195
|
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
210
|
|
|
|
210
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
39
|
|
|
|
Loans, notes, and mortgages includes held for sale loans that
are carried at the lower of cost or fair value and for which the
fair value was below the cost basis at March 31, 2010 and
December 31, 2009. It also includes certain impaired held
for investment loans where an allowance for loan losses has been
calculated based upon the fair value of the loans or collateral.
Level 3 assets as of March 31, 2010 primarily relate
to commercial real estate loans that are classified as held for
sale where there continues to be significant illiquidity in the
loan trading and securitization markets. Level 3 assets as
of December 31, 2009 primarily relate to residential and
commercial real estate loans that are classified as held for
sale where there continues to be significant illiquidity in the
loan trading and securitization markets.
Other payables interest and other includes amounts
recorded for loan commitments at lower of cost or fair value
where the funded loan will be held for sale.
Fair
Value Option Election
The fair value option election allows companies to irrevocably
elect fair value as the initial and subsequent measurement
attribute for certain financial assets and liabilities. Changes
in fair value for assets and liabilities for which the election
is made will be recognized in earnings as they occur. The fair
value option election is permitted on an instrument by
instrument basis at initial recognition of an asset or liability
or upon an event that gives rise to a new basis of accounting
for that instrument. As discussed above, certain of Merrill
Lynchs financial instruments are required to be accounted
for at
32
fair value under Investment Accounting and Derivatives
Accounting, as well as industry level guidance. For certain
financial instruments that are not accounted for at fair value
under other applicable accounting guidance, the fair value
option election has been made.
The following tables provide information about where in the
Condensed Consolidated Statements of Earnings/(Loss) changes in
fair values of assets and liabilities, for which the fair value
option election has been made, are included for the three months
ended March 31, 2010 and March 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Changes in Fair Value For the Three
|
|
Changes in Fair Value For the Three
|
|
|
Months Ended March 31, 2010, for Items
|
|
Months Ended March 31, 2009, for Items
|
|
|
Measured at Fair Value Pursuant to the
|
|
Measured at Fair Value Pursuant to the
|
|
|
Fair Value Option Election
|
|
Fair Value Option Election
|
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
Gains/
|
|
Gains/
|
|
Total
|
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
(losses)
|
|
(losses)
|
|
Changes
|
|
|
Principal
|
|
Other
|
|
in Fair
|
|
Principal
|
|
Other
|
|
in Fair
|
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
Transactions
|
|
Revenues
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
7
|
|
|
$
|
-
|
|
|
$
|
7
|
|
|
$
|
(168
|
)
|
|
$
|
-
|
|
|
$
|
(168
|
)
|
Investment securities
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(103
|
)
|
|
|
(98
|
)
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
(412
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
|
|
92
|
|
|
|
-
|
|
|
|
92
|
|
Short-term borrowings
|
|
|
(44
|
)
|
|
|
-
|
|
|
|
(44
|
)
|
|
|
(16
|
)
|
|
|
6
|
|
|
|
(10
|
)
|
Other payables interest and other
|
|
|
-
|
|
|
|
31
|
|
|
|
31
|
|
|
|
-
|
|
|
|
392
|
|
|
|
392
|
|
Long-term
borrowings(1)
|
|
|
(101
|
)
|
|
|
(67
|
)
|
|
|
(168
|
)
|
|
|
2,104
|
|
|
|
7
|
|
|
|
2,111
|
|
|
|
|
|
|
(1) |
|
Other revenues primarily
represent fair value changes on non-recourse long-term
borrowings issued by consolidated VIEs. |
The following describes the rationale for electing to account
for certain financial assets and liabilities at fair value, as
well as the impact of instrument-specific credit risk on the
fair value.
Resale
and repurchase agreements
Merrill Lynch made the fair value option election for certain
resale and repurchase agreements. The fair value option election
was made based on the tenor of the resale and repurchase
agreements, which reflects the magnitude of the interest rate
risk. The majority of resale and repurchase agreements
collateralized by U.S. Government securities were excluded
from the fair value option election as these contracts are
generally short-dated and therefore the interest rate risk is
not considered significant. Amounts loaned under resale
agreements require collateral with a market value equal to or in
excess of the principal amount loaned resulting in minimal
credit risk for such transactions.
Loans,
notes and mortgages and loan commitments
Merrill Lynch made the fair value option election for certain
corporate loans because the loans are risk managed on a fair
value basis. Upon the acquisition of Merrill Lynch by Bank of
America, Merrill Lynch also made the fair value option election
for certain mortgage, corporate, and leveraged loans and loan
commitments. The change in the fair value of loans, notes and
mortgages and loan
33
commitments for which the fair value option was elected was
primarily attributable to changes in borrower-specific credit
risk for the three months ended March 31, 2010 and
March 31, 2009.
For the three months ended March 31, 2010 and
March 31, 2009, the aggregate fair value of loans, notes
and mortgages for which the fair value option election has been
made that were 90 days or more past due was
$225 million and $346 million, respectively, and the
aggregate fair value of loans, notes, and mortgages that were in
non-accrual status was $650 million and $346 million,
respectively. For the three months ended March 31, 2010 and
March 31, 2009, the unpaid principal amount due exceeded
the aggregate fair value of such loans, notes and mortgages that
are 90 days or more past due
and/or in
non-accrual status by $735 million and $419 million,
respectively.
Short-term
and long-term borrowings
Merrill Lynch made the fair value option election for certain
short-term and long-term borrowings that are risk managed on a
fair value basis, including structured notes, and for which
hedge accounting under Derivatives Accounting had been difficult
to obtain. The majority of the fair value changes on long-term
borrowings is from structured notes with coupon or repayment
terms that are linked to the performance of debt and equity
securities, indices, currencies or commodities. Excluding gains
for the three months ended March 31, 2010 and
March 31, 2009 related to changes in Merrill Lynchs
credit spreads, the majority of the (losses)/gains for the
respective periods are offset by gains/(losses) on derivatives
that economically hedge these borrowings and that are accounted
for at fair value under Derivatives Accounting. The changes in
the fair value of liabilities for which the fair value option
election was made that were attributable to the widening of
Merrill Lynchs credit spreads were gains of approximately
$0.2 billion and $2.2 billion for the three months
ended March 31, 2010 and March 31, 2009, respectively.
Changes in Merrill Lynch specific credit risk are derived by
isolating fair value changes due to changes in Merrill
Lynchs credit spreads as observed in the secondary cash
market.
The fair value option election was also made for certain
non-recourse long-term borrowings and secured borrowings issued
by consolidated VIEs. The fair value of these borrowings is not
materially affected by changes in Merrill Lynchs
creditworthiness.
