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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
X
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
 
OR
     
  
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to           
 
Commission file number: 1-7182
 
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
 
     
Delaware
  13-2740599
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)
   
     
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina
 

28255
(Address of principal executive offices)
  (Zip Code)
 
(704) 386-5681
Registrant’s telephone number, including area code:
 
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):
 
Large accelerated filer    Accelerated filer    Non-accelerated filer X Smaller reporting company   
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       YES      X     NO
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s 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
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 EX-12
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PART I
 
Item 1.  Financial Statements
 
Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)
 
                 
    Three Months Ended
  Three Months Ended
(dollars in millions)   March 31, 2010   March 31, 2009
 
Revenues
               
Principal transactions
  $ 3,218     $ 5,914  
Commissions
    1,467       1,380  
Managed account and other fee-based revenues
    1,051       1,156  
Investment banking
    667       606  
Earnings from equity method investments
    281       40  
Other income
    1,154       271  
Other-than-temporary impairment losses on AFS debt securities:
               
Total other-than-temporary impairment losses on AFS debt securities
    (105 )     -  
Portion of other-than-temporary impairment losses recognized in OCI on AFS debt securities
    19       -  
                 
Subtotal
    7,752       9,367  
Interest and dividend revenues
    1,815       4,383  
Less interest expense
    2,040       3,455  
                 
Net interest (expense)/profit
    (225 )     928  
                 
Revenues, net of interest expense
    7,527       10,295  
                 
Non-interest expenses
               
Compensation and benefits
    3,844       3,278  
Communications and technology
    462       399  
Occupancy and related depreciation
    305       271  
Brokerage, clearing, and exchange fees
    280       272  
Advertising and market development
    85       106  
Professional fees
    144       102  
Office supplies and postage
    43       42  
Other
    431       451  
                 
Total non-interest expenses
    5,594       4,921  
                 
Pre-tax earnings
    1,933       5,374  
Income tax expense
    664       1,624  
                 
Net earnings
  $ 1,269     $ 3,750  
                 
Preferred stock dividends
    38       15  
                 
Net earnings applicable to common stockholder
  $ 1,231     $ 3,735  
                 
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
                 
(dollars in millions, except per share amounts)   March 31, 2010   December 31, 2009
 
ASSETS
                 
Cash and cash equivalents
  $ 19,784     $ 15,005  
                 
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    11,239       20,430  
                 
Securities financing transactions
               
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)
    76,710       69,738  
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)
    56,141       45,422  
                 
      132,851       115,160  
                 
                 
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):
               
Derivative contracts
    45,355       49,582  
Equities and convertible debentures
    33,475       34,501  
Non-U.S. governments and agencies
    27,350       21,256  
Corporate debt and preferred stock
    19,966       16,779  
Mortgages, mortgage-backed, and asset-backed
    8,414       7,971  
U.S. Government and agencies
    2,137       1,458  
Municipals, money markets, physical commodities and other
    13,548       8,778  
                 
      150,245       140,325  
                 
                 
Investment securities (includes $268 in 2010 and $253 in 2009 measured at fair value in accordance with the fair value option election)
    25,040       32,840  
                 
Securities received as collateral, at fair value
    22,963       16,346  
                 
Receivables from Bank of America
    29,492       20,619  
                 
Other receivables
               
Customers (net of allowance for doubtful accounts of $9 in 2010 and $10 in 2009)
    20,073       31,818  
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  
                 
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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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
               
                 
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 Stockholder’s 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 Stockholder’s 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.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
                 
    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.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
                 
    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.


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Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
 
Note 1.  Summary of Significant Accounting Policies
 
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 Lynch’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Annual Report”). The nature of Merrill Lynch’s 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 Lynch’s 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,


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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 VIE’s 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


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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 transferee’s 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.


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Earnings from equity method investments include Merrill Lynch’s pro rata share of income and losses associated with investments accounted for under the equity method.
 