The following tables present the difference between fair values
and the aggregate contractual principal amounts of receivables
under resale agreements, receivables under securities borrowed
transactions, loans, notes, and mortgages and long-term
borrowings for which the fair value option election has been
made as of March 31, 2010 and December 31, 2009,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Principal
|
|
|
|
|
Fair Value
|
|
Amount
|
|
|
|
|
at
|
|
Due Upon
|
|
|
|
|
March 31, 2010
|
|
Maturity
|
|
Difference
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
48,627
|
|
|
$
|
48,334
|
|
|
$
|
293
|
|
Receivables under securities borrowed transactions
|
|
|
3,233
|
|
|
|
3,233
|
|
|
|
-
|
|
Loans, notes and mortgages
|
|
|
4,113
|
|
|
|
6,417
|
|
|
|
(2,304
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings(1)
|
|
|
46,099
|
|
|
|
52,729
|
|
|
|
(6,630
|
)
|
|
|
|
|
|
(1) |
|
The majority of the difference
relates to the impact of the widening of Merrill Lynchs
credit spreads, the change in fair value of non-recourse debt,
and zero coupon notes issued at a substantial discount from the
principal amount. |
34
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Principal
|
|
|
|
|
Fair Value
|
|
Amount
|
|
|
|
|
at
|
|
Due Upon
|
|
|
|
|
December 31,
2009
|
|
Maturity
|
|
Difference
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
41,740
|
|
|
$
|
41,454
|
|
|
$
|
286
|
|
Receivables under securities borrowed transactions
|
|
|
2,888
|
|
|
|
2,888
|
|
|
|
-
|
|
Loans, notes and mortgages
|
|
|
4,649
|
|
|
|
7,236
|
|
|
|
(2,587
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings(1)
|
|
|
47,040
|
|
|
|
50,543
|
|
|
|
(3,503
|
)
|
|
|
|
|
|
(1) |
|
The majority of the difference
relates to the impact of the widening of Merrill Lynchs
credit spreads, the change in fair value of non-recourse debt,
and zero coupon notes issued at a substantial discount from the
principal amount. |
Note 5. Fair
Value of Financial Instruments
The fair values of financial instruments have been derived, in
part, by managements assumptions, the estimated amount and
timing of future cash flows and estimated discount rates.
Different assumptions could significantly affect these estimated
fair values. Accordingly, the net realizable values could be
materially different from the estimates presented below. In
addition, the estimates are only indicative of the value of
individual financial instruments and should not be considered an
indication of the fair value of Merrill Lynch.
The following disclosures represent financial instruments for
which the ending balances at March 31, 2010 and
December 31, 2009 are not carried at fair value in their
entirety on Merrill Lynchs Condensed Consolidated Balance
Sheets.
Short-term
Financial Instruments
The carrying value of short-term financial instruments,
including cash and cash equivalents, cash and securities
segregated for regulatory purposes or deposited with clearing
organizations, certain securities financing transactions,
customer and broker-dealer receivables and payables, and
commercial paper and other short-term borrowings, approximates
the fair value of these instruments. These financial instruments
generally expose Merrill Lynch to limited credit risk and have
no stated maturities or have short-term maturities and carry
interest rates that approximate market interest rates.
Loans,
Notes and Mortgages
Fair values were generally determined by discounting both
principal and interest cash flows expected to be collected using
an observable discount rate for similar instruments with
adjustments that Merrill Lynch believes a market participant
would consider in determining fair value. Merrill Lynch
estimates the cash flows expected to be collected using internal
credit risk, interest rate and prepayment risk models that
incorporate its best estimate of current key assumptions, such
as default rates, loss severity and prepayment speeds for the
life of the loan. Merrill Lynch made the fair value option
election for certain loans and loan commitments. See Note 4
for additional information on loans for which Merrill Lynch made
the fair value option election.
35
Deposits
The fair value for certain deposits with stated maturities was
calculated by discounting contractual cash flows using current
market rates for instruments with similar maturities. For
deposits with no stated maturities, the carrying amount was
considered to approximate fair value and does not take into
account the significant value of the cost advantage and
stability of Merrill Lynchs long-term relationships with
depositors.
Long-term
Borrowings
Merrill Lynch uses quoted market prices for its long-term
borrowings when available. When quoted market prices are not
available, fair value is estimated based on current market
interest rates and credit spreads for Merrill Lynch debt with
similar maturities. Merrill Lynch made the fair value option
election for certain long-term borrowings, including structured
notes. See Note 4 for additional information on long-term
borrowings for which Merrill Lynch made the fair value option
election.
The book and fair values of certain financial instruments at
March 31, 2010 and December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Book Value
|
|
Fair Value
|
|
Book Value
|
|
Fair Value
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and
mortgages(1)
|
|
$
|
35,194
|
|
|
$
|
34,991
|
|
|
$
|
37,663
|
|
|
$
|
37,715
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
13,473
|
|
|
|
13,473
|
|
|
|
15,187
|
|
|
|
15,187
|
|
Long-term
borrowings(2)
|
|
|
145,805
|
|
|
|
154,020
|
|
|
|
154,951
|
|
|
|
162,645
|
|
|
|
|
|
|
(1) |
|
Loans are presented net of
allowance for loan losses. The fair value is determined based on
the present value of future cash flows using credit spreads or
risk adjusted rates of return that a buyer of the portfolio
would require. Merrill Lynch expects to collect the principal
cash flows underlying the book values as well as the related
interest cash flows. |
(2) |
|
Includes junior subordinated
notes (related to trust preferred securities). |
A derivative is an instrument whose value is derived from an
underlying instrument or index, such as interest rates, equity
security prices, currencies, commodity prices or credit spreads.
Derivatives include futures, forwards, swaps, 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).
Derivatives Accounting establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts
(embedded derivatives) and for hedging activities.
Derivatives Accounting requires that an entity recognize all
derivatives as either assets or liabilities and measure those
instruments at fair value. The fair value of all derivatives is
recorded on a
net-by-counterparty
basis on the Condensed Consolidated Balance Sheets where Merrill
Lynch believes a legal right of setoff exists under an
enforceable netting agreement. All derivatives,
36
including bifurcated embedded derivatives within structured
notes, are reported on the Condensed Consolidated Balance Sheets
as trading assets and liabilities.
The accounting for changes in fair value of a derivative
instrument depends on its intended use and if it is designated
and qualifies as an accounting hedging instrument under
Derivatives Accounting.
Trading
derivatives
Merrill Lynch enters into derivatives to facilitate client
transactions, for proprietary trading and financing purposes,
and to manage risk exposures arising from trading assets and
liabilities. Changes in fair value for these derivatives are
reported in current period earnings as principal transactions
revenues.
Derivatives
that Contain a Significant Financing Element
In the ordinary course of trading activities, Merrill Lynch
enters into certain transactions that are documented as
derivatives where a significant cash investment is made by one
party. Certain derivative instruments that contain a significant
financing element at inception and where Merrill Lynch is deemed
to be the borrower are included in financing activities in the
Condensed Consolidated Statements of Cash Flows. The cash flows
from all other derivative transactions that do not contain a
significant financing element at inception are included in
operating activities.
Non-trading
derivatives
Merrill Lynch also enters into derivatives in order to manage
risk exposures arising from assets and liabilities not carried
at fair value as follows:
|
|
1. |
Merrill Lynchs debt was issued in a variety of maturities
and currencies to achieve the lowest cost financing possible.
Merrill Lynch enters into derivative transactions to hedge these
liabilities. Derivatives used most frequently include swap
agreements that:
|
|
|
|
|
|
Convert fixed-rate interest payments into variable-rate interest
payments;
|
|
|
|
Change the underlying interest rate basis or reset
frequency; and
|
|
|
|
Change the settlement currency of a debt instrument.
|
Changes in the fair value of interest rate derivatives are
reported in interest expense when hedge accounting is applied;
otherwise changes in fair value are reported in other revenue.
Changes in the fair value of foreign currency derivatives are
reported in other revenue.
|
|
2.
|
Merrill Lynch uses foreign-exchange forward contracts,
foreign-exchange options, and currency swaps to hedge its net
investments in foreign operations, as well as other foreign
currency exposures (e.g.,
non-U.S. dollar
denominated debt and expenses). These derivatives are used to
mitigate the impact of changes in exchange rates. Changes in the
fair value of these derivatives are reported in other revenue,
unless net investment hedge accounting is applied.
|
|
3.
|
Merrill Lynch enters into futures, swaps, options and forward
contracts to manage the price risk of certain commodity
inventory and forecasted commodity purchases and sales. Changes
in fair value of these derivatives are reported in principal
transaction revenues, unless cash flow hedge accounting is
applied.
|
37
|
|
4. |
Merrill Lynch enters into credit default swaps to manage the
credit risk on certain loans that are not part of trading
activities. Changes in the fair value of these derivatives are
reported in other revenue.
|
Derivatives that qualify as accounting hedges under the guidance
in Derivatives Accounting are designated as one of the following:
|
|
1.
|
A hedge of the fair value of a recognized asset or liability
(fair value hedge). Changes in the fair value of
derivatives that are designated and qualify as fair value hedges
of interest rate risk, along with the gain or loss on the hedged
liability that is attributable to the hedged risk, are recorded
in current period earnings as interest expense. Changes in the
fair value of derivatives that are designated and qualify as
fair value hedges of commodity price risk, along with the gain
or loss on the hedged asset that is attributable to the hedged
risk, are recorded in current period earnings in principal
transactions.
|
|
2.
|
A hedge of the variability of cash flows to be received or paid
related to a recognized asset or liability (cash flow
hedge). Changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recorded in OCI
until earnings are affected by the variability of cash flows of
the hedged asset or liability. For cash flow hedges of commodity
contracts, the amount is reclassified out of OCI and recorded in
principal transactions when the forecasted purchase or sale of
the commodity occurs.
|
|
3.
|
A hedge of a net investment in a foreign operation (net
investment hedge). Changes in the fair value of
derivatives that are designated and qualify as hedges of a net
investment in a foreign operation are recorded in the foreign
currency translation adjustment account within OCI. Changes in
the fair value of the hedging instruments that are associated
with the difference between the spot rate and the contracted
forward rate are recorded in current period earnings in interest
expense for the quarter ended March 31, 2010 and other
revenues for the quarter ended March 31, 2009.
|
Merrill Lynch formally assesses, both at the inception of the
hedge and on an ongoing basis, whether the hedging derivatives
are highly effective in offsetting changes in fair value or cash
flows of hedged items. Merrill Lynch uses regression analysis at
the hedges inception and for each reporting period
thereafter to assess whether the derivative used in its hedging
transaction is expected to be and has been highly effective in
offsetting changes in the fair value or cash flows of the hedged
item. When assessing hedge effectiveness on interest rate hedges
and fair value hedges of commodity price risk, there are no
attributes of the derivatives used to hedge the fair value
exposure that are excluded from the assessment. For cash flow
hedges of commodity price risk, the difference between the spot
rate and the contracted forward rate which represents the time
value of money is excluded from the assessment of hedge
effectiveness and is recorded in principal transactions
revenues. When it is determined that a derivative is not highly
effective as a hedge, Merrill Lynch discontinues hedge
accounting.
38
Hedge accounting activity for 2010 and 2009 included the
following:
Fair
value hedges of interest rate risk on long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Interest expense
|
|
$
|
(214
|
)
|
|
$
|
(370
|
)
|
Gain/(loss) recognized in income on the long-term
borrowing(1)
|
|
Interest expense
|
|
$
|
3
|
|
|
$
|
245
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Interest expense
|
|
$
|
(211
|
)
|
|
$
|
(125
|
)
|
As of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
3,665
|
|
|
$
|
3,362
|
|
|
|
Trading liabilities
|
|
$
|
396
|
|
|
$
|
101
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
44,504
|
|
|
$
|
54,954
|
|
in a liability position
|
|
|
|
$
|
7,542
|
|
|
$
|
4,770
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of the
accretion of purchase accounting adjustments made to certain
long-term borrowings in connection with the acquisition of
Merrill Lynch by Bank of America. |
Fair
value hedges of commodity price risk on commodity
inventory
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Principal transactions
|
|
$
|
57
|
|
|
$
|
55
|
|
Gain/(loss) recognized in income on the commodity inventory
|
|
Principal transactions
|
|
$
|
(61
|
)
|
|
$
|
(57
|
)
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
$
|
(4
|
)
|
|
$
|
(2
|
)
|
As of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
117
|
|
|
$
|
78
|
|
|
|
Trading liabilities
|
|
$
|
3
|
|
|
$
|
4
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
245
|
|
|
$
|
286
|
|
in a liability position
|
|
|
|
$
|
5
|
|
|
$
|
34
|
|
|
|
39
Cash
flow hedges of commodity price risk on forecasted purchases and
sales
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
|
|
|
|
|
|
|
|
|
Gain/(loss) on the derivative deferred in equity
|
|
comprehensive income
|
|
$
|
32
|
|
|
$
|
48
|
|
Gain/(loss) reclassified into earnings in the current period
|
|
Principal transactions
|
|
$
|
3
|
|
|
$
|
3
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
$
|
-
|
|
|
$
|
-
|
|
Amount that is expected to be reclassified into earnings in the
next 12 months
|
|
Principal transactions
|
|
$
|
31
|
|
|
$
|
15
|
|
As of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
$
|
35
|
|
|
$
|
10
|
|
|
|
Trading liabilities
|
|
$
|
-
|
|
|
$
|
5
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
118
|
|
|
$
|
92
|
|
in a liability position
|
|
|
|
$
|
2
|
|
|
$
|
67
|
|
|
|
Net
investment hedges of foreign operations
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) on the derivative and non-derivative hedges deferred
in equity
|
|
Accumulated other
comprehensive income
|
|
$
|
570
|
|
|
$
|
718
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Other revenue
|
|
$
|
-
|
|
|
$
|
(10
|
)
|
Gain/(loss) recognized in income from the unused portion (time
value) of the hedging derivative
|
|
Other revenue
|
|
$
|
-
|
|
|
$
|
(55
|
)
|
|
|
Interest expense
|
|
$
|
(37
|
)
|
|
$
|
-
|
|
As of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
Trading assets
|
|
$
|
367
|
|
|
$
|
353
|
|
|
|
Trading liabilities
|
|
$
|
227
|
|
|
$
|
277
|
|
Carrying value of non-derivative hedges
|
|
Long-term borrowings
|
|
$
|
564
|
|
|
$
|
598
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
$
|
12,669
|
|
|
$
|
16,531
|
|
in a liability position
|
|
|
|
$
|
10,918
|
|
|
$
|
6,098
|
|
|
|
Net
Gains/Losses on non-trading derivatives not in hedge
relationships
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk
|
|
Interest expense
|
|
$
|
56
|
|
|
$
|
(460
|
)
|
Foreign currency risk
|
|
Other revenue
|
|
|
(2,694
|
)
|
|
|
784
|
|
Credit risk
|
|
Other revenue
|
|
|
(12
|
)
|
|
|
69
|
|
|
|
40
The above amounts represent net gains/(losses) on derivatives
that are not used for trading purposes and are not used in
accounting hedging relationships. Interest rate risk primarily
relates to derivatives used to hedge long-term debt where hedge
accounting is not applied and derivatives with third parties
that are recorded by Merrill Lynch and utilized by Bank of
America at the consolidated level for hedge accounting purposes.
As the hedged item is not held by Merrill Lynch, hedge
accounting is not applied by Merrill Lynch. Foreign currency
risk primarily relates to economic hedges of foreign currency
denominated transactions that generate earnings upon
remeasurement in accordance with
ASC 830-20
Foreign Currency Transactions (Foreign Currency
Transactions). As both the remeasurement of the foreign
currency risk on the transaction and the changes in fair value
of the derivative are recorded in earnings, hedge accounting is
not applied. Credit risk relates to credit default swaps used to
economically manage the credit risk on certain loans not
included in trading activities.