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


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


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Counterparty Credit Risk
 
In determining fair value, Merrill Lynch considers both the credit risk of its counterparties, as well as its own creditworthiness. Merrill Lynch attempts to mitigate credit risk to third parties by entering into netting and collateral arrangements. Net counterparty exposure (counterparty positions netted by offsetting transactions and both cash and securities collateral) is then valued for counterparty creditworthiness and this resultant value is incorporated into the fair value of the respective instruments. Merrill Lynch generally calculates the credit risk adjustment for derivatives based on observable market credit spreads.
 
Fair Value Accounting also requires that Merrill Lynch consider its own creditworthiness when determining the fair value of certain instruments, including OTC derivative instruments and certain structured notes carried at fair value under the fair value option election. The approach to measuring the impact of Merrill Lynch’s credit risk on an instrument is done in the same manner as for third party credit risk. The impact of Merrill Lynch’s credit risk is incorporated into the fair value, even when credit risk is not readily observable, of instruments such as OTC derivative contracts. OTC derivative liabilities are valued based on the net counterparty exposure as described above.
 
Legal Reserves
 
Merrill Lynch is a party in various actions, some of which involve claims for substantial amounts. Amounts are accrued for the financial resolution of claims that have either been asserted or are deemed probable of assertion if, in the opinion of management, it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many cases, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no accrual is made until that time. Accruals are subject to significant estimation by management with input from outside counsel.
 
Income Taxes
 
Merrill Lynch provides for income taxes on all transactions that have been recognized in the 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 Lynch’s net deferred tax assets are carryforward amounts generated in the U.S. and the U.K. that are deductible in the future as NOLs. Merrill Lynch has concluded that these deferred tax assets are more-likely-than-not to be fully utilized prior to expiration, based on the projected level of future taxable income of Merrill Lynch and Bank of America, which is relevant due to the intercompany tax-allocation policy. For this purpose, future taxable income was projected based on forecasts, historical


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earnings after adjusting for the past market disruptions and the anticipated impact of the differences between pre-tax earnings and taxable income.
 
Merrill Lynch recognizes and measures its unrecognized tax benefits in accordance with Income Tax Accounting. Merrill Lynch estimates the likelihood, based on their technical merits, that tax positions will be sustained upon examination considering the facts and circumstances and information available at the end of each period. Merrill Lynch adjusts the level of unrecognized tax benefits when there is more information available, or when an event occurs requiring a change. In accordance with Bank of America’s policy, any new or subsequent change in an unrecognized tax benefit related to a Bank of America state consolidated, combined or unitary return in which Merrill Lynch is a member will not be reflected in Merrill Lynch’s balance sheet. However, upon Bank of America’s resolution of the item, any material impact determined to be attributable to Merrill Lynch will be reflected in Merrill Lynch’s balance sheet. Merrill Lynch accrues income-tax-related interest and penalties, if applicable, within income tax expense.
 
Beginning with the 2009 tax year, Merrill Lynch’s results of operations are included in the U.S. federal income tax return and certain state income tax returns of Bank of America. The method of allocating income tax expense is determined under the intercompany tax allocation policy of Bank of America. This policy specifies that income tax expense will be computed for all Bank of America subsidiaries generally on a separate pro forma return basis, taking into account the tax position of the consolidated group and the pro forma Merrill Lynch group. Under this policy, tax benefits associated with net operating losses (or other tax attributes) of Merrill Lynch are payable to Merrill Lynch upon the earlier of the utilization in Bank of America’s tax returns or the utilization in Merrill Lynch’s pro forma tax returns.
 
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.


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Merrill Lynch’s policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under resale agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is generally valued daily and Merrill Lynch may require counterparties to deposit additional collateral or may return collateral pledged when appropriate.
 
Substantially all repurchase and resale activities are transacted under master repurchase agreements that give Merrill Lynch the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. Merrill Lynch offsets certain repurchase and resale agreement balances with the same counterparty on the 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 Lynch’s trading activities consist primarily of securities brokerage and trading; derivatives dealing and brokerage; commodities trading and futures brokerage; and securities financing transactions. Trading assets and trading liabilities consist of cash instruments (e.g., securities and loans) and derivative instruments. Trading assets 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.