Derivative
balances by primary risk
Derivative instruments contain numerous market risks. In
particular, most derivatives have interest rate risk, as they
contain an element of financing risk which is affected by
changes in interest rates. Additionally, derivatives expose
Merrill Lynch to counterparty credit risk, although this is
generally mitigated by collateral margining and netting
arrangements. For disclosure purposes below, the primary risk of
a derivative is largely determined by the business that is
engaging in the derivative activity. For instance, a derivative
that is initiated by an equities derivative business will
generally have equity price risk as its primary underlying
market risk and is classified as such for the purposes of this
disclosure, despite the fact that there may be other market
risks that affect the value of the instrument.
41
The following tables identify the primary risk for derivative
instruments at March 31, 2010 and December 31, 2009.
The primary risk is provided on a gross basis, prior to the
application of the impact of counterparty and cash collateral
netting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
As of March 31, 2010
|
|
|
Contract/
|
|
Trading Assets-
|
|
Contract/
|
|
Trading Liabilities-
|
|
|
Notional(1)
|
|
Derivative Contracts
|
|
Notional(1)
|
|
Derivative Contracts
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$
|
9,004,196
|
|
|
$
|
462,365
|
|
|
$
|
8,762,765
|
|
|
$
|
458,545
|
|
Futures and forwards
|
|
|
2,263,752
|
|
|
|
3,036
|
|
|
|
2,332,899
|
|
|
|
3,158
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,537,443
|
|
|
|
44,197
|
|
Purchased options
|
|
|
1,520,074
|
|
|
|
44,743
|
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
94,877
|
|
|
|
10,247
|
|
|
|
104,391
|
|
|
|
12,780
|
|
Spot, futures and forwards
|
|
|
239,848
|
|
|
|
7,222
|
|
|
|
251,143
|
|
|
|
8,012
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
274,272
|
|
|
|
8,621
|
|
Purchased options
|
|
|
285,144
|
|
|
|
8,122
|
|
|
|
-
|
|
|
|
-
|
|
Equity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
26,879
|
|
|
|
6,627
|
|
|
|
20,707
|
|
|
|
6,823
|
|
Futures and forwards
|
|
|
46,240
|
|
|
|
3,088
|
|
|
|
47,751
|
|
|
|
2,295
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
408,568
|
|
|
|
18,511
|
|
Purchased options
|
|
|
368,880
|
|
|
|
16,321
|
|
|
|
-
|
|
|
|
-
|
|
Commodity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
55,457
|
|
|
|
8,573
|
|
|
|
45,485
|
|
|
|
8,031
|
|
Futures and forwards
|
|
|
222,983
|
|
|
|
10,202
|
|
|
|
211,998
|
|
|
|
9,430
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
64,861
|
|
|
|
4,717
|
|
Purchased options
|
|
|
59,788
|
|
|
|
4,492
|
|
|
|
-
|
|
|
|
-
|
|
Credit derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased protection:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
|
644,967
|
|
|
|
41,806
|
|
|
|
355,983
|
|
|
|
12,254
|
|
Total return swaps
|
|
|
2,557
|
|
|
|
356
|
|
|
|
2,098
|
|
|
|
797
|
|
Other credit derivatives
|
|
|
7,018
|
|
|
|
24
|
|
|
|
5
|
|
|
|
-
|
|
Written protection:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Credit default swaps
|
|
|
371,112
|
|
|
|
11,967
|
|
|
|
654,422
|
|
|
|
36,559
|
|
Total return swaps
|
|
|
5,213
|
|
|
|
1,161
|
|
|
|
5,566
|
|
|
|
462
|
|
Other credit derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
5,886
|
|
|
|
82
|
|
|
|
Gross derivative assets/liabilities
|
|
$
|
15,218,985
|
|
|
$
|
640,352
|
|
|
$
|
15,086,243
|
|
|
$
|
635,274
|
|
Less: Legally enforceable master netting
|
|
|
|
|
|
|
(566,958
|
)
|
|
|
|
|
|
|
(566,958
|
)
|
|
|
Less: Cash collateral applied
|
|
|
|
|
|
|
(28,039
|
)
|
|
|
|
|
|
|
(32,202
|
)
|
|
|
Total derivative assets and liabilities
|
|
|
|
|
|
$
|
45,355
|
|
|
|
|
|
|
$
|
36,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts include trading
derivatives, non-trading derivatives and bifurcated embedded
derivatives. |
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
As of December 31, 2009
|
|
|
Contract/
|
|
Trading Assets-
|
|
Contract/
|
|
Trading Liabilities-
|
|
|
Notional(1)
|
|
Derivative Contracts
|
|
Notional(1)
|
|
Derivative Contracts
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$
|
10,059,442
|
|
|
$
|
472,860
|
|
|
$
|
9,748,704
|
|
|
$
|
471,423
|
|
Futures and forwards
|
|
|
2,606,064
|
|
|
|
3,531
|
|
|
|
2,534,823
|
|
|
|
3,123
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,461,830
|
|
|
|
46,521
|
|
Purchased options
|
|
|
1,313,226
|
|
|
|
46,643
|
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
115,591
|
|
|
|
11,739
|
|
|
|
107,953
|
|
|
|
13,074
|
|
Spot, futures and forwards
|
|
|
208,226
|
|
|
|
8,470
|
|
|
|
223,151
|
|
|
|
8,832
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
264,836
|
|
|
|
10,859
|
|
Purchased options
|
|
|
266,026
|
|
|
|
10,375
|
|
|
|
-
|
|
|
|
-
|
|
Equity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
17,637
|
|
|
|
1,186
|
|
|
|
16,123
|
|
|
|
1,354
|
|
Futures and forwards
|
|
|
41,821
|
|
|
|
2,999
|
|
|
|
33,844
|
|
|
|
2,165
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
250,233
|
|
|
|
18,761
|
|
Purchased options
|
|
|
240,650
|
|
|
|
15,596
|
|
|
|
-
|
|
|
|
-
|
|
Commodity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
30,449
|
|
|
|
6,591
|
|
|
|
34,180
|
|
|
|
6,391
|
|
Futures and forwards
|
|
|
202,571
|
|
|
|
10,369
|
|
|
|
185,109
|
|
|
|
9,612
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
53,438
|
|
|
|
4,955
|
|
Purchased options
|
|
|
50,372
|
|
|
|
4,750
|
|
|
|
-
|
|
|
|
-
|
|
Credit derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased protection:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
|
908,594
|
|
|
|
59,491
|
|
|
|
622,853
|
|
|
|
22,685
|
|
Total return swaps
|
|
|
2,921
|
|
|
|
366
|
|
|
|
1,644
|
|
|
|
358
|
|
Other credit derivatives
|
|
|
14,517
|
|
|
|
59
|
|
|
|
-
|
|
|
|
-
|
|
Written protection:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Credit default swaps
|
|
|
614,066
|
|
|
|
21,833
|
|
|
|
949,107
|
|
|
|
54,265
|
|
Total return swaps
|
|
|
5,173
|
|
|
|
1,563
|
|
|
|
7,336
|
|
|
|
925
|
|
Other credit derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
14,703
|
|
|
|
126
|
|
|
|
Gross derivative assets/liabilities
|
|
$
|
16,697,346
|
|
|
$
|
678,421
|
|
|
$
|
16,509,867
|
|
|
$
|
675,429
|
|
Less: Legally enforceable master netting
|
|
|
|
|
|
|
(602,157
|
)
|
|
|
|
|
|
|
(602,157
|
)
|
|
|
Less: Cash collateral applied
|
|
|
|
|
|
|
(26,682
|
)
|
|
|
|
|
|
|
(38,152
|
)
|
|
|
Total derivative assets and liabilities
|
|
|
|
|
|
$
|
49,582
|
|
|
|
|
|
|
$
|
35,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts include trading
derivatives, non-trading derivatives and bifurcated embedded
derivatives. |
Trading
revenues
Merrill Lynch enters into trading derivatives and non-derivative
cash instruments to facilitate client transactions, for
proprietary trading and financing purposes, and to manage risk
exposures arising from trading assets and liabilities. The
resulting risk from derivatives and non-derivative cash
instruments is managed on a portfolio basis as part of Merrill
Lynchs sales and trading activities and the related
revenue is recorded on different income statement line items,
including principal transactions, commissions, other revenues
and net interest (expense)/profit. The following table
identifies the amounts in the income statement line items
attributable to trading and non-trading activities, including
both derivatives and non-derivative cash instruments categorized
by primary risk for the three months ended March 31, 2010
and March 31, 2009.
Non-trading related amounts include activities in connection
with principal investment, wealth management, and certain
lending activities; economic hedging activity discussed in the
Non-trading derivatives section above; and the impact of
changes in Merrill Lynchs own creditworthiness on
borrowings accounted for at fair value.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
For the Three Months
|
|
Principal
|
|
|
|
Other
|
|
Net Interest
|
|
|
Ended March 31, 2010
|
|
Transactions
|
|
Commissions
|
|
Revenues(1)
|
|
Profit/ (Expense)
|
|
Total
|
|
|
Interest rate risk
|
|
$
|
767
|
|
|
$
|
18
|
|
|
$
|
6
|
|
|
$
|
84
|
|
|
$
|
875
|
|
Foreign exchange risk
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
86
|
|
Equity risk
|
|
|
493
|
|
|
|
775
|
|
|
|
36
|
|
|
|
195
|
|
|
|
1,499
|
|
Commodity risk
|
|
|
149
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(32
|
)
|
|
|
116
|
|
Credit risk
|
|
|
1,548
|
|
|
|
10
|
|
|
|
159
|
|
|
|
397
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading related
|
|
|
3,044
|
|
|
|
803
|
|
|
|
200
|
|
|
|
643
|
|
|
|
4,690
|
|
Non-trading related
|
|
|
174
|
|
|
|
664
|
|
|
|
868
|
|
|
|
(868
|
)
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,218
|
|
|
$
|
1,467
|
|
|
$
|
1,068
|
|
|
$
|
(225
|
)
|
|
$
|
5,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other income and
other-than-temporary
impairment losses on
available-for-sale
debt securities. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
For the Three Months
|
|
Principal
|
|
|
|
Other
|
|
Net Interest
|
|
|
Ended March 31, 2009
|
|
Transactions
|
|
Commissions
|
|
Revenues(1)
|
|
Profit/(Expense)
|
|
Total
|
|
|
Interest rate risk
|
|
$
|
1,362
|
|
|
$
|
13
|
|
|
$
|
(2
|
)
|
|
$
|
203
|
|
|
$
|
1,576
|
|
Foreign exchange risk
|
|
|
190
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(12
|
)
|
|
|
179
|
|
Equity risk
|
|
|
826
|
|
|
|
753
|
|
|
|
24
|
|
|
|
92
|
|
|
|
1,695
|
|
Commodity risk
|
|
|
598
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(51
|
)
|
|
|
548
|
|
Credit risk
|
|
|
558
|
|
|
|
16
|
|
|
|
(110
|
)
|
|
|
311
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading related
|
|
|
3,534
|
|
|
|
782
|
|
|
|
(86
|
)
|
|
|
543
|
|
|
|
4,773
|
|
Non-trading related
|
|
|
2,380
|
|
|
|
598
|
|
|
|
357
|
|
|
|
385
|
|
|
|
3,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,914
|
|
|
$
|
1,380
|
|
|
$
|
271
|
|
|
$
|
928
|
|
|
$
|
8,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other income and
other-than-temporary
impairment losses on
available-for-sale
debt securities. |
Derivatives
as guarantees
Merrill Lynch enters into certain derivative contracts that meet
the definition of a guarantee under ASC 460, Guarantees
(Guarantees Accounting). Guarantees are defined
to include derivative contracts that contingently require a
guarantor to make payment to a guaranteed party based on changes
in an underlying (such as changes in the value of interest
rates, security prices, currency rates, commodity prices,
indices, etc.), that relates to an asset, liability or equity
security of a guaranteed party. Derivatives that meet the
accounting definition of a guarantee include certain written
options (e.g., written interest rate and written currency
options). Merrill Lynch does not track, for accounting purposes,
whether its clients enter into these derivative contracts for
speculative or hedging purposes. Accordingly, Merrill Lynch has
disclosed information about all credit derivatives and certain
types of written options that can potentially be used by clients
to protect against changes in an underlying, regardless of how
the contracts are actually used by the client.
44
Merrill Lynchs derivatives that act as guarantees at
March 31, 2010 and December 31, 2009 are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Payout/
|
|
Less than
|
|
|
|
|
|
|
|
Carrying
|
|
|
Notional
|
|
1 year
|
|
1+
- 3 years
|
|
3+
- 5 years
|
|
Over 5 years
|
|
Value(1)
|
|
|
At March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade(2)
|
|
$
|
349,454
|
|
|
$
|
32,762
|
|
|
$
|
101,540
|
|
|
$
|
122,318
|
|
|
$
|
92,834
|
|
|
$
|
13,570
|
|
Non-investment
grade(2)
|
|
|
686,859
|
|
|
|
61,883
|
|
|
|
200,604
|
|
|
|
215,213
|
|
|
|
209,159
|
|
|
|
23,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit derivatives
|
|
|
1,036,313
|
|
|
|
94,645
|
|
|
|
302,144
|
|
|
|
337,531
|
|
|
|
301,993
|
|
|
|
37,021
|
|
Other derivatives
|
|
|
1,532,512
|
|
|
|
476,426
|
|
|
|
364,370
|
|
|
|
235,114
|
|
|
|
456,602
|
|
|
|
65,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative contracts
|
|
$
|
2,568,825
|
|
|
$
|
571,071
|
|
|
$
|
666,514
|
|
|
$
|
572,645
|
|
|
$
|
758,595
|
|
|
$
|
102,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade(2)
|
|
$
|
520,782
|
|
|
$
|
44,552
|
|
|
$
|
133,089
|
|
|
$
|
216,562
|
|
|
$
|
126,579
|
|
|
$
|
17,255
|
|
Non-investment
grade(2)
|
|
|
1,054,900
|
|
|
|
93,582
|
|
|
|
331,306
|
|
|
|
325,167
|
|
|
|
304,845
|
|
|
|
37,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit derivatives
|
|
|
1,575,682
|
|
|
|
138,134
|
|
|
|
464,395
|
|
|
|
541,729
|
|
|
|
431,424
|
|
|
|
55,190
|
|
Other derivatives
|
|
|
1,574,432
|
|
|
|
488,146
|
|
|
|
405,223
|
|
|
|
245,565
|
|
|
|
435,498
|
|
|
|
59,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative contracts
|
|
$
|
3,150,114
|
|
|
$
|
626,280
|
|
|
$
|
869,618
|
|
|
$
|
787,294
|
|
|
$
|
866,922
|
|
|
$
|
115,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Derivative contracts are shown
on a gross basis prior to cash collateral or counterparty
netting. |
(2) |
|
Refers to the creditworthiness
of the underlying reference obligations. |
Credit
derivatives
Credit derivatives derive value based on an underlying third
party referenced obligation or a portfolio of referenced
obligations. Merrill Lynch is both a seller and a buyer of
credit protection. A seller of credit protection is required to
make payments to a buyer upon the occurrence of a predefined
credit event. Such credit events generally include bankruptcy of
the referenced credit entity and failure to pay under their
credit obligations, as well as acceleration of indebtedness and
payment repudiation or moratorium. Merrill Lynch considers
credit derivatives to be guarantees where it is the seller of
credit protection. For credit derivatives based on a portfolio
of referenced credits or credit indices, Merrill Lynch as a
seller of credit protection may not be required to make payment
until a specified amount of loss has occurred
and/or may
only be required to make payment up to a specified amount.