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Investment Securities
 
Investment securities consist of marketable investment securities and non-qualifying investments. Refer to Note 8.
 
Marketable Investments
 
ML & Co. and certain of its non-broker-dealer subsidiaries, including Merrill Lynch banks, certain of which were sold to Bank of America during 2009, follow the guidance within Investment Accounting for investments in debt and publicly traded equity securities. Merrill Lynch classifies those debt securities that it does not intend to sell as held-to-maturity securities. Held-to-maturity securities are carried at cost unless a decline in value is deemed other-than-temporary, in which case the carrying value is reduced. For Merrill Lynch, the trading classification under Investment Accounting generally includes those securities that are bought and held principally for the purpose of selling them in the near term, securities that are economically hedged, or securities that may contain a bifurcatable embedded derivative as defined in Derivatives Accounting. Securities classified as trading are marked to fair value through earnings. All other qualifying securities are classified as available-for-sale and held at fair value with unrealized gains and losses reported in accumulated other comprehensive income/(loss) (“OCI”).
 
Realized gains and losses on investment securities are included in current period earnings. For purposes of computing realized gains and losses, the cost basis of each investment sold is based on the specific identification method.
 
Merrill Lynch regularly (at least quarterly) evaluates each held-to-maturity and available-for-sale security whose value has declined below amortized cost to assess whether the decline in fair value is other-than-temporary. A decline in a debt security’s fair value is considered to be other-than-temporary if it is probable that all amounts contractually due will not be collected or Merrill Lynch either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. 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 Lynch’s impairment review generally includes:
 
•  Identifying securities with indicators of possible impairment;
 
•  Analyzing individual securities with fair value less than amortized cost for specific factors including:
 
  •  The estimated length of time to recover from fair value to amortized cost;
 
  •  The severity and duration of the fair value decline from amortized cost;
 
  •  Deterioration in the financial condition of the issuer;
 
•  Discussing evidential matter, including an evaluation of the factors that could cause individual securities to have an other-than-temporary impairment;


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•  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 management’s ability to influence the investees. See the Consolidation Accounting Policies section of this Note for more information.
 
For investments accounted for using the equity method, income is recognized based on Merrill Lynch’s share of the earnings or losses of the investee. Dividend distributions are generally recorded as reductions in the investment balance. Impairment testing is based on the guidance provided in Equity Method Accounting, and the investment is reduced when an impairment is deemed other-than-temporary.
 
For investments accounted for at cost, income is recognized as dividends are received. Impairment testing is based on the guidance provided in Investment Accounting, and the cost basis is reduced when an impairment is deemed other-than-temporary.
 
Loans, Notes and Mortgages, Net
 
Merrill Lynch’s lending and related activities include loan originations, syndications and securitizations. Loan originations include corporate and institutional loans, residential and commercial mortgages, asset-based loans, and other loans to individuals and businesses. Merrill Lynch also engages in secondary market loan trading (see the Trading Assets and Liabilities section within this Note) and margin lending. Loans included in loans, notes, and mortgages are classified for accounting purposes as loans held for investment and loans held for sale. Upon completion of the acquisition of Merrill Lynch by Bank of America, certain loans carried by Merrill Lynch were subject to the requirements of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Acquired Impaired Loan Accounting”).
 
Loans held for investment are carried at amortized cost, less an allowance for loan losses, which represents Merrill Lynch’s estimate of probable losses inherent in 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


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included in interest and dividend revenue in the Condensed Consolidated Statements of Earnings/(Loss).
 
Merrill Lynch’s estimate of loan losses includes judgment about collectability based on available information at the balance sheet date, and the uncertainties inherent in those underlying assumptions. While management has based its estimates on the best information available, future adjustments to the allowance for loan losses may be necessary as a result of changes in the economic environment or variances between actual results and the original assumptions.
 