For most credit derivatives, the notional value represents the
maximum amount payable by Merrill Lynch as a seller of credit
protection. However, Merrill Lynch does not exclusively monitor
its exposure to credit derivatives based on notional value.
Instead, a risk framework is used to define risk tolerances and
establish limits to help to ensure that certain credit
risk-related losses occur within acceptable, predefined limits.
Merrill Lynch discloses internal categorizations (i.e.,
investment grade, non-investment grade) consistent with how risk
is managed to evaluate the payment status of its freestanding
credit derivative instruments.
Merrill Lynch economically hedges its exposure to credit
derivatives by entering into a variety of offsetting derivative
contracts and security positions. For example, in certain
instances, Merrill Lynch purchases credit protection with
identical underlying referenced names to offset its exposure. At
45
March 31, 2010 and December 31, 2009, the notional
value and carrying value of credit protection purchased and
credit protection sold by Merrill Lynch with identical
underlying referenced names was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Payout/
|
|
Less than
|
|
|
|
|
|
|
|
Carrying
|
|
|
Notional
|
|
1 year
|
|
1+
- 3 years
|
|
3+
- 5 years
|
|
Over 5 years
|
|
Value(1)
|
|
|
At March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives purchased
|
|
$
|
975,266
|
|
|
$
|
81,221
|
|
|
$
|
274,464
|
|
|
$
|
318,528
|
|
|
$
|
301,053
|
|
|
$
|
31,846
|
|
Credit derivatives sold
|
|
|
1,018,837
|
|
|
|
94,239
|
|
|
|
300,320
|
|
|
|
336,742
|
|
|
|
287,536
|
|
|
|
33,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives purchased
|
|
$
|
1,506,782
|
|
|
$
|
130,297
|
|
|
$
|
432,550
|
|
|
$
|
511,298
|
|
|
$
|
432,637
|
|
|
$
|
49,225
|
|
Credit derivatives sold
|
|
|
1,555,077
|
|
|
|
135,686
|
|
|
|
463,129
|
|
|
|
540,713
|
|
|
|
415,549
|
|
|
|
50,609
|
|
|
|
|
|
|
(1) |
|
Derivative contracts are shown
on a gross basis prior to cash collateral or counterparty
netting. |
Other
derivative contracts
Other derivative contracts in the guarantees table above
primarily represent written interest rate options and written
currency options. For such contracts the maximum payout could
theoretically be unlimited, because, for example, the rise in
interest rates or changes in foreign exchange rates could
theoretically be unlimited. Merrill Lynch does not monitor its
exposure to derivatives based on the theoretical maximum payout
because that measure does not take into consideration the
probability of the occurrence. As such, rather than including
the maximum payout, the notional value of these contracts has
been included to provide information about the magnitude of
involvement with these types of contracts. However, it should be
noted that the notional value is not a reliable indicator of
Merrill Lynchs exposure to these contracts. Instead, as
previously noted, a risk framework is used to define risk
tolerances and establish limits to help ensure that certain
risk-related losses occur within acceptable, predefined limits.
As the fair value and risk of payment under these derivative
contracts are based upon market factors, such as changes in
interest rates or foreign exchange rates, the carrying values in
the table above reflect the best estimate of Merrill
Lynchs performance risk under these transactions at
March 31, 2010 and December 31, 2009. Merrill Lynch
economically hedges its exposure to these contracts by entering
into a variety of offsetting derivative contracts and security
positions.
Credit
risk management of derivatives
Merrill Lynch defines counterparty credit risk as the potential
for loss that can occur as a result of an individual,
counterparty, or issuer being unable or unwilling to honor its
contractual obligations. Merrill Lynch mitigates its credit risk
to counterparties through a variety of techniques, including,
where appropriate, the right to require initial collateral or
margin, the right to terminate transactions or to obtain
collateral should unfavorable events occur, the right to call
for collateral when certain exposure thresholds are exceeded,
the right to call for third party guarantees, and the purchase
of credit default protection.
Merrill Lynch enters into International Swaps and Derivatives
Association, Inc. (ISDA) master agreements or their
equivalent (master netting agreements) with almost
all derivative counterparties. Master netting agreements provide
protection in bankruptcy in certain circumstances and, in some
cases, enable receivables and payables with the same
counterparty to be offset for accounting and risk management
purposes. Netting agreements are generally negotiated
bilaterally and can require complex
46
terms. While Merrill Lynch makes reasonable efforts to execute
such agreements, it is possible that a counterparty may be
unwilling to sign such an agreement and, as a result, would
subject Merrill Lynch to additional credit risk. The
enforceability of master netting agreements under bankruptcy
laws in certain countries or in certain industries is not free
from doubt, and receivables and payables with counterparties in
these countries or industries are accordingly recorded on a
gross basis.
Where Merrill Lynch has entered into legally enforceable netting
agreements with counterparties, it reports derivative assets and
liabilities, and any related cash collateral, net in the
Condensed Consolidated Balance Sheets in accordance with
ASC 210-20,
Balance Sheet-Offsetting. At March 31, 2010 and
December 31, 2009, cash collateral received of
$28.0 billion and $26.7 billion, respectively, and
cash collateral paid of $32.2 billion and
$38.2 billion, respectively, was netted against derivative
assets and liabilities.
Merrill Lynch considers the impact of counterparty credit risk
on the valuation of derivative contracts. Factors used to
determine the credit valuation adjustments on the derivatives
portfolio include current exposure levels (i.e., fair value
prior to credit valuation adjustments) and expected exposure
levels profiled over the maturity of the contracts. Credit
default swaps market information, including either quoted single
name credit default swaps or index or other proxy credit default
swaps, is also considered. In addition, the credit valuation
adjustments also take into account the netting and credit
provisions of relevant agreements including collateral margin
agreements and legally enforceable netting agreements. During
the three months ended March 31, 2010 and March 31,
2009, valuation adjustments of approximately $0.1 billion
of gains and $0.7 billion of losses, respectively, were
recognized in principal transactions for counterparty credit
risk. At March 31, 2010 and December 31, 2009, the
cumulative counterparty credit risk valuation adjustment that
was reflected in derivative assets was $6.5 billion and
$6.8 billion, respectively. In addition, the fair value of
derivative liabilities is adjusted to reflect the impact of
Merrill Lynchs credit quality. During the three months
ended March 31, 2010 and March 31, 2009, valuation
adjustments of approximately $0.1 billion and
$0.9 billion, respectively were recognized as gains in
principal transactions for changes in Merrill Lynchs
credit risk. At March 31, 2010 and December 31, 2009,
the cumulative credit risk valuation adjustment that was
reflected in the derivative liabilities balance was
$0.5 billion and $0.3 billion, respectively.