In general, loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, including loans that are individually identified as being impaired, are 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 Lynch’s estimate of fair value for other loans, notes, and mortgages is determined based on the individual loan characteristics. For certain homogeneous categories of loans, including residential mortgages 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, management’s best estimate of the repayment period is used. At repayment of the loan, any unrecognized deferred fee is immediately recognized in earnings. If the loan is accounted for as held for sale, the fees received are deferred and recognized as part of the gain or loss on sale in other revenues. If the loan is accounted for under the fair value option election, the fees are included in the determination of the fair value and included in other revenues.
 
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


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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 Lynch’s Consolidated Balance Sheet prior to January 1, 2010. See Note 9 for the initial impact of the new Consolidation Accounting guidance on Merrill Lynch’s Condensed Consolidated Balance Sheet.
 
Note 2.  Transactions with Bank of America
 
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 BAI’s net book value of approximately $263 million. In accordance with Business Combinations Accounting, Merrill Lynch’s results of operations for the year ended December 31, 2009 include the results of BAI as if the contribution from Bank of America had occurred on January 1, 2009. BAI’s impact on Merrill Lynch’s 2009 pre-tax earnings and net earnings was not material.


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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.


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Note 3.  Segment and Geographic Information
 
Segment Information
 
Prior to the acquisition by Bank of America, Merrill Lynch’s operations were organized and reported as two operating segments in accordance with the criteria in ASC 280, Segment Reporting (“Segment Reporting”): Global Markets and Investment Banking (“GMI”) and Global Wealth Management (“GWM”).
 
As a result of the acquisition by Bank of America, Merrill Lynch reevaluated the provisions of Segment Reporting in the first quarter of 2009. Pursuant to Segment Reporting, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. Based upon how the chief operating decision maker of Merrill Lynch reviews results in terms of allocating resources and assessing performance, it was determined that Merrill Lynch does not contain any identifiable operating segments under Segment Reporting. As a result, the financial information of Merrill Lynch is presented as a single segment.
 
Geographic Information
 
Merrill Lynch conducts its business activities through offices in the following five regions:
 
•  United States;
 
•  Europe, Middle East, and Africa (“EMEA”);
 
•  Pacific Rim;
 
•  Latin America; and
 
•  Canada.
 
The principal methodologies used in preparing the geographic information below are as follows:
 
•  Revenues 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 management’s judgment, provides a reasonable representation of each region’s 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 Lynch’s 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.


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Note 4.  Fair Value Disclosures
 
Fair Value Accounting
 
Fair Value Hierarchy
 
In accordance with Fair Value Accounting, Merrill Lynch has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
 
Financial assets and liabilities recorded on the 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 management’s 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


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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 Lynch’s material categories of assets and liabilities:
 
U.S. Government and agencies
 
U.S. treasury securities U.S. treasury securities are valued using quoted market prices and are generally classified as Level 1 in the fair value hierarchy.
 
U.S. agency securities U.S. agency securities are comprised of two main categories consisting of agency issued debt and mortgage pass-throughs. Agency issued debt securities are generally valued using quoted market prices. Mortgage pass-throughs include To-be-announced (“TBA”) securities and mortgage pass-through certificates. TBA securities are generally valued using quoted market prices. The fair value of mortgage pass-through certificates are model driven based on the comparable TBA security. Agency issued debt securities and mortgage pass-throughs are generally classified as Level 2 in the fair value hierarchy.
 
Non-U.S. governments and agencies
 
Sovereign government obligations are valued using quoted prices in active markets when available. To the extent quoted prices are not available, fair value is determined based on reference to recent trading activity and quoted prices of similar securities. These 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.


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Corporate and other debt
 
Corporate bonds Corporate bonds are valued based on either the most recent observable trade and/or external quotes, depending on availability. The most recent observable trade price is given highest priority as the valuation benchmark based on an evaluation of transaction date, size, frequency, and bid-offer. This price may be adjusted by bond or credit default swap spread movement. When credit default swap spreads are referenced, cash-to-synthetic basis magnitude and movement as well as maturity matching are incorporated into the value. When neither external quotes nor a recent trade is available, the bonds are valued using a discounted cash flow approach based on risk parameters of comparable securities. In such cases, the potential pricing difference in spread and/or price terms with the traded comparable is considered. Corporate bonds are generally classified as Level 2 or Level 3 in the fair value hierarchy.
 
Corporate loans and commitments The fair values of corporate loans and loan commitments are based on market prices and most recent transactions when available. When not available, a discounted cash flow valuation approach is applied using market-based credit spreads of comparable debt instruments, recent new issuance activity or relevant credit derivatives with appropriate cash-to-synthetic basis adjustments. Corporate loans and commitments are generally classified as Level 2 in the fair value hierarchy. Certain corporate loans, particularly those related to emerging market, leveraged and distressed companies have limited price transparency. These loans are generally classified as Level 3 in the fair value hierarchy.
 
Mortgages, mortgage-backed and asset-backed
 
Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities (“CMBS”), and other Asset-Backed Securities (“ABS”) RMBS, CMBS and other ABS are valued based on observable price or credit spreads for the particular security, or when price or credit spreads are not observable, the valuation is based on prices of comparable bonds or the present value of expected future cash flows. Valuation levels of RMBS and CMBS indices are used as an additional data point for benchmarking purposes or to price outright index positions.
 
When estimating the fair value based upon the present value of expected future cash flows, Merrill Lynch uses its best 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.


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


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Resale and repurchase agreements
 
Merrill Lynch elected the fair value option for certain resale and repurchase agreements. For such agreements, the fair value is estimated using a discounted cash flow model which incorporates inputs such as interest rate yield curves and option volatility. Resale and repurchase agreements for which the fair value option has been elected are generally classified as Level 2 in the fair value hierarchy.
 
Long-term 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 Lynch’s own credit spreads is also included based on Merrill Lynch’s observed secondary bond market spreads. Structured notes are classified as either Level 2 or Level 3 in the fair value hierarchy.


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


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    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.
 

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    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.

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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 Lynch’s 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  
 
 


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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.


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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


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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 Lynch’s financial instruments are required to be accounted for at


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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


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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 Lynch’s 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 Lynch’s 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 Lynch’s 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 Lynch’s 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 Lynch’s credit spreads, the change in fair value of non-recourse debt, and zero coupon notes issued at a substantial discount from the principal amount.


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(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 Lynch’s 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 management’s 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 Lynch’s 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.


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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 Lynch’s 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).
 
Note 6.  Derivatives
 
A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity security prices, currencies, commodity prices or credit spreads. Derivatives include futures, forwards, swaps, option contracts, and other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards) or to purchase or sell other financial instruments at specified terms on a specified date (e.g., options to buy or sell securities or currencies).
 
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,


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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 Lynch’s 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.


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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 hedge’s 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.


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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  
 
 


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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  
 
 


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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.


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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.
 


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(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 Lynch’s 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 Lynch’s own creditworthiness on borrowings accounted for at fair value.
 

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(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.

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Merrill Lynch’s 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


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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 Lynch’s 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 Lynch’s 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


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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 Lynch’s 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 Lynch’s 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 Lynch’s 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 Lynch’s 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 Lynch’s counterparties in respect of changes in Merrill Lynch’s creditworthiness. At March 31, 2010 and December 31, 2009, Merrill Lynch posted collateral of $36.7 billion and


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$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.
 
Note 7.  Securities Financing Transactions
 
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


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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).
 
Note 8.  Investment Securities
 
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


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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 Lynch’s 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 Lynch’s 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  
                                 
 
 
 


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(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.

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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 )
 
 
 
Note 9.  Securitizations and Other Variable Interest Entities (“VIEs”)
 
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 VIE’s 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


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Merrill Lynch’s 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