Monoline derivative credit exposure at March 31, 2010 had a
notional value of $34.7 billion compared with
$36.1 billion at December 31, 2009. Mark-to-market
monoline derivative credit exposure was $9.9 billion at
March 31, 2010 compared with $10.7 billion at
December 31, 2009, driven by positive valuation adjustments
on legacy assets and terminated monoline contracts. At
March 31, 2010, the counterparty credit valuation
adjustment related to monoline derivative exposure was
$5.5 billion compared with $5.7 billion at
December 31, 2009, which reduced Merrill Lynchs net
mark-to-market exposure to $4.3 billion at March 31,
2010, of which 64% related to a single counterparty.
Bank of America has guaranteed the performance of Merrill Lynch
on certain derivative transactions. The aggregate amount of such
derivative liabilities was approximately $2.9 billion and
$2.5 billion at March 31, 2010 and December 31,
2009, respectively.
Credit-risk
related contingent features
The majority of Merrill Lynchs derivative contracts
contain credit-risk-related contingent features, primarily
within the ISDA agreements, that help to reduce the credit risk
of these instruments as compared to other obligations of the
respective counterparty with whom Merrill Lynch has transacted
(e.g., other senior debt). These contingent features may be for
the benefit of Merrill Lynch or may benefit Merrill Lynchs
counterparties in respect of changes in Merrill Lynchs
creditworthiness. At March 31, 2010 and December 31,
2009, Merrill Lynch posted collateral of $36.7 billion and
47
$42.8 billion, respectively, under derivative contracts
that were in a liability position, of which $32.2 billion
and $38.2 billion, respectively, represented cash
collateral, as noted above.
In connection with certain OTC derivatives transactions and
other trading agreements, Merrill Lynch could be required to
provide additional collateral to or terminate transactions with
certain counterparties in the event of a downgrade of the senior
debt ratings of ML & Co. The amount of additional
collateral required depends on the contract and is usually a
fixed incremental amount
and/or an
amount related to the market value of the exposure. At both
March 31, 2010 and 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 $0.7 billion and $0.6 billion of
additional collateral at March 31, 2010 and
December 31, 2009, respectively.
Merrill Lynch enters into secured borrowing and lending
transactions in order to meet customers needs and earn
residual interest rate spreads, obtain securities for settlement
and finance trading inventory positions.
Under these transactions, Merrill Lynch either receives or
provides collateral, including U.S. Government and agency
securities, asset-backed, corporate debt, equity, and
non-U.S. government
and agency securities. Merrill Lynch receives collateral in
connection with resale agreements, securities borrowed
transactions, customer margin loans and other loans. Under most
agreements, Merrill Lynch is permitted to sell or repledge the
securities received (e.g., use the securities to secure
repurchase agreements, enter into securities lending
transactions, or deliver to counterparties to cover short
positions). At March 31, 2010 and December 31, 2009,
the fair value of securities received as collateral where
Merrill Lynch is permitted to sell or repledge the securities
was $343 billion and $308 billion, respectively, and
the fair value of the portion that had been sold or repledged
was $283 billion and $245 billion, respectively.
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.
Additionally, Merrill Lynch receives securities as collateral in
connection with certain securities transactions in which Merrill
Lynch is the lender. In instances where Merrill Lynch is
permitted to sell or repledge securities received, Merrill Lynch
reports the fair value of such securities received as collateral
and the related obligation to return securities received as
collateral in the Condensed Consolidated Balance Sheets.
Merrill Lynch pledges assets to collateralize repurchase
agreements and other secured financings. Pledged securities that
can be sold or repledged by the secured party are
parenthetically disclosed in trading assets and investment
securities on the Condensed Consolidated Balance Sheets. The
carrying value and classification of securities owned by Merrill
Lynch that have been pledged to counterparties
48
where those counterparties do not have the right to sell or
repledge at March 31, 2010 and December 31, 2009 are
as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
March 31, 2010
|
|
|
December 31,
2009
|
|
|
Trading asset category
|
|
|
|
|
|
|
|
|
|
Equities and convertible debentures
|
|
$
|
10,554
|
|
|
|
$
|
7,647
|
|
Corporate debt and preferred stock
|
|
|
9,582
|
|
|
|
|
10,398
|
|
U.S. Government and agencies
|
|
|
2,137
|
|
|
|
|
1,455
|
|
Mortgages, mortgage-backed, and asset-backed securities
|
|
|
1,892
|
|
|
|
|
4,236
|
|
Non-U.S.
governments and agencies
|
|
|
1,873
|
|
|
|
|
1,786
|
|
Municipals and money markets
|
|
|
-
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,038
|
|
|
|
$
|
25,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In certain cases, Merrill Lynch has transferred assets to
consolidated VIEs where those restricted assets serve as
collateral for the interests issued by the VIEs. These assets
are disclosed on the Condensed Consolidated Balance Sheet as
Assets of Consolidated VIEs. These transactions are also
described in Note 9.
Generally, when Merrill Lynch transfers financial instruments
that are not recorded as sales (i.e., secured borrowing
transactions), the liability is recorded as either payables
under repurchase agreements or payables under securities loaned
transactions; however, in instances where Merrill Lynch
transfers financial assets to a consolidated VIE, the
liabilities of the consolidated VIE will be reflected in long or
short-term borrowings (see Note 9). In either case, at the
time of transfer, the related liability is equal to the cash
received in the transaction. In most cases the lenders in
secured borrowing transactions have full recourse to Merrill
Lynch (i.e., recourse beyond the assets pledged).
Investment securities on the Condensed Consolidated Balance
Sheets include:
|
|
|
Investments within the scope of Investment Accounting that are
held by ML & Co. and certain of its non-broker-dealer
subsidiaries consist of:
|
|
|
|
|
|
Debt securities, including debt
held-for-investment
and liquidity and collateral management purposes that are
classified as
available-for-sale,
and debt securities that Merrill Lynch intends to hold until
maturity;
|
|
|
|
Marketable equity securities, which are generally classified as
available-for-sale.
|
|
|
|
Non-qualifying investments are those that are not within the
scope of Investment Accounting and consist principally of equity
investments, including investments in partnerships and joint
ventures. Included in non-qualifying investments are investments
accounted for under the equity method of accounting, which
consist of investments in (i) partnerships and certain
limited liability corporations where Merrill Lynch has more than
a minor influence (generally defined as three to five percent
interest) and (ii) corporate entities where Merrill Lynch
has the ability to exercise significant influence over the
investee (generally defined as ownership and voting interest of
20% to 50%). Also included in non-qualifying investments are
private equity investments and investments in real estate VIEs
held by consolidated investment companies that Merrill Lynch
holds for capital appreciation
and/or
current income and which are accounted for at fair value in
accordance with the Investment
|
49
|
|
|
Company Guide, as well as private equity investments accounted
for at fair value under the fair value option election. The
carrying value of such private equity investments reflects
expected exit values based upon market prices or other valuation
methodologies, including discounted expected cash flows and
market comparables of similar companies.
|
Investment securities reported on the Condensed Consolidated
Balance Sheets at March 31, 2010 and December 31, 2009
are as follows. The decrease in
available-for-sale
securities from December 31, 2009 primarily reflects the
sale of approximately $13 billion of securities,
approximately $11 billion of which were sold to Bank of
America. The securities sold to Bank of America resulted in a
gain of approximately $280 million during the quarter ended
March 31, 2010.
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
March 31, 2010
|
|
|
December 31,
2009
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
Available-for-sale(1)
|
|
$
|
3,111
|
|
|
|
$
|
16,818
|
|
Held-to-maturity
|
|
|
250
|
|
|
|
|
246
|
|
Non-qualifying(2)
|
|
|
21,679
|
|
|
|
|
21,301
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,040
|
|
|
|
$
|
38,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount at December 31,
2009 includes $5.5 billion of investment securities
reported in cash and securities segregated for regulatory
purposes or deposited with clearing organizations. |
(2) |
|
Investments that are
non-qualifying for Investment Accounting purposes, primarily
equity investments, which includes Merrill Lynchs
investment in BlackRock, Inc. |
For the three months ended March 31, 2010,
other-than-temporary
impairment charges related to non-agency mortgage-backed
available-for-sale
securities were $105 million, the credit-related portion of
which was $86 million. There were no
other-than-temporary
impairments related to
available-for-sale
securities during the three months ended March 31, 2009.
Refer to Note 1 for Merrill Lynchs accounting policy
regarding
other-than-temporary-impairment
of investment securities.
Information regarding investment securities subject to
Investment Accounting follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
March 31, 2010
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency collateralized mortgage obligations
|
|
$
|
1,509
|
|
|
$
|
86
|
|
|
$
|
-
|
|
|
$
|
1,595
|
|
Non-agency
|
|
|
1,766
|
|
|
|
123
|
|
|
|
(373
|
)
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,275
|
|
|
$
|
209
|
|
|
$
|
(373
|
)
|
|
$
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt and municipal
|
|
$
|
250
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,525
|
|
|
$
|
209
|
|
|
$
|
(373
|
)
|
|
$
|
3,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
December 31, 2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency collateralized mortgage obligations
|
|
$
|
14,775
|
|
|
$
|
449
|
|
|
$
|
(11
|
)
|
|
$
|
15,213
|
|
Non-agency
|
|
|
1,952
|
|
|
|
154
|
|
|
|
(501
|
)
|
|
|
1,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Available-for-Sale
Securities
|
|
$
|
16,727
|
|
|
$
|
603
|
|
|
$
|
(512
|
)
|
|
$
|
16,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt and municipal
|
|
$
|
246
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,973
|
|
|
$
|
603
|
|
|
$
|
(512
|
)
|
|
$
|
17,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the acquisition of Merrill Lynch by Bank of
America, and the new cost bases established on January 1,
2009, there were no
available-for-sale
securities in an unrealized loss position for greater than one
year as of December 31, 2009. The following table presents
fair value and unrealized losses, after hedges, for
available-for-sale
securities, aggregated by investment category and length of time
that the individual securities have been in a continuous
unrealized loss position at March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Less Than 1 Year
|
|
More than 1 Year
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
Asset Category
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
|
Agency collateralized mortgage obligations
|
|
$
|
412
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
412
|
|
|
$
|
-
|
|
Non-Agency
|
|
|
249
|
|
|
|
(76
|
)
|
|
|
688
|
|
|
|
(297
|
)
|
|
|
937
|
|
|
|
(373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
661
|
|
|
$
|
(76
|
)
|
|
$
|
688
|
|
|
$
|
(297
|
)
|
|
$
|
1,349
|
|
|
$
|
(373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of
available-for-sale
debt securities by expected maturity for mortgage-backed
securities and contractual maturity for other debt securities at
March 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
Due in one year or less
|
|
$
|
223
|
|
|
$
|
156
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Due after one year through five years
|
|
|
1,065
|
|
|
|
986
|
|
|
|
-
|
|
|
|
-
|
|
Due after five years through ten years
|
|
|
1,228
|
|
|
|
1,261
|
|
|
|
250
|
|
|
|
250
|
|
Due after ten years
|
|
|
759
|
|
|
|
708
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
3,275
|
|
|
$
|
3,111
|
|
|
$
|
250
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Actual maturities may differ
from contractual maturities because borrowers may have the right
to call or prepay their obligations with or without prepayment
penalties. |
51
The proceeds and gross realized gains/(losses) from the sale of
available-for-sale
securities during the three months ended March 31, 2010 are
as follows:
|
|
|
|
|
(dollars in millions)
|
|
|
Three Months Ended
|
|
|
March 31, 2010
|
|
|
Proceeds
|
|
$
|
13,427
|
|
Gross realized gains
|
|
|
346
|
|
Gross realized losses
|
|
|
(2
|
)
|
|
|
Merrill Lynch utilizes VIEs in the ordinary course of business
to support its own and its customers financing and
investing needs. Merrill Lynch securitizes loans and debt
securities using VIEs as a source of funding and as a means of
transferring the economic risk of the loans or debt securities
to third parties. Merrill Lynch also administers, structures or
invests in other VIEs including multi-seller conduits, municipal
bond trusts, CDOs and other entities as described in more detail
below.
The entity that has a controlling financial interest in a VIE is
referred to as the primary beneficiary and consolidates the VIE.
In accordance with new consolidation guidance effective
January 1, 2010, Merrill Lynch is deemed to have a
controlling financial interest and is the primary beneficiary of
a VIE if it has both the power to direct the activities of the
VIE that most significantly impact the VIEs economic
performance and an obligation to absorb losses or the right to
receive benefits that could potentially be significant to the
VIE. As a result of this change in accounting, Merrill Lynch
consolidated or deconsolidated certain VIEs and former QSPEs on
January 1, 2010 that were previously unconsolidated or
consolidated. The net incremental impact of this accounting
change on
52
Merrill Lynchs Condensed Consolidated Balance Sheet is set
forth in the table below. The net effect of the accounting
change is recorded as an adjustment to beginning retained
earnings, net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
Opening Balance
|
|
|
Ending Balance Sheet
|
|
Net Increase /
|
|
Sheet
|
|
|
December 31,
2009
|
|
(Decrease)
|
|
January 1, 2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, at fair value
|
|
$
|
90,743
|
|
|
$
|
6,217
|
|
|
$
|
96,960
|
|
Derivative assets
|
|
|
49,582
|
|
|
|
(2,413
|
)
|
|
|
47,169
|
|
Investment securities
|
|
|
32,840
|
|
|
|
1,093
|
|
|
|
33,933
|
|
Loans, notes, and mortgages (net)
|
|
|
37,663
|
|
|
|
(333
|
)
|
|
|
37,330
|
|
All other assets
|
|
|
268,367
|
|
|
|
3,287
|
|
|
|
271,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
479,195
|
|
|
$
|
7,851
|
|
|
$
|
487,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
853
|
|
|
$
|
5,013
|
|
|
$
|
5,866
|
|
Trading liabilities, at fair value
|
|
|
30,340
|
|
|
|
-
|
|
|
|
30,340
|
|
Derivative liabilities
|
|
|
35,120
|
|
|
|
(313
|
)
|
|
|
34,807
|
|
Long-term borrowings
|
|
|
151,399
|
|
|
|
3,067
|
|
|
|
154,466
|
|
All other liabilities
|
|
|
220,345
|
|
|
|
228
|
|
|
|
220,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
438,057
|
|
|
|
7,995
|
|
|
|
446,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit)
|
|
|
4,583
|
|
|
|
(144
|
)
|
|
|
4,439
|
|
All other stockholders equity
|
|
|
36,555
|
|
|
|
-
|
|
|
|
36,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
41,138
|
|
|
|
(144
|
)
|
|
|
40,994
|
|
|
|
|
|
|
|
|
|
|